Halebian v. Berv

JOHN HALEBIAN, individually and on behalf of all othersimilarly situated trust beneficiaries and derivativelyon behalf of Citifunds Trust III, Plaintiff-Appellant, v. ELLIOT J. BERV, DONALD M. CARLTON, A.BENTON COCANOUGHER, MARK T. FINN,STEPHEN RANDOLPH GROSS, DIANA R.HARRINGTON, SUSAN B. KERLEY, ALAN G.MERTEN, R. RICHARDSON PETTIT, Defendants-Appellees,CITIFUNDS TRUST III, Nominal Defendant-Appellee.

No. 12-3360-cv

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Dated: November 12, 2013

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT'S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION "SUMMARY ORDER"). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 12^th day of November, two thousand thirteen.

PRESENT: ROBERT D. SACK,

BARRINGTON D. PARKER,

REENA RAGGI,

Circuit Judges.

APPEARING FOR APPELLANT:

JOEL C. FEFFER (Daniella Quitt, on the brief),

Harwood Feffer LLP, New York, New York.

APPEARING FOR APPELLEES:

MICHAEL K. ISENMAN (James S. Dittmar,

Goodwin Procter LLP, Boston Massachusetts;

Matthew Hoffman, William M. Jay, on the

brief), Goodwin Procter LLP, New York,

New York.

Appeal from an order of the United States District Court for the Southern District of New York (Naomi Reice Buchwald, Judge).

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that the judgment entered on July 26, 2012, is AFFIRMED.

Plaintiff John Halebian, a shareholder in nominal defendant Citifunds Trust III ("CitiTrust" or the "Trust"), appeals from an award of summary judgment in favor of defendants, nine of the ten trustees of CitiTrust (collectively the "Trustees"), dismissing Halebian's claim that the Trust's Board of Trustees (the "Board") breached its fiduciary duties when considering and recommending a new investment advisory agreement to shareholders after the sale of investment advisor Citi Fund Management, Inc. ("CFM") from Citigroup, Inc., to Legg Mason, Inc. Halebian contends that the district court erred in finding that the business judgment doctrine shielded the Trustees' determination that it was not in the Trust's best interest to pursue a derivative proceeding on Halebian's claims. Halebian also challenges the denials of his motions for discovery and to amend the complaint. We assume the parties' familiarity with the underlying facts and the record of prior proceedings, which have been discussed at length in five prior opinions. SeeHalebian v. Berv ("Halebian I"), 631 F. Supp. 2d 284 (S.D.N.Y. 2007); Halebian v. Berv ("Halebian II"), 590 F.3d 195 (2d Cir. 2009); Halebian v. Berv ("Halebian III"), 457 Mass. 620, 981 N.E.2d 986 (2010); Halebian v. Berv ("Halebian IV"), 644 F.3d 122 (2d Cir. 2011); Halebian v. Berv ("Halebian V"), 869 F. Supp. 2d 420 (S.D.N.Y. 2012). We here reference only such facts and proceedings as are necessary to explain our decision to affirm.

1. Motion for Summary Judgment

We review an award of summary judgment de novo, viewing the record evidence in the light most favorable to the nonmoving party and drawing all reasonable inferences in that party's favor. See Townsend v. Benjamin Enters., Inc., 679 F.3d 41, 47 (2d Cir. 2012). In deciding whether a genuine issue of material fact exists as to whether the business judgment doctrine shields the Trustees' decision to terminate the derivative proceeding, we look to substantive state law. See generally Kamen v. Kemper Fin. Servs., 500 U.S. 90 (1991); Burks v. Lasker, 441 U.S. 471 (1979). Here, Massachusetts Business Corporations Act, General Laws Chapter 156D § 7.44(a) applies. In the context of a derivative proceeding, that law "protects a corporation's decision that prosecution of the claim demanded by the shareholder is not in the best interests of the corporation where the decision is made in good faith by independent decision makers after reasonable inquiry." Halebian III, 457 Mass. at 627 n.11, 931 N.E.2d at 991.

Massachusetts places the burden on the Trustees seeking dismissal to show that "a majority of the board of directors was independent" at the time of the challengeddetermination not to pursue the derivative claims. Mass. Gen. Laws ch. 156D, § 7.44(d), (e). Upon such a showing, the burden shifts to plaintiff to demonstrate that the determination was not made in good faith after a reasonable inquiry. See id. § 7.44(e). If, on the other hand, independence is not shown, the burden remains on defendants to demonstrate good faith and a reasonable inquiry. See id.

In contrast to a typical summary judgment motion, a shareholder-plaintiff is not required to adduce evidence; he need only allege particularized facts that raise a genuine issue as to the Trustees' independence, good faith, or reasonable investigation. See Halebian IV, 644 F.3d at 131 n.9 (citing Mass. Gen. Laws ch. 156D, § 7.44(d)). Conclusory assertions or allegations based on speculation or conjecture, however, are not sufficient to overcome the business judgment doctrine. Cf. Scotto v. Almenas, 143 F.3d 105, 114 (2d Cir. 1998) (holding that "non-moving party may not rely on conclusory allegations or unsubstantiated speculation" to defeat motion for summary judgment).

Halebian argues that the district court improperly granted summary judgment because (a) it relied on inadmissible evidence proffered by the Trustees and (b) there is a genuine issue of fact as to the Trustees' independence in conducting the investigation.

A. Admissibility of Evidence

Halebian submits that the Report of the Demand Review Committee, dated June 29, 2006 ("the Report"), attached to the Declaration of Mark T. Finn, one of two Trustees who investigated the derivative claim together with outside counsel, cannot support summary judgment because it is inadmissible hearsay. This argument fails because the districtcourt did not consider the Report for the truth of any matter asserted therein, but rather to show the extent and scope of the investigation conducted. See Halebian V, 869 F. Supp. 2d at 455. Because Finn had personal knowledge of the investigation, we identify no error in the district court's reliance on the Report for this purpose. See Finn Decl. ¶¶ 1, 16-19. To the extent Halebian objects to the admissibility of any other portions of the record, we agree with the district court that such objection is insufficiently specific to warrant further consideration. See Halebian V, 869 F. Supp. 2d at 443 n.24.

B. Trustees' Independence

The record indicates that the Trustees had no direct financial interest in the underlying transaction, and that the Trust Declaration indemnified them for any potential liability based thereon, circumstances supporting a finding of independence as required for the application of the business judgment doctrine.¹

In urging otherwise, Halebian contends that a majority of the Trustees were "interested" as defined in the Investment Company Act of 1940, see 15 U.S.C. § 80a-1 et seq., ("ICA"), because they were "controlled" by CitiTrust, Citigroup, or Legg Mason through the receipt of substantial compensation and retirement benefits, see id. § 80a-2(a)(3)(C) (providing that "affiliated person" includes "any person directly or indirectlycontrolling, controlled by, or under common control, with such other person"); id. § 80a-2(a)(19) (providing that "interested person" of another person/entity includes any "affiliated person").²

Our precedent, however, instructs that "allegations regarding the [Trustees'] appointment, compensation and workload" are insufficient on their own to support an inference of control. Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d 133, 140-41 (2d Cir. 2004).³ Neither is Halebian's claim supported by the record where, as here, the Trust Declaration, an admissible business record, states that Trustee compensation is set by the Trustees, and that Trustees can only be removed by action of the other Trustees or the shareholders. Halebian nevertheless argues that the Trustees' receipt from Citigroup mutual funds of $840,000 in aggregate compensation and $3,600,000 in accrued aggregate retirement benefits, constituting between 25% and 50% of annual income for some Trustees, supports an inference of investment advisors' control, and also relies on a statement by John C. Bogle, founder of Vanguard Group, to support this inference, see Appellant's Br. 30 (quoting John C. Bogle, The Clash of the Cultures 70 (2012) (statingthat fund manager usually "plays an influential role in selecting the funds' directors")). We have rejected this precise argument, as have at least two sister circuits and a number of district courts in cases involving similar inquiries into trustee independence when approving investment advisory agreements. See Amron v. Morgan Stanley Inv. Advisors Inc., 464 F.3d 338, 345 (2d Cir. 2006); see also Krantz v. Prudential Invs. Fund Mgmt. LLC, 305 F.3d 140, 142 (3d Cir. 2002); Migdal v. Rowe Price-Fleming Int'l, Inc., 248 F.3d 321, 330 (4th Cir. 2001); Verkouteren v. Blackrock Fin. Mgmt., Inc., 37 F. Supp. 2d 256, 259 (S.D.N.Y. 1999), aff'd, 208 F.3d 204 (2d Cir. 2000) (unpublished disposition); Krantz v. Fidelity Mgmt. & Research Co., 98 F. Supp. 2d 150, 157 (D. Mass. 2000).

Nor can Halebian raise a genuine issue as to independence through conclusory allegations that compensation ranging from $82,600 to $120,200 for an individual Trustee's service on anywhere from 32 to 37 boards is "far greater" than that received by board members in the above-cited cases, or in cases relied upon by the district court in rejecting this...