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Behradrezaee v. Johndashtara

November 9, 2006


Appeal from the Superior Court of the District of Columbia (CA-6175-01) (Hon. Michael L. Rankin, Trial Judge).

The opinion of the court was delivered by: Wagner, Senior Judge

Argued December 9, 2004

Before FARRELL, Associate Judge, and WAGNER*fn1 and BELSON, Senior Judges.

Appellant, Nader Behradrezaee, appeals from an order of the trial court dismissing his derivative action against appellees, NAMA Discounter, Inc. (NAMA), a corporation, and M. John Dashtara (Dashtara), an officer and director of NAMA, for failure to state a claim. He argues that the trial court erred in its ruling because: (1) the complaint meets the particularized pleading requirements of Super. Ct. Civ. R. 23.1 (governing a corporate shareholder's derivative action); and (2) the court could not determine on a motion to dismiss under Super. Ct. Civ. R. 12 (b)(6) that the corporation acted in good faith in refusing his demand for action against Dashtara. We conclude that appellant's second amended complaint meets the pleading requirements of Rule 23.1, and that the trial court erred in dismissing it. Further, we conclude that appellees were not entitled to summary judgment as a matter of law. Therefore, we reverse and remand for further proceedings consistent with this opinion.

I. Factual Background

Behradrezaee and Dashtara incorporated NAMA Discounter, Inc. (a retail furniture store) under the laws of the District of Columbia on April 18, 1991.*fn2 Of the 1000 shares of stock issued, 510 were issued to Dashtara (51%), and 490 (49%) were issued to appellant. At the corporation's initial meeting, Dashtara was elected President and Treasurer, and appellant was elected Vice-President and Secretary. At the first annual meeting of the corporation's shareholders on January 2, 1992, the directors named in the articles of incorporation, Dashtara, Dashtara's wife, Nasrin Dashtara, and appellant, were confirmed as directors of the corporation. Appellant and Dashtara worked for the corporation in its retail furniture store in the District of Columbia and, later, in Fairfax, Virginia, until appellant's termination as an officer, director, and employee of the corporation in June 2001.*fn3

A. Original and First Amended and Supplemental Complaints

After the action terminating him, appellant filed a complaint in this case against NAMA and Dashtara for voluntary dissolution and liquidation of the corporation, appointment of a receiver and for damages individually and as a stockholder. Both NAMA and Dashtara filed answers to the original complaint asserting, inter alia, that the complaint failed to state a claim for which relief could be granted. Appellant filed an amended and supplemental complaint seeking (1) appointment of a receiver, pendente lite and permanently, to liquidate the corporation and distribute its assets (Count I); (2) damages for malicious prosecution against both appellees (Count II); (3) damages for himself individually for breach of employment contract against NAMA (Count III); (4) damages for himself individually and as a stockholder of NAMA against Dashtara for breach of fiduciary duty (Count IV); (5) damages for himself individually and as a stockholder based on conversion and waste of corporate assets against Dashtara (Counts V & VI); and (6) dissolution of the corporation pursuant to D.C. Code § 29-221.01(Count VII). Dashtara and NAMA filed answers to the amended and supplemental complaint, again asserting among their defenses that the complaint failed to state a claim for which relief could be granted. Dashtara and NAMA then filed motions for summary judgment and to dismiss to which appellant filed no opposition.*fn4

The trial court granted appellant leave to amend Counts IV, V and VI of his complaint (for breach of fiduciary duty, conversion, and waste) to assert these claims as a derivative action in his capacity as a shareholder only. The court granted summary judgment in favor of appellees on all remaining counts, including appellant's individual claims as set forth in Counts IV, V, and VI. In explanation of its ruling, the court stated:

. . . [Behradrezaee] has failed to comply with the rules governing shareholder's derivative actions, i.e., [he] failed to explain in his complaint why he had not first made a demand on the board of directors for the requested relief before filing this suit in court. Super. Ct. Civ. R. 23.1. Although [his] reasons could be inferred from the nature of the complaint, he nonetheless must plead these with specificity before bringing a derivative action. Rule 23.1's pleading requirement is mandatory. Therefore, the court will not consider counts IV, V, and VI at this time; however, it will grant [Behradrezaee] leave to re-file a complaint regarding the above counts upon [his] proper showing of either his efforts in obtaining action from the directors or, if none were made, his reasons for not making the effort. [Behradrezaee's] allowance to re-file on the above three counts, however, is limited to a derivative action. [Dashtara's] motion to dismiss counts IV, V, and VI, insofar as [Behradrezaee] brings these in his individual capacity, will be treated as a motion for summary judgment and is hereby granted. [Behradrezaee] has no legally cognizable personal claims for conversion, waste, or breach of fiduciary duties: any alleged breaches, thefts, or wastes involved corporate transactions and funds, and not [his] individual property.

B. Second Amended Complaint

Following entry of the trial court's order, appellant filed a Second Amended Complaint, as a derivative action pursuant to Super. Ct. Civ. R. 23.1, seeking compensatory and punitive damages from appellees for alleged breach of fiduciary duty, conversion, and waste of corporate assets. These claims are centered on several transactions in which appellant alleged that Dashtara engaged in self-dealing and misused corporate assets. Specifically, these transactions included: (1) a lease by the corporation for a store in Georgetown (D.C.); (2) a lease for a store in Fairfax, Virginia; (3) a lease for warehouse space in Ashburn, Virginia; (4) Dashtara's hiring of his own family members; (5) and appellant's summary removal to the detriment of the corporation. NAMA and Dashtara then filed a motion to dismiss the second amended complaint with prejudice or alternatively for summary judgment. In support of the motion, they argued that: (1) appellant failed to plead his claim with particularity as required by Rule 23.1; (2) appellant was aware of, and participated in the actions about which he complains; (3) appellant conceded the Board's independence by making a demand for Board action, and he failed to allege that the Board did not validly exercise its business judgment with respect to the claims; and (4) the claims are barred by laches.

The trial court granted Dashtara's and NAMA's motion and dismissed the second amended complaint with prejudice. As reasons for its order, the court stated that "[Behradrezaee's] derivative action cannot be sustained in light of the 'business judgment' rule as discussed in defendant's brief[,] and [t]he second amended complaint is dismissed for failing to state a claim for which relief can be granted. Super. Civ. R. 12 (b)(6)." Appellant noted the present appeal from that order. He argues on appeal that the trial court erred in dismissing his second amended complaint for failure to state a claim upon which relief can be granted. Specifically, he contends that, contrary to the trial court's ruling, the complaint meets the pleading requirements of Super. Ct. Civ. R. 23.1, which governs shareholders' derivative actions. Appellees argue that the allegations in the complaint fall short of the particularized pleading requirements for derivative suits.

II. Applicable Legal Principles

"'The directors of a corporation and not its shareholders manage the business and affairs of the corporation.'" Flocco v. State Farm Mut. Auto. Ins. Co., 752 A.2d 147, 151 (D.C. 2000) (quoting Levine v. Smith, 591 A.2d 194, 200 (Del. 1991) (footnote omitted)); D.C. Code § 29-101.32 (a) (2001) (formerly D.C. Code § 29-332 (a) (1981)) (providing that "[t]he business and affairs of a corporation shall be managed by a board of directors.").*fn5 The management authority of corporate directors includes decisions to litigate on behalf of the corporation. Flocco, 752 A.2d at 151 (citations omitted); Grimes v. Donald, 673 A.2d 1207, 1215 (Del. 1996) (citation omitted); see D.C. Code § 29-101.04 (2) (2001) (formerly D.C. Code § 29-304 (2) (1981)) (providing that a corporation has the power "[t]o sue and be sued, complain and defend, in its corporate name. . . ."). "The derivative form of action permits an individual shareholder to bring 'suit to enforce a corporate cause of action against officers, directors, and third parties.'" Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991) (emphasis in the original) (quoting Ross v. Bernhard, 396 U.S. 531, 534 (1970)). "[T]he purpose of the derivative action was to place in the hands of the individual shareholder a means to protect the interests of the corporation from the misfeasance and malfeasance of 'faithless directors and managers.'" Id. (quoting Cohen v. Beneficial Loan Corp., 337 U.S. 541, 548 (1949)).

In order to pursue the derivative action remedy, a shareholder must first demonstrate to the court either that the corporation refused to proceed after a suitable demand for action or that a demand would have been futile. Kamen, supra, 500 U.S. at 95-96(citation omitted); Flocco, supra, 752 A.2d at 151 (citations omitted). "The purpose of the demand requirement is to affor[d] the directors an opportunity to exercise their reasonable business judgment and waive a legal right vested in the corporation in the belief that its best interest will be promoted by not insisting on such right." Kamen, supra, 500 U.S. at 96 (internal quotations omitted) (citing Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 533 (1984), and Corbus v. Alaska Treadwell Gold Mining Co., 187 U.S. 455, 463 (1903)). "Thus, the demand requirement implements 'the basic principle of corporate governance that the decisions of a corporation -- including the decision to initiate litigation -- should be made by the board of directors or the majority of shareholders.'" Kamen, 500 U.S. at 101 (quoting Daily Income Fund, supra,464 U.S. at 530); Gaubert v. Federal Home Loan Bank Bd., 274 U.S. App. D.C. 153, 159, 863 F.2d 59, 65 (D.C. Cir. 1988) (citations omitted) (noting that the demand requirement furthers the principle that corporate management is entrusted to its board of directors).*fn6

Under the futility exception, the demand requirement is excused. Gaubert, supra, 274 U.S. App. D.C. at 159, 863 F.2d at 65 (citing Untermeyer v. Fidelity Daily Income Trust, 580 F.2d 22, 23-24 (1st Cir. 1978)). "By permitting the shareholder to circumvent the board's business judgment on the desirability of corporate litigation, the 'futility' exception defines the circumstances in which the shareholder may exercise this particular incident of managerial authority." Kamen, supra, 500 U.S. at 102 (citing Zapata Corp. v. Maldonado, 483 A.2d 779, 784 (Del. 1981)). Jurisdictions differ in defining the scope of the ...

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