Shareholders are required to make a “demand” on the corporation’s board of directors before filing a derivative suit, unless they sufficiently allege that demand would be futile. Before Arduini filed his derivative action against IGT and its board, four shareholders filed derivative suits that were consolidated. They argued that a demand was excused because: the IGT board extended the employment contract of IGT’s former CEO and chairman of IGT’s board of directors, and allowed him to resign rather than terminating him for cause; three directors received such high compensation from IGT that their ability to impartially consider a demand was compromised; six directors faced a substantial likelihood of liability for breaches of their fiduciary duties as committee members; and that other members had engaged in insider trading. The district court dismissed the consolidated suit for failure to make a demand or sufficiently allege futility; the Ninth Circuit affirmed. The district court then dismissed Arduini’s action, holding that Arduini had failed to make a demand and could not allege demand futility based on issue preclusion due to its ruling in the prior suit. The Ninth Circuit affirmed, holding that under Nevada law and these facts, issue preclusion barred relitigation of futility. View "Arduini v. Int'l Gaming Tech." on Justia Law
Allergan, the pharmaceutical manufacturer of Botox, settled several qui tam suits concerning allegations that it had acted illegally in marketing and labeling Botox, and pled guilty in a criminal case. Plaintiffs, all Allergan shareholders, subsequently filed a derivative action alleging that Allergan's directors are liable for violations of various state and federal laws, as well as breaches of their fiduciary duties to Allergan. Plaintiffs failed to make a demand on Allergan's board requesting that Allergan bring the derivative claims in its own name. The court concluded that the district court misapplied governing Delaware law and improperly drew inferences against plaintiffs rather than in their favor when the district court dismissed the action on the ground that plaintiffs failed to allege particularized facts showing that demand was excused under Federal Rule of Civil Procedure 23.1. The court concluded that demand was excused where plaintiffs' particularized allegations established a reasonable doubt as to whether the Board faces a substantial likelihood of liability and as to whether the Board is protected by the business judgment rule. Accordingly, the court reversed the judgment of the district court.View "Rosenbloom v. Pyott" on Justia Law
Fitness Holdings, the debtor in this bankruptcy case, was a home fitness corporation. At issue was whether debtor's pre-bankruptcy transfer of funds to its sole shareholder, in repayment of a purported loan, could be a constructively fraudulent transfer under 11 U.S.C. 548(a)(1)(B). The court held that a court has the authority to determine whether a transaction created a debt if it created a right to payment under state law. Because the district court concluded that it lacked authority to make this determination, the court vacated the decision and remanded for further proceedings. View "In re: Fitness Holdings Int'l" on Justia Law
National Elevator, lead plaintiff on behalf of investors who purchased VeriFone stock, appealed the dismissal of its securities fraud class action. National Elevator alleged that VeriFone, the CEO and former Chairman of the Board of Directors, and the company's former CFO and Executive Vice President, violated sections 10(b), 20(a), and 20A of the Securities and Exchange Act of 1934, 15 U.S.C. 78j(b), 78t-1(a), and 78t(a), and Securities and Exchange Commission Rule 10-b, 17 C.F.R. 240.10b-5(b), in connection with a December 2007 restatement of financial results. The court held that National Elevator adequately pleaded violations of section 10B and Rule 10b as to all defendants; its section 20A claim against the individual defendants was sufficiently pled; but the section 20(a) claim was properly dismissed. Accordingly, the court affirmed in part and dismissed in part. View "National Elevator Industry Pension Fund v. VeriFone Holdings, Inc., et al" on Justia Law
Posted in: Business Law, Class Action, Corporate Compliance, Securities Law, U.S. 9th Circuit Court of Appeals
CIRI filed suit against defendants, shareholders of CIRI, alleging that they had violated the Alaska Native Claims Settlement Act (ANCSA), 43 U.S.C. 1601-1629(h), and Alaska law. On appeal, defendants challenged the district court's holding that it had subject matter jurisdiction over the ANCSA claims. The court held that there was federal jurisdiction under the general federal question jurisdiction statute, 28 U.S.C. 1331, over plaintiff's ANCSA claims because federal law created the cause of action in the claims and because the claims were not frivolous. Accordingly, the court affirmed the judgment of the district court. View "Cook Inlet Region, Inc. v. Rude, et al." on Justia Law
Under Internal Revenue Code 1361(a) and 1362(a)(1), qualifying small business corporations could affirmatively elect S corporation status for federal income tax purposes. Under Internal Revenue Code 1363(a) and 1366(a)(1)(A), an S corporation's "profits pass through directly to its shareholders on a pro rata basis and are reported on the shareholders' individual tax returns." At issue was whether a corporate taxpayer was ineligible for S corporation status, and therefore must be taxed as a C corporation, because its sole shareholder was a custodial Roth IRA. Taproot contended that a Roth IRA could not be distinguished from its individual owner under a reasonable interpretation of the governing statute. Adhering to this construction, Taproot thus argued that it satisfied the S corporation requirements. The court agreed with the Tax Court that Revenue Ruling 92-73 provided persuasive guidance that IRAs were ineligible for S corporation shareholders. Here, the 2004 amendment, coupled with the prior legislative history, unequivocally supported the IRS's interpretation of the S corporation statute and promulgation of Revenue Ruling 92-73. The court also agreed with the IRS's narrow interpretation of Treasury Regulation 1.1361-1(e)(1), restricting its application of custodial accounts in which corporate dividends were taxed in the year received. Moreover, the court found persuasive the IRS's opinion that ownership of custodial IRAs and Roth IRAs should not be attributed to the underlying individual for purposes of S corporation eligibility. Accordingly, the decision of the Tax Court was affirmed.
This appeal concerned the maintenance of a suit for rescission under section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. 78a et seq., by plaintiffs Kenneth Weiss and his wholly-owned corporation. The district court granted summary judgment to defendants on all claims and awarded defendants attorneys' fees. The court held that a plaintiff suing under section 10(b) seeking rescission must demonstrate economic loss and that the misrepresentation or fraud conduct caused the loss. The court found that the record revealed that rescission was not feasible in the instant case. Yet employing a rescissionary measure of damages, Weiss would be able to convince the finder of fact that he was entitled to relief. On that basis, the court reversed the district court's grant of summary judgment of Weiss's federal and state securities claims and remanded for consideration under a rescissionary measure of damages. With respect to the statue of limitations issue, the court remanded for consideration in light of Merck & Co., Inc. v. Reynolds. The court affirmed the district court's judgment on Weiss's state law claims of common law fraud, negligent misrepresentation, mutual mistake, and unjust enrichment. The court vacated the district court's attorneys' fee award and dismissed the appeal of this award as moot.
Posted in: Business Law, Contracts, Corporate Compliance, Securities Law, U.S. 9th Circuit Court of Appeals
Chevron, the franchisor, brought suit for declaratory judgment against one of its franchised dealers, M&M Petroleum Services, Inc. M&M responded with a counterclaim of its own, a counterclaim that was not only found to be frivolous, but the product of perjury and other misconduct. The court held that had M&M merely defended Chevron's suit, it could not have been held liable for attorneys' fees. The court held, however, that in affirmatively bringing a counterclaim that was reasonably found to be frivilous, M&M opened itself up to liability for attorneys' fees under the Petroleum Marketing Practices Act, 15 U.S.C. 2805(d)(3). Therefore, the district court did not err in determining that Chevron was eligible to recover attorneys' fees, nor did the district court abuse its discretion in determining that M&M's counterclaim was frivolous and awarding attorneys' fees to Chevron under section 2805(d)(3).
Posted in: Business Law, Contracts, Corporate Compliance, Energy, Oil & Gas Law, Tax Law, U.S. 9th Circuit Court of Appeals
WPP Luxembourg Gamma Three Sarl (WPP) appealed from the district court's dismissal of the amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). Defendant and cross-appellants cross-appealed the district court's decision to dismiss some of WPP's claims without prejudice. WPP generally alleged violations of the Securities and Exchange Act of 1934, 15 U.S.C. 78(a), that amidst large operating losses unknown to investors, Spot Runner executives solicited WPP to buy shares in it at the same time that executives of the company were selling personally owned shares. The court affirmed the dismissal of the Rule 10b-5(a) and (c) fraudulent scheme against all of the defendants, the dismissal of the Rule 10b-5(b) fraudulent omissions claim against the general counsel for Spot Runner and Spot Runner, and the dismissal of the Rule 10b-5 insider trading claim against Spot Runner. The court reversed the dismissal of the Rule 10b-5(b) omission claims against the founders of Spot Runner.
Posted in: Business Law, Contracts, Corporate Compliance, Professional Malpractice & Ethics, Securities Law, U.S. 9th Circuit Court of Appeals
This case arose from the IRS's investigation of a type of tax shelter known as a "Son-of-Boss" (a variant of the Bond and Options Sales Strategy (BOSS) shelter). Petitioner appealed the Tax Court's decision in favor of the Commissioner of Internal Revenue. The court held that the IRS properly sent petitioner an affected item notice of deficiency because the deficiency required a partner-level determination. The court also held that the Tax Court had jurisdiction to redetermine affected items based on the partnership item determinations in the Final Partnership Administrative Adjustment (FPAA). Therefore, the court affirmed the judgment of the Tax Court.
Posted in: Business Law, Corporate Compliance, Professional Malpractice & Ethics, Securities Law, Tax Law, U.S. 9th Circuit Court of Appeals