Teran v. GB International S.P.A. , 652 F. App'x 660 ( 2016 )

FILED
United States Court of Appeals
UNITED STATES COURT OF APPEALS Tenth Circuit
FOR THE TENTH CIRCUIT June 14, 2016
_________________________________
Elisabeth A. Shumaker
Clerk of Court
CARLOS TERAN,
Plaintiff - Appellant,
v. No. 15-3102
(D.C. No. 2:11-CV-02236-JAR)
GB INTERNATIONAL, S.P.A.; GB (D. Kan.)
MIAMI, S.R.L.; AMERICAN CRANE &
TRACTOR PARTS, INC.,
Defendants - Appellees.
_________________________________
ORDER AND JUDGMENT*
_________________________________
Before KELLY, MATHESON, and McHUGH, Circuit Judges.
_________________________________
Carlos Teran appeals from the grant of summary judgment to Defendants GB
International, S.p.A. (“GB International”), GB Miami, S.r.l. (“GB Miami”), and
American Crane and Tractor Parts, Inc., (“ACTP”). He also appeals from the grant of
summary judgment to GB Miami on its counterclaim against him. Exercising jurisdiction
under 28 U.S.C. § 1291, we affirm.
*
This order and judgment is not binding precedent, except under the doctrines of
law of the case, res judicata, and collateral estoppel. It may be cited, however, for its
persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
I. BACKGROUND
A. Factual History1
Mr. Teran was a shareholder and Managing Director of ACTP, a tractor supply
company. In 2004, ACTP entered a Supply Agreement with GB International, requiring
ACTP to purchase parts from GB International. GB International later became the
majority owner of ACTP.
GB International allegedly used its control over ACTP to help its subsidiary, CGR
Ghinassi, S.p.A. (“CGR”), at ACTP’s expense. According to Mr. Teran, GB
International amended the Supply Agreement to require ACTP to buy substantially all of
its tractor supply parts from CGR in Italy. As a result, ACTP paid a premium ranging
from 15 to 50 percent and experienced three- to six-month delays in delivery, frequently
leaving ACTP without inventory. GB International also instructed CGR to solicit
ACTP’s customers in Latin America at the expense of ACTP. Finally, GB International
raised the minimum price at which ACTP could sell certain parts, causing ACTP’s prices
in Latin America to exceed those of CGR. As a result, ACTP lost customers to CGR.
Due to the foregoing, Mr. Teran submitted a resignation letter dated July 25, 2010,
to ACTP, which stated, “it is my intention to sever my employment relationship with
[ACTP], effective at the end of the business day on October 29, 2010.” App. at 607. He
1
Because Mr. Teran appeals a summary judgment ruling, we “view all of the facts
in the light most favorable to [him] and draw all reasonable inferences from the record in
[his] favor.” Lounds v. Lincare, Inc., 812 F.3d 1208, 1220 (10th Cir. 2015) (quotations
omitted).
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explained that his “efforts to grow the company, which would [have] result[ed] in
increased bonuses, dividends and stock value for [him], [had] been completely
frustrated.” Id. In a letter dated August 5, 2010, the president of ACTP responded,
“Your resignation effective as of the end of the business day on October 29, 2010 is
accepted by the Company.” Id. at 325.
In the event Mr. Teran resigned, the Shareholders Agreement between ACTP and
its shareholders had granted GB Miami—an affiliate of GB International and a
shareholder of ACTP—a call right to purchase all of Mr. Teran’s shares for one dollar.2
GB Miami sent Mr. Teran a written “Section 2.9(B) Exercise Notice” on September 16,
2010, stating he had “resigned from his employment with [ACTP],” giving GB Miami
the right to purchase his stock for one dollar under Section 2.9(B)(d) of the Shareholders
Agreement. Id. at 614. GB Miami requested that Mr. Teran deliver his stock certificates
within 180 days of the notice.
ACTP then persuaded Mr. Teran to stay. On October 29, 2010, the day Mr. Teran
had planned for his resignation to become effective, the president of ACTP sent Mr.
Teran a letter stating:
[ACTP] is pleased to extend the following offer of employment to you:
1. You will be employed in the full-time position of Managing
Director of Latin American Markets, reporting to the President and
CEO and Board of Directors of ACTP.
2
The parties do not explain the nature of the relationship between GB
International and GB Miami.
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2. Your employment will begin on November 1, 2010.
....
If you choose to accept our offer of employment and agree to the above
terms, please sign, date and return a copy of this letter to my attention by no
later than 5:00 pm (eastern daylight time) October 29, 2010.
Id. at 616-17. Mr. Teran accepted the offer and signed the agreement (“Letter
Agreement”) before 5:00 p.m. on October 29, 2010.
On December 1, 2010, the president of ACTP sent Mr. Teran a letter regarding
GB Miami’s Section 2.9(B) Exercise Notice. Enclosed with the letter was a cashier’s
check for one dollar and documents necessary to transfer his shares to GB Miami. The
letter asked Mr. Teran to sign and return the documents transferring ownership within
eight days. Mr. Teran refused. ACTP subsequently cancelled his stock certificates and
recorded the shares as transferred to GB Miami on ACTP’s books.
Mr. Teran resigned on December 23, 2010.
B. Relevant Documents
1. 2006 Employment Agreement
Mr. Teran signed an employment agreement with ACTP in 2006 (“2006
Employment Agreement”) covering the period between November 9, 2006, and April 30,
2015. The 2006 Employment Agreement included the following provision:
5. Termination. Employee’s employment by the Company under this
Agreement shall be terminated upon the earliest to occur of the following
events:
(a) Termination by Employee. Employee’s resignation or other
voluntary departure, in which case, he will no longer serve as an
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“employee” or represent the Company from the date of such
resignation or ceasing of services.
Aplt. App. at 661.3
2. ACTP’s Shareholders Agreement
On November 9, 2006, ACTP signed a Shareholders Agreement with its
shareholders, which included GB International, GB Miami, Mr. Teran, and various other
individuals.
Section 1.3 of the Shareholders Agreement included the following provision:
1.3 Decisions of the Board. Each of the following decisions shall require
the consent of the Board of Directors and the approval of the Continuing
Shareholders[4] . . . :
....
(b) Any amendment or modification by the Company of the Supply
Agreement . . . .
Id. at 282. We refer to this language in Section 1.3 as the “Approval Rights Provision.”
Section 2.9(B) of the Shareholders Agreement included the following language:
(d) If . . . Carlos terminates the Carlos Employment Agreement under
paragraph 5(a) of such agreement within ten (10) years of April 29, 2005,
then, . . . . GB Miami shall have a call right, exercisable immediately, and
continuing thereafter, for a total purchase price of One Dollar ($1.00) for all
of Carlos’ ownership in the Company; . . .
(e) Beginning on the eighth (8th) anniversary of April 29, 2005, and
continuing indefinitely thereafter, GB Miami shall have the right, but not
3
The agreement defined “Employee” as Mr. Teran and “Company” as ACTP.
4
The Shareholders Agreement defined “Continuing Shareholders” as certain
individual shareholders uninvolved in this appeal.
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the obligation, to require Carlos to sell all, but not less than all, of the
shares owned by him . . . to GB Miami for a price equal to the Call
Valuation Price. . . .
Id. at 293.
Finally, the Shareholders Agreement included a choice of law provision, stating
the agreement “shall be governed by and construed in accordance with the internal
substantive laws and not the choice of law rules of the State of Kansas.” Id. at 297.
C. Procedural History and GB Miami’s Exercise of the Second Call Right
On April 22, 2011, Mr. Teran brought this diversity action in the United States
District Court for the District of Kansas, eventually naming GB International, GB Miami,
and ACTP as defendants in the First Amended Complaint, which Defendants moved to
dismiss. The district court granted their motion in part and denied it in part without
prejudice to seek to leave to amend.
1. GB Miami’s Exercise of the Second Call Right
On May 29, 2013, while the litigation was pending, ACTP sent Mr. Teran a letter
enclosing an exercise notice from GB Miami. The notice explained: to whatever extent
the First Call Right may have been invalid and to whatever extent Mr. Teran therefore
retained ownership of his stock, GB Miami sought to purchase it a second time under
Section 2.9(B)(e) of the Shareholders Agreement because the eight-year anniversary date
had passed. The letter and notice calculated the purchase price—more specifically, the
Call Valuation Price referred to in Section 2.9(B)(e) of the Shareholders Agreement—to
be zero dollars based on the formula in the Shareholders Agreement and ACTP’s poor
financial performance.
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2. Second Amended Complaint and GB Miami’s Counterclaim
Mr. Teran then filed a Second Amended Complaint.
Counts One and Two were brought derivatively on ACTP’s behalf. Count One
alleged GB International breached its fiduciary duty of good faith by amending the
Supply Agreement to benefit CGR at ACTP’s expense. Count Two alleged GB
International tortiously interfered with ACTP’s business relationships in Latin America.
Counts Three through Five were brought individually on Mr. Teran’s behalf.
Count Three sought a declaratory judgment that Mr. Teran retains ownership over his
shares because he did not resign, and the First Call Right consequently did not exist.
Count Four, brought alternatively to Count Three, alleged GB Miami and GB
International breached the Shareholders Agreement when GB Miami exercised the First
Call Right, even though Mr. Teran had not resigned. Count Five alleged GB
International and ACTP breached the Shareholders Agreement by amending the Supply
Agreement without obtaining the approvals required under the Approval Rights
Provision.
GB Miami filed a counterclaim seeking a declaratory judgment that “[b]y virtue of
GB Miami’s exercise of the First Call Right—and if not, by virtue of its exercise of the
Second Call Right—Teran is no longer a shareholder in ACTP, and thus Teran has no
standing to pursue derivative claims on behalf of ACTP.” App. at 212. Mr. Teran
asserted four affirmative defenses in his answer to GB Miami’s counterclaim:
unconscionability, prior breach, unclean hands, and waiver.
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3. Summary Judgement for Defendants and the Denial of Leave to Amend Counts
One and Two
The district court granted summary judgment:
 To GB Miami on its counterclaim, concluding (1) the Letter Agreement
indicated Mr. Teran resigned on October 29, 2010, as a matter of law,
(2) GB Miami’s exercise of the First Call Right was therefore valid, and
(3) Mr. Teran’s four affirmative defenses to the counterclaim were
meritless.5
 To GB International on Claims One and Two, concluding Mr. Teran lost
shareholder standing to bring derivative claims on ACTP’s behalf when GB
Miami exercised the First Call Right. Mr. Teran’s opposition brief had
requested leave to amend Counts One and Two by bringing them
individually should the court rule they failed as derivative claims. The
district court’s summary judgment order denied that request.
 To GB International and GB Miami on Claims Three and Four based on its
conclusion that Mr. Teran resigned on October 29, 2010, as a matter of law,
and GB Miami’s exercise of the First Call Right was therefore valid. [Dkt.
165 at 12.]
 (1) To GB International on Count Five, concluding the Approval Rights
Provision did not bind GB International, and (2) to ACTP on Count Five,
concluding that count failed as an individual claim because Mr. Teran
alleged no individual harm.
The district court entered final judgment for Defendants. Mr. Teran appeals from
the grants of summary judgment and from the denial of his request to amend Counts One
and Two.
5
Because the court decided GB Miami’s exercise of the First Call Right was valid,
it declined to address whether its exercise of the Second Call Right was also valid.
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II. DISCUSSION
We begin by affirming summary judgment for GB Miami on its counterclaim on
the ground that its exercise of the Second Call Right was valid. We also affirm summary
judgment on:
 Counts One and Two because, when GB Miami exercised its Second Call
Right, Mr. Teran lost shareholder standing to pursue these derivative claims
on ACTP’s behalf.
 Count Three because Mr. Teran did not own shares in ACTP after GB
Miami exercised its Second Call Right.
 Count Four because Mr. Teran did not allege the non-performance of a duty
to support his breach of contract claim.
 Count Five because Mr. Teran alleged harm to ACTP but not to himself.
Finally, we affirm the denial of Mr. Teran’s request to amend Counts One and Two.
A. Standard of Review and Summary Judgment Standard
We review a grant of summary judgment de novo. Osborne v. Baxter Healthcare
Corp., 798 F.3d 1260, 1266 (10th Cir. 2015). “The court shall grant summary judgment
if the movant shows that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). In applying
this standard, we view the evidence in the light most favorable to the non-moving party.
Osborne, 798 F.3d at 1266.
B. GB Miami’s Counterclaim
We affirm the district court’s grant of summary judgment on GB Miami’s
counterclaim seeking a declaratory judgment that Mr. Teran is no longer a shareholder in
ACTP. The district court granted GB Miami summary judgment on the basis of the First
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Call Right. It reasoned Mr. Teran resigned as a matter of law, his resignation triggered
the First Call Right, and he therefore lost his shares when GB Miami exercised the First
Call Right. We affirm on the alternative ground that GB Miami validly exercised the
Second Call Right. See Knight v. Mooring Capital Fund, LLC, 749 F.3d 1180, 1186
(10th Cir. 2014) (“[W]e may affirm on any ground supported by the record.”).
The Second Call Right arose from Section 2.9(B)(e) of the Shareholders
Agreement:
Beginning on the eighth (8th) anniversary of April 29, 2005, and continuing
indefinitely thereafter, GB Miami shall have the right, but not the
obligation, to require Carlos to sell all, but not less than all, of the shares
owned by him . . . to GB Miami for a price equal to the Call Valuation
Price. . . .
App. at 293. This provision gave GB Miami the right to purchase all of Mr. Teran’s
stock beginning April 29, 2013.
On May 29, 2013, ACTP sent Mr. Teran a letter, enclosing an exercise notice from
GB Miami. The letter and notice explained that, to whatever extent the First Call Right
may have been invalid and to whatever extent Mr. Teran therefore retained ownership of
his equity, GB Miami sought to purchase his stock a second time now that April 29,
2013, had passed. The letter and notice calculated the Call Valuation price based on the
formula in the Shareholders Agreement, producing a Call Valuation Price of zero dollars.
Mr. Teran has not disputed that GB Miami sought to exercise the Second Call
Right following April 29, 2013, as required by the Shareholders Agreement, either in
district court or on appeal. He has not challenged the adequacy of GB Miami’s exercise
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notice or the manner in which GB Miami exercised the Second Call Right. Nor has he
disputed the accuracy of GB Miami’s calculations.6
He instead asserted four affirmative defenses in district court: unconscionability,
prior breach, unclean hands, and waiver. The court rejected all of these defenses, which
Mr. Teran now claims was error. Two of the defenses—unclean hands and waiver—
concern only the First Call Right.7 Because we resolve GB Miami’s counterclaim based
6
In district court, Mr. Teran challenged only the manner in which Defendants
offered evidence of their calculations under District of Kansas Local Rule 56.1(d), which
provides, “Where facts referred to in an affidavit or declaration are contained in another
document, such as a deposition, interrogatory answer, or admission, a copy of the
relevant excerpt from the document must be attached.”
In moving for summary judgment, Defendants supported their calculations with
two declarations, one from Stanley House, an accountant at ACTP’s independent auditor,
House Park Dobratz & Wiebler, P.C. and the other from Paul King, ACTP’s president.
Mr. House’s declaration stated that, in March 2013, on ACTP’s request, he reviewed
ACTP’s financial records and determined ACTP’s EBITDA in 2010, 2011, and 2012; its
average EBITDA over those three years; its outstanding balances on its debt obligations
as of December 31, 2012; and its net financial position as of that same date. The
declaration listed all of these values and stated his firm had sent Mr. King a letter
including this information on March 20, 2013. The letter was attached to the declaration.
Mr. King’s declaration stated that, on March 20, 2013, ACTP’s independent financial
auditor determined the above-mentioned values. The declaration explained how ACTP
used them to calculate a Call Valuation Price of zero dollars.
Mr. Teran argues Defendants’ declarations were inadequate under Rule 56.1(d)
because Defendants failed to attach all of the financial records Mr. House used to
determine the values in the March 20, 2013 letter. We disagree. Rule 56.1(d) provides
only that, when facts referred to in a declaration are contained in another document, a
party must attach that document. Here the declarations referred to the March 20, 2013
letter, which did not itself refer to other documents. Defendants attached that letter in
compliance with the rule. If Mr. Teran wished to obtain further records that led to the
development of the letter, he was free to request them during discovery.
7
In a section of his district court opposition brief separate from his unclean hands
analysis, Mr. Teran argued in passing that GB Miami could not exercise the Second Call
Right for zero dollars based on “the fundamental princip[le] that one cannot benefit from
Continued . . .
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on the Second Call Right, we address only the remaining two defenses—
unconscionability and prior breach. Because these two defenses fail as to the Second
Call Right, we affirm.
1. Unconscionability
Mr. Teran alleges the Shareholders Agreement was unconscionable because of
unequal bargaining power. He asserts “he was given the [Shareholders Agreement]
approximately one hour before the merger was to close, and under pressure to get the deal
closed, he signed.” Aplt. Br. at 25. The district court rejected this defense, concluding
Mr. Teran’s allegations of unequal bargaining power were insufficient to render the
Shareholders Agreement unconscionable. We agree.
We evaluate Mr. Teran’s unconscionability defense under Kansas law based on
the choice of law provision in the Shareholders Agreement. Under Kansas law, the
“doctrine of unconscionability is . . . directed against one-sided, oppressive and unfairly
surprising contracts, and not against the consequences per se of uneven bargaining power
or even a simple old-fashioned bad bargain.” Wille v. Sw. Bell Tel. Co., 549 P.2d 903,
907 (Kan. 1976). Accordingly, “unequal bargaining position alone is not enough to find
a contract term unconscionable. For a contract term to be unconscionable, there must be
his own wrongdoing.” App. at 365. He asserted, “Since Teran alleges that Defendants
caused ACTP’s earnings as well as the value of his shares to decrease, Defendants cannot
as a matter of law be permitted to . . . call Teran’s shares due for no money.” Id.
Whatever the nature of this argument—whether an unclean hands argument or
otherwise—it fails. Mr. Teran alleged GB International amended the Supply Agreement
to benefit CGR at ACTP’s expense. He alleged no facts indicating GB Miami was
involved, nor did he allege any other misconduct by GB Miami that hurt ACTP.
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some type of deceptive practice associated with the term.” Aves ex rel. Aves v. Shah, 906
P.2d 642, 652 (Kan. 1995). 8 Mr. Teran alleges unequal bargaining power without
alleging a deceptive practice. His defense therefore fails.9
2. Prior Breach
Mr. Teran’s prior breach defense contends GB Miami may not assert any call right
under the Shareholders Agreement because it previously breached that same agreement.
He asserts GB Miami breached the Shareholders Agreement by failing to oppose GB
International’s amendment of the Supply Agreement, which itself allegedly violated the
Approval Rights Provision. The district court rejected this defense, concluding (1) Mr.
Teran alleged a prior breach by GB International, not GB Miami—the party with the call
right, and (2) he cited no evidence or authority indicating GB International’s alleged
breach should be imputed to GB Miami. We agree.
“When the federal courts are called upon to interpret state law, the federal court
must look to the rulings of the highest state court, and, if no such rulings exist, must
endeavor to predict how that high court would rule.” Johnson v. Riddle, 305 F.3d 1107,
1118 (10th Cir. 2002). The Kansas Supreme Court has yet to address the effect of a
8
Mr. Teran argues only the Kansas Consumer Protection Act—not Kansas
common law—requires unequal bargaining power to be accompanied by a deceptive
practice to create unconscionability. The Kansas Supreme Court’s bright-line holding in
Aves—a case involving common law unconscionability—indicates otherwise.
9
Mr. Teran additionally argues Section 2.9(B)(d) is substantively unconscionable.
Because Section 2.9(B)(d) pertains only to the First Call Right, we need not address this
argument.
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party’s prior breach on a subsequent attempt to enforce its contractual rights. We predict
it would adopt the widespread principle that “a party’s failure to perform its obligation
under a dependent covenant results in the suspension of the complying party’s obligation
to perform under the agreement.” 14 Williston on Contracts § 43:5 (4th ed.) (collecting
cases); see also Restatement (Second) of Contracts § 237 (Am. Law Inst. 1981) (stating
generally, “it is a condition of each party’s remaining duties to render performances to be
exchanged under an exchange of promises that there be no uncured material failure by the
other party to render any such performance due at an earlier time” (collecting cases)).
Mr. Teran’s defense fails under this principle for two reasons.
First, as explained above, a prior breach defense requires the party asserting the
contractual right to be the party who committed the prior breach. Mr. Teran’s defense
fails to meet this requirement. He alleged GB International, not GB Miami, breached the
Approval Rights Provision.
Second, Mr. Teran asserts GB Miami was “a party to [GB International’s] prior
breach” because “[t]here is no evidence in the record that GB Miami opposed [GB
International’s] amendments of the Supply Agreement that were procedurally improper
as they lacked the required approval . . . . ” Aplt. Br. at 28. As the district court noted,
there is no evidence or authority supporting this argument. On the contrary, Kansas
courts generally respect the corporate form. Absent certain factors, which Mr. Teran
does not argue exist, corporations in the same corporate family are generally not liable
for each other’s conduct. See Dean Operations, Inc. v. One Seventy Assocs., 896 P.2d
1012, 1016-22 (Kan. 1995) (explaining factors).
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* * * *
We therefore affirm because GB Miami validly exercised the Second Call Right.10
C. Counts One and Two
We also affirm the grant of summary judgment on Counts One and Two. Count
One alleged GB International breached its fiduciary duty of good faith by amending the
Supply Agreement to benefit CGR at ACTP’s expense. Count Two alleged GB
International tortiously interfered with ACTP’s business relationships in Latin America.
10
We also reject Mr. Teran’s argument that the district court abused its discretion
in managing the parties’ briefing on the affirmative defenses. Defendants’ motion for
summary judgment did not address the affirmative defenses in Mr. Teran’s answer to GB
Miami’s counterclaim. Mr. Teran raised these defenses in his opposition motion.
Defendants then addressed them for the first time in their reply brief. The district court,
acting sua sponte, ordered Mr. Teran to file a sur-reply responding to the new arguments
in Defendants’ reply brief. Mr. Teran argues this order for a sur-reply was an abuse of
discretion; he argues the district court should have denied GB Miami summary judgment
based on Defendants’ failure to address the affirmative defenses in their original motion
for summary judgment.
Whether to grant a sur-reply is a supervision of litigation question that we review
for abuse of discretion. See Pippin v. Burlington Res. Oil & Gas Co., 440 F.3d 1186,
1192 (10th Cir. 2006); Beaird v. Seagate Tech., Inc., 145 F.3d 1159, 1164 (10th Cir.
1998). When a party moves for summary judgment, the non-movant is entitled to “notice
and a reasonable time to respond” to its arguments. Fed. R. Civ. P. 56(f); see Celotex
Corp. v. Catrett, 477 U.S. 317, 326 (1986) (explaining a sua sponte grant of summary
judgment is proper only if the non-movant was on notice it must come forward with all
its evidence). “Thus, when a moving party advances in a reply new reasons and evidence
in support of its motion for summary judgment, the nonmoving party should be granted
an opportunity to respond.” Beaird, 145 F.3d at 1164.
The court acted within its discretion in ordering a sur-reply. The order gave Mr.
Teran adequate notice and time to respond to Defendants’ reply. It also gave the court
the opportunity to rule on the summary judgment motion with the benefit of full merits
briefing.
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We affirm summary judgment for GB International on both counts because Mr.
Teran lost shareholder standing to continue litigating these derivative claims when GB
Miami exercised the Second Call Right. We also affirm the denial of Mr. Teran’s request
to amend both claims to bring them individually rather than derivatively.
1. Summary Judgment
a. Legal Standard
i. Shareholder Standing Requirements
To maintain a derivative suit in most jurisdictions, a shareholder must own shares
(1) at the time of the alleged misconduct, (2) when the litigation commenced, and
(3) throughout the litigation. See 3 James D. Cox & Thomas Lee Hazen, Treatise on the
Law of Corporations § 15:9 (3d ed. 2010) (explaining these requirements exist under
Federal Rule of Civil Procedure 23.1 and most state law). The last of these requirements
is commonly referred to as the “continuous ownership requirement.” See id.; see also
Santomenno ex rel. John Hancock Tr. v. John Hancock Life Ins. Co. (U.S.A.), 677 F.3d
178, 182-83 (3d Cir. 2012) (explaining Rule 23.1 creates this requirement); Quinn v.
Anvil Corp., 620 F.3d 1005, 1012 (9th Cir. 2010) (same).
The purpose of this requirement is to ensure adequate representation: “because a
shareholder will receive at least an indirect benefit (in terms of increased shareholder
equity) from any corporate recovery, he has an adequate interest in vigorously litigating
the claim.” Portnoy v. Kawecki Berylco Indus., Inc., 607 F.2d 765, 767 (7th Cir. 1979).
In contrast, “[a] non-shareholder or one who loses his shareholder interest during the
course of the litigation may lose any incentive to pursue the litigation adequately.” Id.
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For example, “a former shareholder, who would not benefit from a corporate recovery,
might be willing to accept an improper or inadequate settlement.” Am. Law Inst.,
Principles of Corp. Governance: Analysis and Recommendations § 7.02 cmt. d (1994).
It remains uncertain whether Federal Rule of Civil Procedure 23.1, which imposes
the continuous shareholder requirement, or state law controls on this issue in diversity
actions.11 The parties have not addressed this question. They have cited case law from
Missouri, where ACTP is incorporated, and interpreted those cases to impose a
continuous ownership requirement.12
Regardless of whether Rule 23.1 or Missouri law governs, we conclude the
continuous ownership requirement applies here. The federal rule imposes a continuous
shareholder requirement. Santomenno, 677 F.3d at 182-83; Quinn, 620 F.3d at 1012.
Missouri law appears to be silent on whether the requirement exists,13 but we predict the
11
See Quinn, 620 F.3d at 1013 n.5 (“The continuous ownership requirement
imposed by Rule 23.1 of the Federal Rules of Civil Procedure is procedural and therefore
applies in diversity actions such as this one.” (citing Kona Enters., Inc. v. Estate of
Bishop, 179 F.3d 767, 769 (9th Cir. 1999))); Silverstein ex rel. Tetragon Fin. Grp. Ltd. v.
Knief, 843 F. Supp. 2d 441, 443-45 (S.D.N.Y. 2012) (similar). But see 7C Charles Alan
Wright et al., Federal Practice & Procedure § 1829 (3d ed. 2007) (noting there is “still
some uncertainty” whether Rule 23.1 applies in diversity and noting several
considerations indicating state law applies).
12
We agree that if state law governs this issue, the law of Missouri, the state of
ACTP’s incorporation, applies. The district court applied Missouri law to Counts One
and Two, and the parties’ appeal briefs cite Missouri law. The choice of Kansas law in
the Shareholders Agreement governs matters addressed in that agreement and does not
extend to the requirements to bring a derivative suit.
13
In discussing the continuous ownership requirement, the district court and
Defendants cited K-O Enterprises, Inc. v. O’Brien, 166 S.W.3d 122, 130 (Mo. Ct. App.
Continued . . .
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Missouri Supreme Court would adopt the continuous shareholder requirement for two
reasons. First, Missouri Rule of Civil Procedure 52.09 is consistent with the rationale of
Rule 23.1’s continuing ownership requirement, as explained above. Rule 52.09 states,
“The derivative action may not be maintained if it appears that the plaintiff does not
fairly and adequately represent the interests of the shareholders or members similarly
situated in enforcing the right of the corporation or association.” Second, the continuous
ownership requirement is the majority rule. See 3 James D. Cox & Thomas Lee Hazen,
Treatise on the Law of Corporations § 15:9 (3d ed. 2010) (explaining most jurisdictions
require continuous ownership).
ii. Equitable Exception to Shareholder Standing Requirements
Various jurisdictions have created equitable exceptions to the shareholder standing
requirements. See Kona Enters., 179 F.3d at 770 (discussing different jurisdictions’
equitable exceptions). Mr. Teran relied on Eastwood v. Nat’l Bank of Commerce, 673 F.
Supp. 1068 (W.D. Okla. 1987), in district court.
In Eastwood, the plaintiff brought a derivative action on behalf of a corporation.
Prior to bringing suit, he lost his shares when a loan they secured was foreclosed. The
district court nonetheless allowed him to pursue his derivative claims because he alleged
2005), and Schwartz v. Custom Printing Co., 926 S.W.2d 490, 494 (Mo. Ct. App. 1996),
but these cases are distinguishable. The courts held plaintiffs had no standing to initiate
suits because they lost their shares before the litigation commenced. They did not
address whether the continuous shareholder requirement applies, causing a plaintiff who
loses his or her shares mid-litigation to lose standing.
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that the defendants had fraudulently induced him to take certain actions leading to the
default of the loan and the loss of his shares. It reasoned:
the Tenth Circuit has not been hesitant to find that a plaintiff who has lost
his technical shareholder status in a transaction permeated by fraud is an
“equitable” shareholder, with standing to sue derivatively, see Frey v.
Frankel, 443 F.2d 1240, 1244 (10th Cir. 1971); Amen v. Black, 234 F.2d
12, 23 (10th Cir. 1956), at least where the plaintiff seeks to set aside the
fraudulent transaction in which he lost his technical or legal shareholder
status, see Amen v. Black, 234 F.2d at 23.
Eastwood, 673 F. Supp. at 1077. Frey v. Frankel, cited in Eastwood, recognized
equitable shareholder standing when a plaintiff alleged defendants fraudulently induced
him to transfer his shares. 443 F.2d at 1242-44. Amen v. Black similarly held plaintiffs
had equitable ownership over stock when they alleged they were fraudulently induced to
part with it. 234 F.2d at 21.
b. Analysis
Mr. Teran concedes he has not continuously owned ACTP stock because he lost
his shares when GB Miami exercised the Second Call Right. He seeks shareholder
standing on equitable grounds.
In district court, Mr. Teran invoked the language in Eastwood quoted above. In
ruling against him, the district court held Eastwood did not apply because Mr. Teran
failed to allege fraud. We agree. Unlike the plaintiffs in Eastwood, Frey, and Amen, Mr.
Teran did not allege GB Miami fraudulently induced him to transfer his shares at any
point.
Mr. Teran invokes various other equitable exceptions for the first time on appeal.
See Aplt. Br. at 36-40. He waived these arguments by raising them for the first time on
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appeal without arguing plain error. See Richison v. Ernest Grp., Inc., 634 F.3d 1123,
1131 (10th Cir. 2011) (“[T]he failure to argue for plain error and its application on appeal
. . . marks the end of the road for an argument for reversal not first presented to the
district court.”). We therefore affirm as to Counts One and Two, concluding Mr. Teran
fails to satisfy the continuous shareholder requirement and that he does not fall within an
equitable exception.
2. The Denial of Mr. Teran’s Request to Amend
In his response to Defendants’ motion for summary judgment, Mr. Teran
requested leave to amend Counts One and Two to bring them as individual claims should
the district court decide he lost shareholder standing to bring them as derivative claims.
The district court denied Mr. Teran leave to amend. We affirm.
a. Additional Procedural History
Mr. Teran brought Counts One and Two as individual claims in the First Amended
Complaint. Defendants moved to dismiss both counts, arguing he could not bring these
claims individually because he failed to allege individual harm. The district court agreed.
It dismissed both counts without prejudice to seek leave to amend the First Amended
Complaint.
GB Miami then exercised the Second Call Right, after which Mr. Teran filed the
Second Amended Complaint. He amended Counts One and Two by bringing them as
derivative claims, not by adding allegations of individual harm.
Defendants moved for summary judgment. Mr. Teran’s response brief noted that,
if the district court decided he lacked shareholder standing to bring Counts One and Two
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derivatively, he sought leave to amend those counts to bring them as individual claims (as
he had in the First Amended Complaint).
Mr. Teran argued such leave would be proper based on Defendants’ use of a
“gotcha” tactic. He alleged they (1) moved to dismiss the individual claims in Counts
One and Two of the First Amended Complaint, arguing they should have been brought
derivatively, (2) delayed the litigation in bad faith beyond April 29, 2013, so they could
exercise the Second Call Right, and then (3) reversed course by arguing Counts One and
Two—now derivative claims in the Second Amended Complaint—failed because Mr.
Teran lost shareholder standing when GB Miami exercised either the First or Second Call
Right.
The district court granted summary judgment to Defendants and denied Mr. Teran
leave to amend Counts One and Two. Between the filing of Defendants’ reply and Mr.
Teran’s sur-reply, the court had held a final pretrial conference and entered a final pretrial
order listing Mr. Teran’s claims. It therefore construed Mr. Teran’s request for leave to
amend Counts One and Two as an attempt to amend the final pretrial order. In evaluating
this request, it applied Federal Rule of Civil Procedure 15(a)(2), which provides a “court
should freely give leave” to amend the pleadings “when justice so requires.”
The court denied Mr. Teran’s request to amend Counts One and Two under Rule
15(a)(2) for two reasons. First, it rejected Mr. Teran’s “gotcha tactic” theory, noting
Defendants had consistently argued Mr. Teran lost his shares when GB Miami exercised
the First Call Right. Second, it found Mr. Teran’s request untimely.
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b. Analysis
Rule 15(a) generally addresses all “Amendments Before Trial.” Rule 15(a)(1)
concerns amendments to pleadings made “as a matter of course” within 21 days of certain
events—in the case of complaints, within 21 days of service. Rule 15(a)(2) covers
amendments to pleadings “[i]n all other cases” before trial. Because Mr. Teran sought
leave to amend before trial but more than 21 days after service, Rule 15(a)(2) applies.
Under Rule 15(a)(2), a “court should freely give leave” to amend the pleadings “when
justice so requires.”14
We review decisions denying leave to amend under Rule 15(a)(2) for abuse of
discretion. Hertz v. Luzenac Grp., 576 F.3d 1103, 1117 (10th Cir. 2009). A district court
abuses its discretion when it “clearly err[s] or venture[s] beyond the limits of permissible
choice under the circumstances” or when it “issues an arbitrary, capricious, whimsical, or
manifestly unreasonable judgment.” Birch v. Polaris Indus., Inc., 812 F.3d 1238, 1247
(10th Cir. 2015) (quotations omitted). The district court here acted within its Rule
15(a)(2) discretion for two reasons.
14
Federal Rule of Civil Procedure 16(e) may also apply because, although the
court had not entered the pretrial order when Mr. Teran requested leave to amend, it had
entered it by the time it considered Mr. Teran’s request. Rule 16(e), which governs the
“Final Pretrial Conference and Orders,” permits amendment of a final pretrial order “only
to prevent manifest injustice.” Its “manifest injustice” standard is more stringent than
Rule 15’s “freely give leave” standard. As explained below, the district court acted
within its discretion in denying Mr. Teran’s request to amend under Rule 15(a)(2).
Because Rule 15(a)(2) is the more lenient of the two rules as to Mr. Teran, we need not
address Rule 16(e).
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First, we agree with its rejection of Mr. Teran’s “gotcha tactic” argument. Mr.
Teran’s assertions of bad faith delay tactics are conclusory and lack factual support. Nor
did Defendants manufacture the Second Call Right through the litigation. On the
contrary, they contracted with Mr. Teran for it pre-litigation. Further, Defendants did not
reverse their position. They have consistently argued Mr. Teran lost his shares when GB
Miami exercised the First Call Right. Their argument that he lost his shares when GB
Miami exercised the Second Call Right is an additional argument, not an inconsistent
one. Nor does their motion to dismiss the First Amended Complaint contradict their
motion for summary judgment on his Second Amended Complaint. The former argued
his individual claims failed because he did not allege individual harm. The latter argued
his amended derivative claims failed because he was no longer a shareholder.
Defendants were entitled to make both arguments.
Second, we agree with the district court’s conclusion that Mr. Teran’s request to
amend was untimely. When the district court dismissed Counts One and Two in the First
Amended Complaint because they failed to allege individual harm, Mr. Teran could have
amended the claims to add that allegation. Instead, he changed his claims to derivative
ones in the Second Amended Complaint.15 A year and a half following the dismissal of
15
Mr. Teran argues he could not have amended Counts One and Two of the First
Amended Complaint based on the district court’s analysis in its dismissal order. During
the pleadings stage, Mr. Teran had argued Kansas law applied and that Kansas law
permitted a shareholder to bring an individual suit based on harm to the corporation in
limited circumstances applicable here. The district court rejected this argument,
concluding in its choice-of-law analysis that Missouri law, not Kansas law, applied.
Continued . . .
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the individual claims, Mr. Teran’s summary judgment briefing requested leave to
“revive” his individual claims should his derivative claims fail. Aplt. Br. at 31. Mr.
Teran provided no explanation for his failure to seek leave to amend the claims in this
manner earlier. Given the amount of time that had passed and the absence of any
explanation, the district court acted within its discretion in denying Mr. Teran’s request.
See Duncan v. Manager, Dep’t of Safety, City & Cty. of Denver, 397 F.3d 1300, 1315
(10th Cir. 2005) (“[U]ntimeliness alone is an adequate reason to refuse leave to amend
[under Rule 15].”).16
Nothing in its decision to apply Missouri law precluded Mr. Teran from amending
Counts One and Two to allege individual harm.
16
Mr. Teran also asserts Counts One and Two of the First Amended Complaint
did allege individual harm. Count One, for example, alleged GB International’s conduct
“caused Teran to lose significant sums and miss business opportunities.” Aplt. Br. at 33
(quoting Count One of First Amended Complaint). Count Two, for example, alleged GB
International’s conduct caused Mr. Teran to “los[e] the orders from [the stolen Latin
American] customers” and “the opportunity to procure more business from these
customers.” Id. (quoting Count Two of First Amended Complaint).
This argument does not challenge the court’s decision to deny leave to amend the
Second Amended Complaint. It challenges the court’s decision to dismiss Counts One
and Two from the First Amended Complaint based on a failure to allege individual harm.
As to that decision, the district court explained in its dismissal order that Mr. Teran may
have alleged he lost clients, but those clients were ACTP’s clients. Mr. Teran did “not
allege that he maintained his own customer base or explain how he incurred any separate
damage as a result of his origination of these customers and thus, any action seeking
relief must be brought derivatively.” Teran v. GB Int’l, S.P.A., 920 F. Supp. 2d 1176,
1187 (D. Kan. 2013). Mr. Teran has forfeited any argument to the contrary by failing to
respond to the district court’s reasoning on appeal.
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D. Count Three
Count Three fails based on our resolution of GB Miami’s counterclaim. Count
Three, brought under the Kansas Declaratory Judgment Act, Kan. Stat. Ann. § 60-1701 et
seq., sought a declaratory judgment that Mr. Teran continues to own ACTP stock because
Mr. Teran did not resign; the First Call Right consequently did not exist; and GB Miami’s
exercise of the First Call Right was accordingly invalid. But, as explained above, Mr.
Teran lost his shares when GB Miami validly exercised the Second Call Right. The
exercise of the Second Call Right therefore precludes a declaratory judgment that Mr.
Teran retains ownership over his shares. We accordingly affirm summary judgment on
Count Three.
E. Count Four
Count Four, brought alternatively to Count Three, alleged GB Miami breached the
Shareholders Agreement by exercising the First Call Right even though Mr. Teran had
not resigned. It alleged GB International also breached the Shareholders Agreement “to
the extent [it] was acting through its affiliate GB Miami in exercising” the First Call
Right. App. at 145. We affirm the grant of summary judgment as to both GB Miami and
GB International.
1. GB Miami
We affirm as to GB Miami because Mr. Teran has not shown GB Miami failed to
perform a duty under the Shareholders Agreement. A “breach of contract . . . is the
failure to perform a duty arising from a contract . . . .” David v. Hett, 270 P.3d 1102,
1114 (Kan. 2011); see also Kan. Pub. Emps. Ret. Sys. v. Reimer & Koger Assocs., Inc.,
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936 P.2d 714, 718 (Kan. 1997) (“A breach of contract may be said to be a material failure
of performance of a duty arising under or imposed by agreement.” (quotations
omitted)).17 A duty may exist based on an express term in a contract or the implied duty
of good faith and fair dealing. See Waste Connections of Kan., Inc. v. Ritchie Corp., 298
P.3d 250, 266 (Kan. 2013) (explaining that, under the implied duty of good faith and fair
dealing, a party agrees not to “do anything which will have the effect of destroying or
injuring the right of the other party to receive the fruits of the contract” (quotations
omitted)).
We affirm because Mr. Teran has failed to identify an express or implied duty that
GB Miami allegedly breached. He instead argues the First Call Right did not exist under
the Shareholders Agreement because he did not resign. In short, he asserts the non-
existence of a right, not the non-performance of a duty. His request that we conclude the
First Call Right did not exist under the Shareholders Agreement is properly brought in
Count Three’s request for a declaratory judgment. See Kan. Stat. Ann. § 60-1704
(Kansas Declaratory Judgment Act) (“Any person having an interest under a . . . written
contract . . . may obtain a declaration of rights . . . thereunder.”). It is not properly
brought as a breach of contract claim because it fails to identify a contracted-for duty that
17
See also Restatement (Second) of Contracts § 235(2) (Am. Law Inst. 1981)
(“When performance of a duty under a contract is due any non-performance is a
breach.”); Breach of Contract, Black’s Law Dictionary (10th ed. 2014) (defining a breach
of contract as the “[v]iolation of a contractual obligation by failing to perform one’s own
promise, by repudiating it, or by interfering with another party’s performance”); 23
Williston on Contracts § 63:1 (4th ed.) (“[A] breach of contract is a failure, without legal
excuse, to perform any promise that forms the whole or part of a contract.”).
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GB Miami failed to perform. We therefore affirm summary judgment for GB Miami on
Count Four.
2. GB International
Count Four’s claim against GB International is predicated on its claim against GB
Miami. It alleged GB International breached the Shareholders Agreement only “to the
extent [it] was acting through its affiliate GB Miami in exercising” the First Call Right.
App. at 145. The failure of Count Four against GB Miami is therefore fatal to its claim
against GB International.
* * * *
For these reasons, we affirm the grant of summary judgement on Counts Three
and Four.
F. Count Five
We affirm the grant of summary judgement on Count Five against GB
International and ACTP. Count Five, brought on Mr. Teran’s individual behalf, alleged
GB International and ACTP breached the Shareholders Agreement by amending the
Supply Agreement without obtaining the approvals required under the Approval Rights
Provision. Mr. Teran brought Count Five as an individual claim, not a derivative claim.
The district court granted summary judgment to GB International on the ground
that the Approval Rights Provision bound only ACTP. It granted summary judgment to
ACTP by concluding Mr. Teran could not bring Count Five in his individual capacity
because he failed to allege he suffered individual harm. He instead alleged harm to
ACTP.
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We agree Count Five fails as an individual claim because it alleges no individual
harm. Because this ground is sufficient to affirm as to both Defendants, we need not
address whether GB International is additionally entitled to summary judgment because
the Approval Rights Provision did not bind it.
1. Applicable Law
Count Five implicates a shareholder’s right to bring a breach of contract claim
individually rather than derivatively. Defendants’ brief cites Missouri law. Mr. Teran
argues Kansas law governs. Either way, the outcome is the same.
Courts from both states have required a plaintiff alleging harm to the corporation
to bring a derivative suit. “When a corporation has been injured by the actions of those in
control thereof, the well-established general rule is that the suit seeking redress for such a
grievance belongs to the corporation and must be brought as a derivative action, meaning
one or more shareholders may bring suit on behalf of the corporation for harm done to the
corporation.” Lightner v. Lightner, 266 P.3d 539, 545 (Kan. Ct. App. 2011). As a
result,“[s]hareholders do not have standing to [individually] sue for harms to the
corporation or even for the derivative harm to themselves that might arise from a tort or
other wrong to the corporation.” Id.; see also Halley v. Barnabe, 24 P.3d 140, 146-48
(Kan. 2001) (discussing the same requirement in the context of limited liability
companies); Nickell v. Shanahan, 439 S.W.3d 223, 227 (Mo. 2014) (explaining claims
based on injuries “to the corporation as whole” must be brought derivatively); Cook v.
Cook, 143 S.W.3d 709, 711 (Mo. Ct. App. 2004) (“A shareholder is without standing to
sue in his individual capacity for damages to the corporation.” (quotations omitted)).
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Courts have adopted this rule to avoid “a multiplicity of suits, and a consequent
possibility that those who brought the latter suits would not be able to receive a full
recovery.” Centerre Bank of Kan. City, Nat’l Ass’n v. Angle, 976 S.W.2d 608, 613 (Mo.
Ct. App. 1998).
Thus, to bring an individual claim in either state, a shareholder must allege an
individual harm beyond that suffered by the corporation and its shareholders. See
Lightner, 266 P.3d at 545 (holding a shareholder may bring an individual claim if “he or
she has suffered an injury that is not dependent on an injury to the corporation” and the
shareholder can therefore “prevail without showing an injury to the corporation”
(quotations omitted)); Nickell, 439 S.W.3d at 227 (“Individual actions are permitted, and
provide the logical remedy, if the injury is to the shareholders themselves directly, and
not to the corporation.” (quotations omitted)); Centerre Bank of Kan. City, 976 S.W.2d at
614 (holding plaintiffs must “have been harmed individually,” and they may not bring
individual actions if they allege wrongful conduct “directly harmed the corporation, and
only indirectly harmed them in various amounts in their capacities as shareholders”).
2. Analysis
Mr. Teran may not bring Count Five in his individual capacity because he failed to
allege any individual harm; he alleged only harm to ACTP. More specifically, he alleged
the breach of the Approval Rights Provision was “detrimental to ACTP’s business,” “led
to the loss of sales and profits for ACTP,” “caused ACTP to lose a great deal of money,”
“made ACTP less attractive to customers,” and made “ACTP’s profit margin shr[i]nk
dramatically.” Aplt. App. at 147-48, ¶¶ 126-28, 131. In sum, he alleged the breach of
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contract caused “ACTP to continuously lose money and leave no profit margin or real
revenues from which to pay the shareholders, including Teran.” Id. at 148, ¶ 134. He
therefore failed to allege he suffered any individual harm other than indirect harm as a
shareholder.18 Mr. Teran’s arguments to the contrary are unpersuasive.
First, Mr. Teran argues he alleged individual harm, citing other provisions in the
Shareholders Agreement giving GB International the right to purchase other
shareholders’ stock.19 He asserts these provisions afforded other shareholders purchase
prices worth millions of dollars—well in excess of the purchase prices applicable to him.
He argues, “[t]his means that no matter what improper actions GB [International]
engaged in to damage ACTP, [these other individual shareholders] would not be
damaged like Teran”; they would receive higher purchase prices “if GB [International]
called their shares due.” Aplt. Br. 42. In contrast, GB International “could
systematically destroy the value of ACTP and cause harm to Teran—harm that was
separate and distinct from that caused to the other shareholders as it related solely to the
Call Right for Teran’s shares.” Id.
18
This is not to say his claim, as pled, would have succeeded had he brought it
derivatively. To bring a breach of contract claim against ACTP on behalf of ACTP
“would lead to the confounding possibility that a shareholder of a corporation could bring
a derivative action on behalf of the corporation against the corporation itself.” In re
Stillwater Capital Partners Inc. Litig., 851 F. Supp. 2d 556, 569 (S.D.N.Y. 2012)
(quotations omitted). Our point is only that Mr. Teran needed to allege individual harm if
he wished to bring a breach of contract claim on his own behalf.
19
Although the Shareholders Agreement gave GB Miami call rights to purchase
Mr. Teran’s stock, it gave GB International call rights to purchase the other shareholders’
stock.
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We are unpersuaded. Mr. Teran theorizes other shareholders would have made
more money if GB International had called their shares due. But he never alleged GB
International did so. Even if GB International had purchased their shares for a higher
price, any resulting individual harm would not be attributable to ACTP and GB
International’s failure to obtain the necessary approvals before amending the Supply
Agreement—the basis of Count Five. It would instead arise from the parties’ insertion of
different purchase prices into an entirely different section of the Shareholders Agreement.
Second, Mr. Teran invokes a Kansas exception to the general rule that individual
claims must allege individual harm. This exception, recognized in Lightner, provides
that if a corporation is closely held, a court may treat “an action raising derivative claims
as a direct [(meaning individual)] action” if doing so will not “(1) unfairly expose the
corporation to a multiplicity of actions; (2) materially prejudice the interests of creditors
in the corporation; or (3) interfere with a fair distribution of the recovery among all
interested persons.” Lightner, 266 P.3d at 546 (quotations omitted).20
Even if Kansas law applies, Mr. Teran does not fall under Lightner’s exception.
Lightner explained a plaintiff fails to satisfy the second requirement—no material
prejudice to creditor’s interests—if he or she seeks judgment against the corporation
itself. By seeking judgment against the corporation, the plaintiff exposes the
20
Mr. Teran has arguably waived his Lightner argument by failing to raise it in his
district court briefing on Count Five. Because he did raise the Lightner exception in his
discussion of Counts One and Two in his response to Defendants’ motion to dismiss the
First Amended Complaint, we address and reject his invocation of that exception on the
merits.
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corporation’s assets and thereby imperils the interests of its creditors. Id. at 548-49 (“It
would be difficult to imagine any more prejudicial outcome for the Corporation’s
creditors.”). Mr. Teran seeks a judgment against ACTP itself. He therefore fails to
satisfy Lightner’s second requirement.
We therefore affirm summary judgment for ACTP and GB International on Count
Five.
III. CONCLUSION
For the foregoing reasons, we affirm.
ENTERED FOR THE COURT,
Scott M. Matheson, Jr.
Circuit Judge
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