JUDSON C. BALL REVOCABLE TRUST, Plaintiff/Counter-Defendant/Appellant, v. PHOENIX ORCHARD GROUP I, L.P., et al., Defendants/Counter-Claimants/Intervenors/Appellees.
No. 1 CA-CV 17-0642
ARIZONA COURT OF APPEALS DIVISION ONE
FILED 10-2-2018
Appeal from the Superior Court in Maricopa County Nos. CV2015-011768 CV2016-000284 (Consolidated) The Honorable Dawn M. Bergin, Judge AFFIRMED
COUNSEL
Barrett & Matura P.C., Scottsdale
By Jeffrey Matura, Amanda J. Taylor
Counsel for Plaintiff/Counter-Defendant/Appellant
Freeman Law P.L.L.C., Scottsdale
By Shelton L. Freeman, Jason M. Venditti, Elizabeth C. Heims
Counsel for Defendants/Counter-Claimants/Intervenors/Appellees
OPINION
Presiding Judge Kenton D. Jones delivered the Opinion of the Court, in which Judge Diane M. Johnsen and Judge Paul J. McMurdie joined.
J O N E S,
¶1 The Judson C. Ball Revocable Trust (the Trust) challenges the trial court’s determination that it lacked standing to pursue derivative claims on behalf of Phoenix Orchard Group I, L.P. and Phoenix Orchard Group II, L.P. (collectively, POG) after its partnership interests in the entities were rescinded. In this Opinion, we adopt the continuous ownership rule, which requires a plaintiff in a derivative action to continue to possess an interest in the entity on whose behalf it sues throughout the litigation. Because the Trust no longer has any interest in POG, it lacks standing to pursue its derivative claims. Accordingly, we affirm the court’s order dismissing the Trust’s claims.
FACTS AND PROCEDURAL HISTORY
¶2 In 2006, the Trust bought limited partnership interests in POG. Nine years later, the Trust sued POG and related parties,1 alleging violations of the Arizona Securities Act. See
¶3 In January 2016, the Trust filed a separate limited partnership derivative action on behalf of POG, alleging other partners and participants had breached the partnership agreements and the offering documents by making various payments “that appeared to be not allowed within the offering documents or partnership agreements.”3 See
¶4 The Trust timely appealed a final judgment entered pursuant to
DISCUSSION
¶5 The Trust had standing to file the derivative claims because it was a limited partner in POG at the time it filed its complaint. The only issue on appeal is whether the Trust lost its standing after its partnership interests were rescinded. Whether a
¶6 A limited partner may file a derivative action on behalf of the limited partnership “if general partners with authority to do so have refused to bring the action or if an effort to cause those general partners to bring the action is not likely to succeed.”
[T]he plaintiff shall be a partner at the time of bringing the action and:
- Shall have been a partner at the time of the transaction of which he complains; or
- His status as a partner shall have devolved upon him by operation of law or pursuant to the terms of the partnership agreement from a person who was a partner at the time of the transaction.
The complaint must:
- be verified;
- allege facts sufficient to show that the plaintiff has standing to maintain the derivative action; and
- allege facts sufficient to show that the plaintiff satisfies all statutory and other requirements under the law for maintaining the derivative action.
¶7 The Trust argues that neither the statutes nor the rule expressly require the plaintiff in a partnership derivative action to continue to hold a partnership interest after filing the complaint. The Trust points out that
¶8 As an initial matter, we do not agree that the recent elimination of the express “fairly and adequately represent” language from
¶9 A derivative action, by its very nature, challenges the power of the entity’s management. Ala. By-Prods. Corp. v. Cede & Co. ex rel. Shearson Lehman Bros., Inc., 657 A.2d 254, 264-65 (Del. 1995). Given this inherent conflict, Delaware courts have held, as a matter of common law, that a derivative plaintiff must have “an adequate interest in vigorously litigating the claim.” Id. at 265 (quoting Portnoy v. Kawecki Berylco Indus., Inc., 607 F.2d 765, 767 (7th Cir. 1979)). Once the derivative plaintiff no longer has an ownership interest in the entity upon whose behalf the suit was brought, the plaintiff no longer has standing because it has no financial interest in recovery and “may lose any incentive to pursue the litigation adequately.” Id. at 265-66 (quoting Portnoy, 607 F.2d at 767).
¶10 Accordingly, in Delaware “[t]o have standing to maintain a shareholder derivative suit, a plaintiff must be a shareholder at the time of the filing of the suit and must remain a shareholder throughout the litigation.” Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 354 (Del. 1988). Courts in other jurisdictions have adopted the continuous ownership requirement for the same reasons, even when it is not expressly required by statute. See Portnoy, 607 F.2d at 767; Grosset v. Wenaas, 42 Cal. 4th 1100, 1109-10 (2008); Timko v. Triarsi, 898 So. 2d 89, 91-92 (Fla. Dist. Ct. App. 2005); Bacigalupo v. Kohlhepp, 240 S.W.3d 155, 157 (Ky. Ct. App. 2007); White ex rel. Banes Co. Derivative Action v. Banes Co., 866 P.2d 339, 342 (N.M. 1993).
¶11 Not all jurisdictions have adopted the continuous ownership requirement. Indeed, the Trust urges us to follow the Supreme Court of North Carolina in Alford v. Shaw, which found “no requirement of continu[ous] share ownership” in the plain language of the applicable statute. 398 S.E.2d 445, 449 (N.C. 1990); accord Ross-Williams ex rel. Sprint Nextel Corp. v. Bennett, 419 P.3d 608, 626-27 (Kan. App. Ct. 2018). But neither Alford nor the Trust address the considerations that led Delaware and other jurisdictions to adopt the continuous ownership requirement as a matter of common law — reasons that we find persuasive.4 Moreover, Alford is distinguishable because, unlike the present case where the Trust sued for and obtained rescission, the Alford plaintiff alleged the defendant corporation wrongfully deprived him of his interest via a fraudulent merger. Alford, 398 S.E.2d at 451-52. Although equitable considerations may warrant an exception to the continuous ownership requirement when the plaintiff is wrongfully deprived of standing, see, e.g., Lewis v. Anderson, 477 A.2d 1040, 1046 n.10 (Del. 1984) (recognizing an exception to the continuous ownership requirement where the merger that deprived the plaintiff of ownership is the subject of a claim of fraud) (citing Bokat v. Getty Oil Co., 262 A.2d 246, 249 (Del. 1970)), we need not and do not address exceptions that may apply under circumstances not presented here.
¶12 We find the Delaware courts’ reasoning for adopting the continuous ownership requirement both sound and consistent with longstanding Arizona common law. Although Arizona’s constitution does not require standing to sue, we nonetheless generally require that each party have an actual interest in the outcome of the litigation. See Armory Park Neighborhood Ass’n v. Episcopal Cmty. Servs. in Ariz., 148 Ariz. 1, 6 (1985). This ensures that our courts “do not issue mere advisory opinions, that the case is not moot and that the issues will be fully developed by true adversaries.” Id. Combining the continuous ownership rule with the statutory and rule requirements serves that principle by ensuring that a derivative action is both brought and then maintained by a plaintiff that continues to have an actual interest in the outcome of the litigation.
¶13 The Trust argues that it has a sufficient incentive to continue the litigation on behalf of POG because it may recover attorneys’ fees if it prevails. But the Trust cites no authority for the proposition that the mere hope of a fee award will encourage a plaintiff to appropriately and adequately pursue a derivative claim on behalf of a business entity. The potential to recover fees at the end of a case does not confer standing to pursue it or ensure that the claims are litigated by true adversaries. Cf. Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 107 (1998) (“Obviously, . . . a plaintiff cannot achieve standing to litigate a substantive issue by bringing suit for the cost of bringing suit. The litigation must give the plaintiff some other benefit besides reimbursement of costs that are a byproduct of the litigation itself [to satisfy Article III of the U.S. Constitution].“); Lewis v. Cont’l Bank Corp., 494 U.S. 472, 480 (1990) (“[An] interest in attorney’s fees is, of course, insufficient to create a[] case or controversy where none exists on the merits of the underlying claim.“) (citing Diamond v. Charles, 476 U.S. 54, 70-71 (1986)); see also Sears v. Hull, 192 Ariz. 65, 71, ¶ 24 (1998) (noting that Arizona courts consistently require standing similar to that imposed by the U.S. Constitution “as a matter of judicial restraint“).
¶15 Finally, relying on Workman v. Verde Wellness Center, Inc., 240 Ariz. 597 (App. 2016), the Trust contends that continuous ownership is not necessary in the absence of a requirement in statute or rule that the plaintiff fairly and adequately represent the interests of the entity. See also Lewis v. Chiles, 719 F.2d 1044, 1050 n.1 (9th Cir. 1983) (noting the “fairly and adequately” requirement “has served as an anchor for the concept that ownership must extend throughout the life of the litigation“). The plaintiff in Workman was a member of the board of a nonprofit corporation who sued to dissolve the corporation under
¶16 In sum, we adopt the continuous ownership rule and hold that, to maintain standing in a derivative action, the plaintiff must not only possess an ownership interest when commencing suit, but must also continue to maintain its ownership interests throughout the litigation. Because the Trust no longer possesses any ownership interest in POG, we conclude, as did the trial court, that the Trust lacks standing to maintain the derivative action.
CONCLUSION
¶17 The trial court’s order dismissing the Trust’s derivative complaint is affirmed.
¶18 Both parties request an award of attorneys’ fees incurred on appeal pursuant to
AMY M. WOOD • Clerk of the Court
FILED: AA