Davis v. Baier

1

BRIAN DAVIS, BRIAN BICKETT, and ROBERT BAZINET, derivatively on behalf of BROOKDALE SENIOR LIVING INC., Plaintiffs, v. LUCINDA M. BAIER, T. ANDREW SMITH, STEVEN E. SWAIN, MARCUS E. BROMLEY, FRANK M. BUMSTEAD, JACKIE M. CLEGG, DANIEL A. DECKER, RITA JOHNSON-MILLS, JEFFREY R. LEEDS, MARK J. PARRELL, WILLIAM G. PETTY, JR., GUY P. SANSONE, JAMES R. SEWARD, DENISE W. WARREN, and LEE S. WIELANSKY, Defendants, and BROOKDALE SENIOR LIVING INC., a Delaware corporation, Nominal Defendant.

No. 3:20-cv-0929

United States District Court, M.D. Tennessee, Nashville Division

January 27, 2023

MEMORANDUM

ALETA A. TRAUGER, JUDGE

The defendants have filed a Motion to Dismiss Plaintiffs' Verified Consolidated Amended Shareholder Derivative Complaint (Doc. No. 46), to which the plaintiffs have filed a Response (Doc. No. 48), and the defendants have filed a Reply (Doc. No. 49). For the reasons set out herein, the motion will be granted in part and denied in part.

I. BACKGROUND^[1]

A. The Nature of the Case

Brookdale Senior Living Inc. (“Brookdale”) is “the largest operator of senior living communities in the United States based on total capacity, with 679 communities in 41 states and the ability to serve more than 60,000 residents as of December 31, 2021.” (Doc. No. 42 ¶ 2.) The individual defendants are current and former Brookdale executives and members of its Board of Directors (“Board”). (Id. ¶¶ 30-89.) In recent years, Brookdale, which is incorporated in Delaware has faced a number of allegations regarding (1) the quality of its services and (2) the honesty of its and its executives' representations to the public. Several lawsuits have been filed based on those allegations including the consolidated cases at issue here. (Id. ¶¶ 11-17, 29.) These plaintiffs, like many of the others, take particular issue with (1) Brookdale's accumulation of liabilities as part of its corporate expansion, which allegedly resulted in excessive pressure to cut costs; (2) Brookdale's attempts to cut those costs through an internal software algorithm, the Service Alignment Software (“SAS”), that produced staffing-level recommendations that, according to the plaintiffs, were deficient; and (3) the defendants' various statements allegedly misrepresenting or concealing the reality of that situation.

These plaintiffs are, or at least were, owners of Brookdale stock, and these cases are shareholder derivative suits, meaning that they were brought by those shareholders-ostensibly on Brookdale's behalf, but without the consent of the Board. Specifically, these derivative plaintiffs seek to pursue six counts on Brookdale's behalf against the officer and director defendants. Count I, the only statutory claim, is for violation of Section 14(a) of the Securities Exchange Act of 1934 (“Exchange Act”). (Doc. No. 42 ¶¶ 224-36.) Counts II through VI are common law claims for, respectively, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. (Id. ¶¶ 237-67.)

Claims such as the plaintiffs' depart from the ordinary structure of litigation in that they permit one party to pursue claims on behalf of another. See Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991) (“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.'”) (quoting Ross v. Bernhard, 396 U.S. 531, 534, (1970)). In order for a stockholder to bring a claim on behalf of the corporation in which he owns only a partial, non-controlling share, however, certain threshold requirements must be met. See id. at 97.

Delaware law provides that “[t]he business and affairs of every corporation organized [under the laws of the state] shall be managed by or under the direction of a board of directors, except as may be otherwise provided in [the Delaware Code] or in its certificate of incorporation.” Del. Code Ann. tit. 8, § 141(a). Pursuant to that rule, “[w]hether or not a corporation shall seek to enforce in the courts a cause of action for damages is, like other business questions, ordinarily a matter of internal management and is left to the discretion of the directors, in the absence of instruction by vote of the stockholders.” Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 532 (1984) (quoting United Copper Secs. Co. v. Amalgamated Copper Co., 244 U.S. 261, 263 (1917)). The law theoretically could treat that right of control by directors, in the absence of a shareholder vote, to be inviolable, allowing directors to manage or mismanage a corporation however they wish, until they are constrained by the entity's owners acting collectively. That, though, is not the status quo that Delaware has chosen to adopt with regard to the initiation of litigation.

Rather, Delaware law recognizes that a shareholder may bring suit on a corporation's behalf if he can establish “either that the board wrongfully refused the plaintiff's pre-suit demand to initiate the suit or, if no demand was made, that such a demand would [have been] a futile gesture and is therefore excused.” White v. Panic, 783 A.2d 543, 550 (Del. 2001) (citations omitted). That rule-typically referred to as the “demand requirement”- “exists to preserve the primacy of board decisionmaking,” In re Am. Int'l Grp., Inc., 965 A.2d 763, 808 (Del. Ch. 2009) (citation omitted), while leaving open two narrow paths through which a shareholder of a corporation may seize that responsibility from the directors by “articulat[ing] a reasonable basis” for that shareholder “to be entrusted with a claim that,” by right, “belongs to the corporation.” Brehm v. Eisner, 746 A.2d 244, 255 (Del. 2000).

One of those narrow paths-establishing that the corporation's Board of Directors wrongly refused a litigation demand-is at issue in a separate set of consolidated cases currently pending in this court. See Anders v. Baier, No. 3:21-CV-0373, 2022 WL 4097332, at *11 (M.D. Tenn. Sept. 7, 2022). The court held in that case that, although the Board claimed merely to be indefinitely forestalling consideration of those plaintiffs' litigation demand, the Board's unjustifiable delays eventually reached the stage at which the demand had been constructively refused, giving rise to a right to sue derivatively. Id. at *13. This case involves the other option for overcoming the demand requirement-establishing that such a demand would have been futile in the first place. See id. (discussing relationship between the two suits). (Doc. No. 42 ¶¶ 200-01.) The defendants now seek dismissal of the plaintiffs' claims on the ground that the plaintiffs have failed to plead facts sufficient to support that theory. (Doc. No. 46.)

II. LEGAL STANDARD

In deciding a motion to dismiss for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the court must, generally speaking, “construe the complaint in the light most favorable to the plaintiff, accept its allegations as true, and draw all reasonable inferences in favor of the plaintiff.” Directv, Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007); Inge v. Rock Fin. Corp., 281 F.3d 613, 619 (6th Cir. 2002). The court's evaluation of the sufficiency of those facts, however, depends on the applicable pleading standard. Most ordinary civil claims are governed by the relatively forgiving requirements of Rule 8. Shareholder derivative actions, however, are subject to the more demanding pleading standard of Rule 23.1(b), which requires that the complaint:

(1) allege that the plaintiff was a shareholder or member at the time of the transaction complained of, or that the plaintiff's share or membership later devolved on it by operation of law;

(2) allege that the action is not a collusive one to confer jurisdiction that the court would otherwise lack; and

(3) state with particularity:

(A) any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and

(B) the reasons for not obtaining the action or not making the effort.

Fed. R. Civ. P. 23.1; see McCall v. Scott, 239 F.3d 808, 815 (6th Cir. 2001).

“[A]lthough Rule 23.1 clearly contemplates both the demand requirement and the possibility that demand may be excused, it does not create a demand requirement of any particular dimension.” Kamen, 500 U.S. at 96. The Supreme Court has held that, faced with this “gap in the federal securities laws,” a federal court should apply the “scope of the demand requirement” that exists “under state law.” Id. at 108. The parties agree that the relevant state, in this instance, is Delaware.

III. ANALYSIS

A. Principles of Demand Futility Under Delaware Law

“The purpose of the demand-futility analysis is to assess whether the board should be deprived of its decision-making authority because there is reason to doubt that the directors would be able to bring their impartial business judgment to bear on a litigation demand.” United Food & Com. Workers Union & Participating Food Indus. Emps. Tri-State Pension Fund v. Zuckerberg, 262 A.3d 1034, 1059 (Del. 2021). Delaware's demand futility rule should not be misconstrued as a barrier intended to insulate all but the most egregious misbehavior by directors from liability. To the contrary, “[t]he demand requirement does not exist for the benefit of defendants in derivative suits” at all, but rather “for the benefit of the corporation itself.” In re Am. Int'l Grp., Inc., 965 A.2d at 808 & n.160 (citing Aronson v. Lewis 473 A.2d 805, 811 (Del. 1984)). The court's inquiry therefore is not focused on judging the individual directors' behavior, in and of itself, but on whether the pleaded facts raise sufficient doubt about those directors' capacity to...