F5 Capital v. Pappas
856 F.3d 61
| 2d Cir. | 2017Background
- F5 Capital, a minority shareholder of Star Bulk (Marshall Islands corp.), brought a derivative suit asserting that Star Bulk’s board members and affiliated entities effected three self‑dealing transactions (Oceanbulk merger, Excel ship purchase, and service contracts) that harmed the corporation and diluted minority shareholders.
- Complaint asserted three derivative causes of action (breach of fiduciary duty, aiding and abetting, corporate waste) and one putative direct class claim for equity dilution; F5 made no pre‑suit demand on Star Bulk’s board.
- Defendants removed under CAFA; district court dismissed under Fed. R. Civ. P. 23.1 for failure to plead demand futility and ruled the dilution claim derivative, not direct; plaintiff appealed.
- On appeal, the Second Circuit (applying Delaware law) considered: (1) whether the dilution claim was direct or derivative; (2) whether federal courts retained jurisdiction after the class claim’s failure; and (3) whether demand futility was adequately pled.
- Court held the dilution claim was derivative (not a Gentile direct dilution), federal jurisdiction properly rested on CAFA at removal and could be retained, §1367(b) did not bar supplemental jurisdiction here, and F5 failed to plead particularized facts showing demand futility; leave to amend denied as futile.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Is the equity‑dilution claim direct or derivative? | Dilution reduced F5’s ownership percentage and economic value; therefore it is a direct class claim. | The alleged harm is to the corporation and all shareholders proportionally; dilution is typically derivative and here fits that pattern. | Derivative — Tooley/Gentile/Feldman framework applies; no controlling stockholder or aggregation plausible to convert to direct claim. |
| Did federal courts retain jurisdiction after the class claim was rejected? | CAFA no longer anchors jurisdiction once the class claim is judicially invalidated. | Jurisdiction is assessed at removal; CAFA anchored jurisdiction at removal and post‑removal events do not divest it. | Retained jurisdiction — jurisdiction assessed at time of removal; subsequent failure of class status does not divest the court. |
| Did 28 U.S.C. §1367(b) bar supplemental jurisdiction over the derivative claims? | §1367(b) prevents supplemental jurisdiction where diversity (or complete diversity) would be defeated. | CAFA is the original jurisdictional anchor and Congress intended CAFA to expand federal jurisdiction; §1367(b) should not be read to defeat CAFA‑based removal in this context. | §1367(b) did not preclude supplemental jurisdiction here given CAFA removal, statutory purpose, and removal posture; district court properly exercised supplemental jurisdiction. |
| Did F5 plead demand futility under Rule 23.1 (Delaware law)? | Board was dominated/controlled by Pappas/Oaktree/Monarch; five directors were conflicted or beholden; transactions were irrational/business‑judgment‑defeating. | Plaintiff’s allegations were conclusory and lacked particularized director‑by‑director facts; majority of directors were sufficiently independent and business‑judgment protection applies. | Demand futility not pled with requisite particularity; plaintiff failed both the independence/interest and business‑judgment prongs. Leave to amend denied as futile. |
Key Cases Cited
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (two‑step test for whether a claim is derivative or direct)
- Gentile v. Rossette, 906 A.2d 91 (Del. 2006) (direct dilution recognized only where controlling stockholder issues excessive shares to benefit itself)
- Feldman v. Cutaia, 956 A.2d 644 (Del. Ch. 2007) (analysis distinguishing direct vs. derivative dilution claims)
- Feldman v. Cutaia, 951 A.2d 727 (Del. 2008) (Delaware Supreme Court affirming derivative nature of typical dilution claims)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (demand futility framework and standards for director independence)
- Gantler v. Stephens, 965 A.2d 695 (Del. 2009) (definition and scope of the business judgment rule)
- Freeport‑McMoRan, Inc. v. KN Energy, Inc., 498 U.S. 426 (1991) (jurisdiction measured at commencement/removal; subsequent events generally do not divest jurisdiction)
- Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546 (2005) (discussion of supplemental jurisdiction and the ‘‘contamination’’/complete diversity principle)
- Touch Concepts, Inc. v. Cellco P’ship, 788 F.3d 98 (2d Cir. 2015) (post‑removal amendments that eliminate original federal basis generally do not defeat jurisdiction)