Les Kepley v. Gerald Lanz , 715 F.3d 969 ( 2013 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 13a0130p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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Plaintiffs-Appellants, -
LES KEPLEY; BRUCE KEPLEY,
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No. 12-5078
v.
,
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Defendant-Appellee. -
GERALD L. LANZ,
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Appeal from the United States District Court
for the Western District of Kentucky at Louisville.
No. 3:10-cv-695—Charles R. Simpson III, District Judge.
Argued: November 30, 2012
Decided and Filed: May 9, 2013
Before: SUTTON and STRANCH, Circuit Judges; STEEH, District Judge.*
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COUNSEL
ARGUED: Ryan T. Polczynski, PEDLEY & GORDINIER, PLLC, Louisville,
Kentucky, for Appellants. Larry Selander, DUANE MORRIS LLP, Chicago, Illinois,
for Appellee. ON BRIEF: Ryan T. Polczynski, James R. McKenzie, PEDLEY &
GORDINIER, PLLC, Louisville, Kentucky, for Appellants. Larry Selander, DUANE
MORRIS LLP, Chicago, Illinois, for Appellee.
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OPINION
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JANE B. STRANCH, Circuit Judge. This appeal grows out of a claim by
Plaintiffs Bruce and Les Kepley, shareholders in A Technological Advantage, Inc.
(ATA), that Defendant Gerald Lanz’s threat to sell his restricted share in ATA stock to
*
The Honorable George Caram Steeh III, United States District Judge for the Eastern District of
Michigan, sitting by designation.
1
No. 12-5078 Kepley, et al. v. Lanz Page 2
one of its competitors was an anticipatory breach of their Investors Rights Agreement
(IRA). The Kepleys sued in state court, alleging that Lanz’s threat forced them to sell
their shares of stock at a price lower than fair market value. Lanz removed the case to
federal court and filed a motion to dismiss based on lack of personal jurisdiction, res
judicata, and forum non conveniens. The district court, sua sponte, dismissed the case
under the “shareholder standing rule” after determining that any damage was done to
ATA and any injury the Kepleys suffered was derivative. The Kepleys appeal the
district court’s ruling. For the following reasons, we REVERSE the judgment of the
district court and REMAND the case for further proceedings consistent with this
opinion.
I. BACKGROUND
In 1994, Les Kepley incorporated ATA, a Kentucky corporation that provides
post-secondary education services. Bruce and Les Kepley, brothers and residents of
Kentucky, owned approximately 30% of ATA’s issued and outstanding capital stock.
About ten years later, Gerald Lanz, a Florida resident, became an investor in ATA when
he bought one share of Series A Convertible Preferred Stock in the corporation and a
right to purchase common stock. At the time of the purchase, Lanz, ATA, and its
shareholders entered into the IRA, agreeing to restrict the sale of certain
stock—including the share owned by Lanz—and prohibiting the sale of restricted shares
to competitors of ATA.
On May 14, 2010, the Kepleys received notification that Lanz sought to sell his
restricted share and his right to purchase additional shares of common stock to Crimson
Aero Holdings Corporation (Crimson), a competitor of ATA, for the proposed price of
$2,799,000. Relying on the agreement made by Lanz, the Kepleys filed suit in state
court seeking a declaratory judgment that the proposed sale was prohibited by the IRA
and requesting that the sale be voided if it had taken place. On June 9, the Kepleys
voluntarily dismissed “the sole claim alleged” in their declaratory judgment action with
prejudice.
No. 12-5078 Kepley, et al. v. Lanz Page 3
The Kepleys then filed another suit in state court, alleging that Lanz’s attempt
to sell his stock “breached and/or anticipatorily breached” the IRA. They contended that
in response to their objection to the sale, Crimson’s president told them that they could
not afford the Lanz shares and could not “fund litigation-we can” and that Crimson
would “shut it down or squeeze them out.” The Kepleys alleged that they were forced
to sell Crimson their shares of capital stock in ATA at a value much lower than fair
market value. After they sold all their shares in ATA to Crimson, Lanz did not complete
the sale of his stock and remained a shareholder in ATA, 30% of which Crimson then
owned. The Kepleys sought the difference between the sale price and the fair market
value of the shares as damages.
Lanz removed the state court case to federal court and filed a motion to dismiss,
arguing that he was not subject to personal jurisdiction in Kentucky; that the Kepleys’
lawsuit was barred by the doctrine of res judicata; and that the doctrine of forum non
conveniens required dismissal. The district court granted the motion, but on different
grounds. The court, sua sponte, determined that the Kepleys lacked standing to bring
their claim because the alleged breach of the IRA by Lanz harmed the corporation and
was therefore a derivative claim. Although recognizing that an exception to this general
rule exists when the shareholder suffers an injury that is “separate and distinct” from that
suffered by the corporation, the court found the exception inapplicable. It determined
that the injury alleged by the Kepleys amounted to diminution in stock value, was
suffered by the corporation, and was only derivatively shared by the Kepleys. The
Kepleys’ motion to vacate the district court’s order pursuant to Federal Rule of Civil
Procedure 59(e) was denied on the same grounds.
II. ANALYSIS
A. Standard of Review
Although Lanz sought dismissal on other grounds, the district court dismissed
for lack of standing. Standing “goes to [a c]ourt’s subject matter jurisdiction,” Loren v.
Blue Cross & Blue Shield of Mich., 505 F.3d 598, 607 (6th Cir. 2007); therefore, this
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court “review[s] de novo a district court’s dismissal of a case for lack of standing . . .
under Fed. R. Civ. Proc. 12(b)(1).” Stalley v. Methodist Healthcare, 517 F.3d 911, 916
(6th Cir. 2008).
Because this is a diversity case, we must also review the substantive law applied
by the district court. In diversity cases, a federal court must rely upon the substantive
law of the forum state. Pennington v. State Farm Mut. Auto. Ins. Co., 553 F.3d 447, 450
(6th Cir. 2009) (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938)). A federal
court exercising diversity jurisdiction must “follow the decisions of the state’s highest
court when that court has addressed the relevant issue.” Savedoff v. Access Grp., Inc.,
524 F.3d 754, 762 (6th Cir. 2008) (internal quotation marks omitted). If the issue has
not been decided, a federal court “must ‘anticipate how the relevant state’s highest court
would rule’” and may rely on the state’s intermediate appellate court decisions, along
with other persuasive authority, in making this determination. Id. (quoting In re Dow
Corning Corp., 419 F.3d 543, 549 (6th Cir. 2005)). We review the district court’s
application of state law in a diversity case de novo. Andrews v. Columbia Gas
Transmission Corp., 544 F.3d 618, 624 (6th Cir. 2008).
B. Direct and Derivative Claims
The dispositive question is whether the Kepleys’ claim is direct or derivative, and
it must be answered by looking at the law in the state of incorporation. See Casden v.
Burns, 306 F. App’x 966, 974 (6th Cir. 2009). ATA is incorporated in Kentucky, and
both parties agree that Kentucky law is applicable. It is undisputed that the Kentucky
Supreme Court has yet to render a decision articulating a particular test to be applied in
determining whether a claim is direct or derivative under these circumstances.
The Kepleys correctly note that the district court failed to undertake an Erie
analysis of Kentucky law. Such an analysis, they argue, reveals that Kentucky’s highest
court would apply the Delaware Supreme Court’s test to determine whether a claim is
direct or derivative: “(1) who suffered the alleged harm (the corporation or the suing
stockholders, individually); and (2) who would receive the benefit of any recovery or
other remedy (the corporation or the stockholders, individually)?” Tooley v. Donaldson,
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Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004). The Kepleys note that in the
context of addressing whether a breach of fiduciary claim could be brought directly or
derivatively, a federal district court in Kentucky cited Tooley favorably and also
recognized that Kentucky appellate courts have relied upon Delaware’s courts as leading
authorities on the subject of corporate law. See 2815 Grand Realty Corp. v. Goose
Creek Energy, Inc., 656 F. Supp. 2d 707, 716 (E.D. Ky. 2009).
Lanz argues that the district court did not err in applying the “separate and
distinct” injury standard. He correctly contends that the Kentucky Court of Appeals has
applied some form of the test used by the district court. See Sahni v. Hock, 369 S.W.3d
39, 47 (Ky. Ct. App. 2010) (finding that shareholder “failed to demonstrate a specific
injury to herself outside the diminution in value of [the corporation’s] stock”). Another
decision by the Kentucky Court of Appeals, rendered shortly after briefing was
concluded in this case, applied the same test. See Watkins v. Stock Yards Bank & Trust
Co., __ S.W.3d __, 2012 WL 2470692, at *5 (Ky. Ct. App. June 29, 2012).
There is little substantive distinction between the tests proposed by the parties.
Cf. Remora Invs., L.L.C. v. Orr, 673 S.E.2d 845, 848 (Va. 2009) (noting that regardless
of the test applied, the claims were derivative). The question of whether the
shareholder’s injury is “separate and distinct” from that of the corporation’s is essentially
the same inquiry as the first step of Delaware’s Tooley test, though the second step also
informs the analysis. Under either test, we find the focus to be on (1) the nature of the
duty owed and (2) the nature of the injury suffered. Therefore, the district court did not
err in its choice of law.
We disagree, however, with the district court’s application of these principles in
determining that the Kepleys’ injury was not “separate and distinct” from any injury
suffered by ATA. Lanz’s duty under the IRA not to sell his stock was owed to both
ATA and the Kepleys, but this does not foreclose a finding that the Kepleys’ claim may
be asserted directly against Lanz. The nature of the injury alleged here is one that, if
proven, was suffered only by the Kepleys. The Kepleys allege that Lanz and his
associates used the threat of the sale of his preferred—and restricted—share, along with
No. 12-5078 Kepley, et al. v. Lanz Page 6
the threat that opposition to the sale would result in either costly litigation or being
“squeezed out,” to force the Kepleys to sell their 30% ownership interest in the company
they created. There is nothing in the record to suggest that any of the other shareholders
sold their stock or were pressured to do so. It also appears that after the Kepleys were
forced out, Lanz never carried out his threat to sell his stock. Thus, by selling their stock
for less than it was worth, the Kepleys suffered an injury that was not suffered by either
the corporation or the other shareholders. Their injury is therefore “separate and
distinct.”
A policy rationale—the familiar repugnance for a wrong without a remedy—also
supports a finding that the Kepleys have standing to bring a direct claim. In Kentucky,
the sale of the Kepleys’ stock means that they are no longer shareholders and do not
have a right to bring a derivative claim. See, e.g., Bacigalupo v. Kohlhepp, 240 S.W.3d
155, 158 (Ky. Ct. App. 2007) (noting that following a merger, the former shareholders
lack standing to bring a derivative claim because they “would receive no benefit from
any corporate recovery”). Thus, if the complaint were dismissed on the grounds
articulated by the district court, there would be a loss suffered that could not be
addressed either individually or derivatively—the Kepleys would have no direct claim,
yet by selling their stock in an effort to minimize their damages, they could no longer
bring a derivative claim. Moreover, even if the Kepleys could bring a derivative claim,
Lanz and Crimson—whose threat to sell and purchase the stock, respectively, caused the
alleged harm to the Kepleys—would stand to benefit from the recovery and the Kepleys
would not. Cf. Kollman v. Cell Tech Int’l, Inc., 279 P.3d 324, 332 (Or. Ct. App. 2012)
(accepting plaintiff’s argument that if his breach of fiduciary duty claim were treated as
derivative, the person “who ultimately obtained ownership of more than 90 percent of
the shares of the corporation[] would be the primary beneficiary of the recovery of
damages,” even though that person was the “primary beneficiary of [the] wrongdoing
in the first place”). Thus, the Kepleys’ allegations fit squarely within key purposes
underlying direct claims.
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At this point in the litigation, “[t]he facts alleged by the plaintiff must be
accepted as true.” VIBO Corp. v. Conway, 669 F.3d 675, 683 (6th Cir. 2012). The
Kepleys’ complaint alleges that they were parties to the IRA that Lanz threatened to
breach and they were placed in the position of having to sell their shares or be “squeezed
out.” The Kepleys properly contend that they suffered a separate and distinct injury as
a result of Lanz’s breach of the IRA. Cf. Kollman, 279 P.3d at 336 (affirming judgment
on plaintiff’s direct claim because “the series of events culminating in the breach of
fiduciary duty here were not intended to—and did not—equally harm all shareholders”).
We find the Kepleys have standing to bring a direct claim and reverse the district court’s
sua sponte dismissal of their claim against Lanz.
C. Claim Preclusion
Lanz argues that the Kepleys’ current suit should be dismissed on grounds of res
judicata, or claim preclusion, because it arises out of the same set of facts as their
voluntarily dismissed declaratory judgment action. Under Kentucky law, claim
preclusion bars subsequent litigation when the following three elements are established:
“(1) identity of the parties, (2) identity of the causes of action, and (3) resolution on the
merits.” Coomer v. CSX Transp., Inc., 319 S.W.3d 366, 371 (Ky. 2010). This court,
applying Kentucky law, previously held that a suit for declaratory relief did not have
preclusive effect on a plaintiff’s later claim for tortious interference with prospective
business relations. See Ventas, Inc. v. HCP, Inc., 647 F.3d 291, 304-05 (6th Cir. 2011).
Although the parties briefed and argued the claim preclusion issue before this court, the
district court did not have the opportunity to address the doctrine’s applicability because
it determined that the Kepleys lacked standing. We reverse that holding and remand the
case to allow the district court to consider the matter of claim preclusion in the first
instance.
III. CONCLUSION
For the foregoing reasons, we REVERSE the district court and REMAND for
further proceedings consistent with this opinion.