Halebian v. Berv
2011 U.S. App. LEXIS 9452
| 2d Cir. | 2011Background
- Halebian, a CitiFunds Trust III shareholder, sues the Trust's board over the 2005 sale of adviser subsidiaries and resulting termination of investment-advisory contracts.
- Plaintiff challenges the New Agreements’ authorization of soft dollars and the proxy voting via echo voting by Citigroup-affiliated service agents.
- Plaintiff asserts derivative claims on behalf of the Trust and direct claims for misstatements/omissions in the proxy materials.
- Defendants move to dismiss under Rule 12(b)(6), Rule 23.1, ICA provisions, and Massachusetts law business-judgment rule; district court relies on 7.44(a).
- Halebian II certified a Massachusetts question about applying the business-judgment rule to a derivative action commenced before a demand rejection; Massachusetts answered in Halebian III.
- Massachusetts Supreme Judicial Court held that 7.44 dismissal can apply pre- or post-demand rejection if independent directors conclude in good faith after reasonable inquiry that maintenance is not in the corporation’s best interests.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Claims Two and Three were properly dismissed as derivative. | Halebian contends they are direct claims or properly derivative under ICA. | Defendants argue these claims are derivative under Massachusetts law and subject to 7.44 dismissal. | Affirm claims Two and Three dismissal (derivative ruling affirmed). |
| Whether Claim One can be dismissed under Mass. 7.44 prior to demand rejection. | Halebian argues 7.44 dismissal should be available; independence/inquiry must be evaluated. | Defendants rely on district court’s 12(b)(6) dismissal under 7.44. | Mass. 7.44 can dismiss pre- or post-rejection derivative actions; independence and good-faith inquiry must be reviewed; district court’s dismissal vacated. |
| How 7.44 interacts with Rule 12(b)(6) and discovery on remand. | 7.44 requires extrinsic submissions; discovery may be needed to rebut them. | Discovery should be limited; 12(b)(6) suffices unless 7.44 procedures apply. | District court must remand and adjudicate Claim One on summary judgment under 12(d) framework due to 7.44's evidentiary requirements. |
| Whether discovery should be re-opened on remand. | Plaintiff seeks more discovery to rebut 7.44 materials. | Discovery is within district court discretion. | Remand may allow controlled discovery consistent with summary-judgment framework. |
Key Cases Cited
- Halebian v. Berv, 590 F.3d 195 (2d Cir. 2009) (certified Massachusetts issue; later Massachusetts answer on business judgment rule)
- Halebian v. Berv, 457 Mass. 620 (Mass. 2010) (Mass. SJC holds 7.44 can apply pre- or post-demand rejection)
- Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42 (3d Cir. 1991) (summary-judgment-like evaluation; 12(b)(6) vs. extrinsic evidence tension)
- Global Network Communications, Inc. v. City of New York, 458 F.3d 150 (2d Cir. 2006) (extrinsic materials on dismissal; Rule 12(b)(6) limitations)
- Chambers v. Time Warner, Inc., 282 F.3d 147 (2d Cir. 2002) (integration of documents and judicial notice on dismissal)
- DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104 (2d Cir. 2010) (integral-documents concept and dismissal standards)
- LaBounty v. Adler, 933 F.2d 121 (2d Cir. 1991) (practice on 12(b)(6) and extrinsic materials)
- Meyer v. Fleming, 327 U.S. 161 (U.S. 1946) (nominal defendant concept in derivative suits)