-
Ninth Circuit Dismisses Director Defendant from Investor Suit to Cure Jurisdictional Defect, Affirms Dismissal for Failure to Make Demand
08/01/2016On July 18, 2016, a unanimous panel of the United States Court of Appeals for the Ninth Circuit affirmed the dismissal of a shareholder derivative action against Wynn Resorts, Limited (“Wynn Resorts”) and eleven individuals—including Steve Wynn—who sit or sat on its board of directors. La. Mun. Police Employees’ Retirement Sys. v. Wynn, __ F. 3d __, No. 14-15695, 2016 WL 3878228, (9th Cir. July 18, 2016). Its ruling confirmed that the federal courts may dismiss, sua sponte, a “stateless” defendant if necessary to perfect their diversity jurisdiction; that trial court determinations regarding demand futility are reviewed for abuse of discretion in the Ninth Circuit; and that plaintiffs alleging demand futility must plead their case with particularity.
The lawsuit arose out of Wynn Resort’s May 2011 donation of $135 million to the University of Macau, which plaintiffs alleged was essentially a bribe to persuade the government of Macau to approve the company’s application for a lease to develop a resort and casino. Plaintiffs alleged that the director defendants had breached their fiduciary duties and committed waste by approving the donation because it attracted scrutiny from both the SEC and Nevada Gaming Commission Board, causing the company to incur legal expenses and be exposed to potential liability. (Inquiries from both regulatory bodies were ultimately resolved without formal enforcement proceedings.) The United States District Court for the District of Nevada dismissed both the original and amended complaints for failure to plead demand futility.
On appeal, the Ninth Circuit noted a problem with the plaintiffs’ assertion of jurisdiction under 28 U.S.C. § 1332(a)(2), which provides for federal jurisdiction over suits between “citizens of a State and citizens or subjects of a foreign state” (sometimes referred to as “alienage jurisdiction”). The Court found that jurisdiction under § 1332(a)(2) did not exist, because plaintiffs alleged that they were American citizens and that the defendants were both foreign and American citizens. The Court also concluded that there was no diversity jurisdiction under 28 U.S.C. § 1332(a)(3), which provides federal jurisdiction over suits between “citizens of different States,” because one of the director defendants was an American citizen but not domiciled in any U.S. State, and therefore not a citizen of any State for purposes of diversity jurisdiction. To cure the jurisdictional defect, the Court invoked Federal Rule of Civil Procedure 21, which has been held to empower the courts of appeals “to dismiss a dispensable nondiverse party.” Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 837 (1989). Because the nondiverse director was not a member of the board that approved the Macau donation, and there was no suggestion that any party would be prejudiced by her dismissal, the Court deemed her a dispensable party and dismissed her from the case.
The Court next addressed plaintiffs’ contentions that any demand upon the board would have been futile because three directors—forming, together with Steve Wynn, a majority of the board—were “beholden” by economic and social ties to Mr. Wynn, who was allegedly “interested” in the transaction. The first, a former governor of Nevada, was alleged to have been a personal friend of Mr. Wynn’s for over twenty-three years, to be Mr. Wynn’s partner in a separate business venture, and to have received donations from Mr. Wynn totaling $70,000 in connection with a 1994 political campaign. The second was alleged to have “as thick as blood relations” with Mr. Wynn because of various business ties between their families dating back to their respective fathers’ operation of a bingo hall in the 1950s. The third was alleged to have received a $1 million ownership stake in Wynn Resorts when he became a director, and to have previously worked at Deutsche Bank, which “provided financing to Steve Wynn for various ventures.”
Applying an “abuse of discretion” standard, the Court affirmed the trial court’s conclusion that plaintiffs’ allegations were insufficiently particularized insofar as they failed to establish that the various purported ties were “sufficiently substantial” to each specific director, such that they could not objectively fulfill their fiduciary duties. The Ninth Circuit rejected plaintiffs’ argument that it should apply a de novo standard of review to determinations of demand futility under Federal Rule of Civil Procedure 23.1, on the grounds that its holding in Potter v. Hughes, 546 F.3d 1051, 1056 (9th Cir. 2008), which required an abuse of discretion standard, was controlling, even though there were “plausible arguments that de novo review would be more appropriate . . . in cases like this.” Wynn, 2016 WL 3878228, at *6 n. 4. The Ninth Circuit thus declined to follow the approach of the Second Circuit, which last year overruled its precedents and applied a de novo standard of review instead of abuse of discretion. See Espinoza v. Dimon, 797 F.3d 229 (2d Cir. 2015).
