In a March 29, 2011 order (here),
Southern District of New York Judge Jed Rakoff granted the
defendants' motions to dismiss a pair of subprime-related derivative lawsuits
that had been brought against certain directors and officers of Merrill Lynch.
Because the plaintiffs -- former shareholders of Merrill Lynch who became BofA
shareholders at the time of BofA's January 2009 acquisition of Merrill-asserted
their claims in the capacities as BofA shareholders, both lawsuits represented
so-called double derivative suits. A copy of Judge Rakoff's March 29 ruling can
be found here.
Judge Rakoff granted the motions to dismiss because he
concluded that the plaintiffs had failed to show that BofA's board was" so
involved in the underlying wrongdoing alleged in the derivative complaint that
it could not impartially consider a demand to pursue claims against the Merrill
officers and directors."
Both lawsuits sought to assert claims against the
defendants for the "unprecedented losses" Merrill had experienced "as a result
of its aggressive investment in collateralized debt obligations." A detailed
review of the underlying facts can be found here.
In an earlier ruling, Judge Rakoff had previously
ruled that the plaintiffs lacked standing to assert derivative claims on
Merrill's behalf because they were no longer Merrill shareholders. His prior
ruling was without prejudice to their refilling their claims in their
capacities as BofA shareholders.
The plaintiffs refilled their complaints seeking to
compel BofA's board to force its Merrill subsidiary to bring claims against
certain Merrill directors and officers in connection with Merrill's reckless
investments. The key difference in the two actions is that in the first action
(referred to as the "Derivative Action"), the plaintiffs allege that they are
not required to bring a demand that BofA's board bring the action against the
Merrill officials, whereas in the second action (the "Lambrecht Action"), the
plaintiffs had presented a demand which the BofA board had refused.
Judge Rakoff concluded that both actions should be
dismissed, noting that
The Court does not take this step lightly, for the
allegations of the complaint, if true, describe the kind of risky behavior by
high-ranking financiers that helped created the economic crisis from which so
many Americans continue to suffer. But a derivative action is brought for the
benefit of the company, and nothing here alleged in the complaints raises a
reason to doubt that the board of the relevant company, BofA, was at all times
fairly positioned to determine whether bringing an action against Merrill's
former directors and officers was in the company's interests.
With respect to the Derivative Action, Judge Rakoff
specifically concluded that the plaintiffs had "failed to make a legally
adequate showing" that the BofA board was so involved in the underlying
wrongdoing "that it could not impartially consider a demand to pursue claims
against the Merrill officers and directors."
With respect to the Lambrecht Action, Judger Rakoff
concluded that the plaintiffs had "failed to carry the considerable burden of
showing that the BofA's Board's decision not to bring a lawsuit against the
Merrill officers and directors was made in bad faith or was based on an
unreasonable investigation."
Discussion
Some time ago, as discussed here,
Merrill Lynch settled for $475 million dollars the related securities class
action lawsuit that had been filed on behalf of Merrill's shareholder. Merrill
also at the same time agreed to settle the related ERISA liability suit for an
additional $75 million. In addition, Merrill agreed to settle the related
securities suit that had been brought by its bondholders for $150 million, as
discussed here.
These settlements represent $700 million in aggregate.
However, Merrill and its successor in interest BofA
declined to settle the related derivative litigation, and Judge Rakoff's
decision dismissing the derivative litigation appears to vindicate that
decision.
Judge Rakoff's ruling is interesting if for no other
reason that the unusual posture of the double derivative suit, where the demand
to pursue the claims against the former directors and officers of a subsidiary
must be directed against the board of the parent company.
The ruling is also interesting because it illustrates
just how difficult it is to overcome the initial pleading hurdles in a
derivative suit. Judge Rakoff concluded that the initial pleading requirements
had not been satisfied notwithstanding allegations that Judge Rakoff himself
said "describe the kind of risky behavior by high-ranking financiers that
helped create the economic crisis from which so many Americans continue to
suffer. " The clear implication is that even allegations of egregious behavior
will not suffice if the demand requirements have not been satisfied or proved
inapplicable.
Judge Rakoff's analysis of the BofA board's rejection of
the Lambrecht plaintiffs' suit demand is particularly interesting. In reviewing
the substance of the reasons the BofA board gave for rejecting the demand,
Judge Rakoff noted that the rejection letter the board had sent "belies
plaintiff's assertions" that the rejection was cursory and the letter itself
mere boilerplate. In support of this conclusion, he noted that the board had
reasoned that taking up the litigation as the Lambrecht plaintiffs demanded
would have undermined Merrill's defenses in the securities litigation and in
the ERISA litigation. The letter also reflected the board's conclusion that the
cost of the urged litigation might well any benefit that might reasonably be
expected. These types of considerations often are present when these types of
demands are presented to boards, and Judge Rakoff's analysis seems to confirm
that it these kinds of considerations are appropriate for boards to take into
account in rejecting litigation demands.
Finally, Judge Rakoff rejected the plaintiffs suggestions
that the response letter irself showed that consideration of the litigation
demand was cursory, noting that" there is no prescribed procedure a board must
follow in responding to a demand letter."
I have in any event added the ruling to my running tally
of subprime-related dismissal motions rulings, which can be accessed here.
Nate Raymond's March 29, 2011 Am Law Litigation Daily article
about Judge Rakoff's decision can be found here.
Special thanks to the securities litigation group at
Skadden for forwarding me a copy of Judge
Rakoff's ruling. Skadden represented Bank of America and Merrill Lynch in the
two derivative suits.
An International D&O Resource. I
know from conversations with readers that one issue of recurring concern is
finding resources on which to rely in connection with the non-U.S. exposures of
directors and officers. With that concern in mind, I am pleased to link here to
the recently completed paper by my friend Perry Granof.
The paper, which is entitled "The Top 10 Non-US-Jurisdictions Based Upon
Maturity and Activity" (here)
analyzes the ten non-U.S. jurisdictions that Perry believes have the most
evolved systems with respect to the liabilities of directors and officers. The
list also includes three 'up-and-coming" jurisdictions, as well.
Read other
items of interest from the world of directors & officers liability, with
occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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