957 F. Supp. 2d 466
S.D.N.Y.2013Background
- Derivative suit originally filed by Renee Smith, later amended to proceed on behalf of shareholder Duane Howell against Lockheed Martin directors/officers for alleged long-running submission of false claims and related breaches of fiduciary duty.
- Amended complaint alleged multiple causes of action (breach of fiduciary duty, gross mismanagement, contribution/indemnification, abuse of control, waste) and asserted wrongdoing spanning decades but did not specify dates of Howell’s share ownership.
- Rule 23.1(b)(1) and Maryland’s contemporaneous ownership rule require a derivative plaintiff to plead ownership throughout the period of the alleged wrongdoing.
- Plaintiff failed to plead dates or continuous ownership; counsel conceded lack of information at oral argument and later submitted evidence showing only ownership on discrete dates (Apr. 30, 2009 and Feb. 28, 2010).
- Plaintiff also did not make a pre-suit demand on the board; survival of the complaint thus depended on pleading demand futility under Maryland’s narrow standard.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Continuous ownership under Rule 23.1 / contemporaneous ownership | Howell alleged ownership during an unspecified “Relevant Period,” arguing no particularity requirement for dates | Complaint fails to plead continuous ownership throughout period of alleged misconduct; conclusory "Relevant Period" insufficient | Dismissed: plaintiff failed to plausibly allege continuous ownership; Twombly-era plausibility required; dismissal with prejudice because cure would be futile |
| Sufficiency of pleading after substitution of plaintiff | Substitution of Howell cures prior deficiencies; allegations spanning decades suffice | Substitution raised implausibility of continuous ownership; verified statements removed continuous-ownership verification | Court found substitution highlighted deficiency; counsel conceded lack of necessary ownership info; deficiency fatal |
| Demand requirement / demand futility under Maryland law | Demand excused because majority of directors were allegedly conflicted or interested | Allegations of compensation, potential liability, routine business relationships, and familial ties do not plausibly show directors were so conflicted that demand would be futile | Dismissed: plaintiff failed to plead particularized facts showing a majority of directors were incapable of independent judgment; at least six directors were sufficiently independent |
| Pleading standard post-Twombly (plausibility) | Broad allegations of ongoing misconduct and ownership during a "Relevant Period" are adequate | Pleadings must allege a plausible set of facts (dates, continuous ownership, particularized facts on demand futility) | Court applied Twombly/Iqbal plausibility standard and found the complaint deficient on ownership and demand-futility grounds |
Key Cases Cited
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (pleading must state a plausible claim to survive dismissal)
- In re Bank of New York Derivative Litig., 320 F.3d 291 (2d Cir. 2003) (rejecting vague temporal allegations to satisfy continuous-ownership requirement)
- Werbowsky v. Collomb, 362 Md. 581 (Md. 2001) (demand futility under Maryland is a narrow exception; plaintiff must plead particularized reasons demand would be futile)
- Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86 (2d Cir. 2010) (Twombly plausibility applied to securities/derivative pleading standards)
- Danielewicz v. Arnold, 137 Md. App. 601 (Md. Ct. Spec. App. 2001) (contemporaneous ownership rule: shareholder lacks standing for pre-ownership conduct)