Opinion
No. 654027/2013.
10-14-2014
Paul DAVIS, Plaintiff, v. SCOTTISH RE GROUP LIMITED, Scottish Re (US), Inc., SRGL Acquisition, LDC, Benton Street Partners I, L.P., Benton Street Partner II, L.P., Benton Street Partner III, L.P., Massmutual Insurance, Cerberus Capital, LLC, Jonathan Bloomer, Brett Adamczyk, James Butler, James Chapman, Thomas Finke, Jeffrey Hughes, Robert Joyal, Larry Port, Michael Rollings, Raymond Wechsler, Meredith Alicia Ratajczak, Michael Steven Baumstein, and Daniel Ryan Roth, Defendants.
Guzov LLC (Deborah J. Guzov, Esq., and David J. Kaplan, Esq., of counsel), Bolatti & Associates (Silvia Bolatti, Esq. of counsel) co-counsel for Plaintiff Paul Davis. Mayer Brown LLP (Jean–Marie L. Atamian, Esq., and James Ancone, Esq., of counsel) for the Scottish Re Defendants. Quinn Emanuel, Urquhart & Sullivan, LLP (Jennifer J. Barrett, Esq ., Joshua S. Margolin, Esq., and Jeniifer Swearingen, Esq., of counsel) for the MassMutual Defendants, Thomas Finke and Larry Port. Kasowitz, Benson, Torres & Friedman LLP (Marc E. Kasowitz, Esq., Michael J. Bowe, Esq., and Joseph P. Hyland, Esq., of counsel) for Defendant Michael Rollings. Schulte Roth & Zabel LLP (Howard O. Godnick, Esq., Frank J. LaSalle, Esq., and Andrew D. Gladstein, Esq., of counsel) for the Cerberus Defendants.
Guzov LLC (Deborah J. Guzov, Esq., and David J. Kaplan, Esq., of counsel), Bolatti & Associates (Silvia Bolatti, Esq. of counsel) co-counsel for Plaintiff Paul Davis.
Mayer Brown LLP (Jean–Marie L. Atamian, Esq., and James Ancone, Esq., of counsel) for the Scottish Re Defendants.
Quinn Emanuel, Urquhart & Sullivan, LLP (Jennifer J. Barrett, Esq ., Joshua S. Margolin, Esq., and Jeniifer Swearingen, Esq., of counsel) for the MassMutual Defendants, Thomas Finke and Larry Port.
Kasowitz, Benson, Torres & Friedman LLP (Marc E. Kasowitz, Esq., Michael J. Bowe, Esq., and Joseph P. Hyland, Esq., of counsel) for Defendant Michael Rollings.
Schulte Roth & Zabel LLP (Howard O. Godnick, Esq., Frank J. LaSalle, Esq., and Andrew D. Gladstein, Esq., of counsel) for the Cerberus Defendants.
Opinion
O. PETER SHERWOOD, J.
Before the Court are three substantially overlapping motions to dismiss the complaint of plaintiff Paul Davis (“Davis”) (the “Complaint”) pursuant to CPLR 3211(a)(1), (a)(2), (a)(3), (a)(7), and (a)(8). For the following reasons, the motions will be granted in part. Regardless of how they are pleaded Counts 4, and 6 through 10, in the Complaint are derivative in nature. Under the law of the Caymans Islands (“Cayman”) applicable to these claims under New York choice of law rules, Davis lacks standing to assert derivative claims. The claims must therefore be dismissed. Count 3 (breach of contract) and Count 5 (tortious interference with contract) fail to state causes of action. Counts 1 and 2, (breach of contract) are asserted against Scottish Re and may be subject to dismissal for lack of personal jurisdiction. The motion of Scottish Re as to these claims will be decided after jurisdictional discovery is completed.
Motion Sequence 002 is brought on behalf of Benton Street Partners I, L.P. (“Benton I”), Benton Street Partners II, L.P. (“Benton II”), Benton Street Partners III, L.P. (“Benton III”) (together, the “Benton Entities”); Massachusetts Mutual Life Insurance Company (“Mass Mutual,” and collectively with the Benton Entities the “Mass Mutual Defendants”); and Thomas Finke, Michael Rollings and Larry Port. Motion Sequence 003 is brought on behalf of SRGL Acquisition, LDC (“SRGL”) and Cerberus Capital, LLC (“Cerberus” and, together with SRGL, the “Cerberus Defendants”). Motion Sequence 004 is brought on behalf of Scottish Re Group Limited (“Scottish Re”); Scottish Re directors Jonathan Bloomer, Brett Adamczyk, James Butler, James Chapman, Jeffrey Hughes, Robert Joyal, Raymond Wechsler,(collectively with Finke, Rollings and Port, the “Scottish Re Directors”); Scottish Re (U.S.), Inc. (“SRUS”); SRUS directors Meredith Ratajczak, Michael Baumstein, and Daniel Roth (collectively, “SRUS Directors”) (Scottish Re, Scottish Re Directors, SRUS, and SRUS Directors, collectively, “Scottish Re Defendants”).
Unless otherwise noted, the facts contained herein are taken from the Complaint and assumed to be true for purposes of this motion (see Monroe v. Monroe, 50 N.Y.2d 481, 484 [1980] ).
I. The Parties
Plaintiff Davis, a resident of Mexico City, Mexico, owns more than 2.4 million shares of defendant Scottish Re's Non–Cumulative Perpetual Preferred Shares (the “PPS”), and was a holder of more than 13,000,000 of ordinary shares in Scottish Re as of June 30, 2011. Plaintiff was a holder of both PPS and ordinary shares at all times relevant to this Complaint. He purchased the shares through the New York Stock Exchange (“NYSE”) or other secondary markets located in New York.
Scottish Re is a holding company, organized and existing under the laws of Cayman. It is engaged in the business of reinsurance through its operating subsidiaries in Cayman, Ireland and the United States. One such subsidiary is defendant SRUS, an insurance company organized and existing under the laws of Delaware, with its principal place of business in Charlotte, North Carolina.
Defendant SRGL is an exempted company organized and existing under the laws of Cayman with its principal place of business in New York. Defendant Cerberus, which is alleged to own or control SRGL, is a limited partnership organized and existing under the laws of Delaware with its principal place of business in New York.
Defendant Benton I is an exempted limited partnership organized and existing under the laws of Cayman. Defendants Benton II and Benton III are limited partnerships organized and existing under the laws of Delaware. The Complaint alleges that the Benton Entities are owned or controlled by Mass Mutual. Mass Mutual has its principal place of business in Springfield, Massachusetts.
With the exceptions of Mr. Hughes and Mr. Wechsler who reside in New York State, all of the Scottish Re Directors and SRUS Directors are non-New York residents.
II. Scottish Re's Capital Structure
Scottish Re's capital structure lies at the heart of this action. At the beginning of the relevant time period, Scottish Re's capital structure consisted of ordinary shares, convertible cumulative participating preferred shares (the “CCPPS”), and the aforementioned PPS. The PPS were issued in 2005 via a public offering listed on the NYSE and are governed by the terms of a Certificate of Designation dated June 28, 2005 (the “COD”). The Cerberus Defendants and the Mass Mutual Defendants (collectively the “Investors”) own all 1,000,000 shares of CCPPS. They acquired these shares in a private transaction which closed in May 2007 for a total of $600 million. Each CCPPS carries a $600 liquidation preference and accrues dividends at the rate of 7.25% per annum. As of March 31, 2013, the CCPPS accrued dividends plus liquidation preference amounted to $781.58 per share.
The 1,000,000 shares of CCPPS are convertible into 150,000,000 of ordinary shares. The Complaint alleges that the holders of the CCPPS are entitled to vote their shares on an as-converted basis. Accordingly, upon the closing in May 2007, the Cerberus Defendants and the Mass Mutual Defendants became entitled to exercise approximately 68% of the voting shares of Scottish Re. The Complaint further alleges that approximately 67,000,000 ordinary shares of Scottish Re were issued and outstanding as of January 1, 2008 and were publicly traded on the NYSE.
III. Relevant Provisions of the COD
The COD authorized the issuance of 5,000,000 PPS, each share bearing a liquidation preference of $25 per share. The PPS are redeemable at the option of Scottish Re at the pre-set price of $25 per share. However, the COD provided that any partial redemptions by Scottish Re must be pro rata or via some other “fair and equitable method” (Klingenberg Aff., Exh. C, COD ¶ 5[e] ).
Holders of the PPS were entitled to receive a quarterly dividend at a fixed rate for the first five years after their issuance in 2005. However, this dividend was payable “if, as and when” declared by the Scottish Re Board of Directors in its sole discretion. The COD granted the PPS holders certain rights if dividends remained unpaid. First, no dividends could be paid to holders of junior shares nor could junior shares be purchased, redeemed or otherwise acquired for consideration, so long as dividends were not being paid to PPS holders for a particular quarter. Second, in the event that Scottish Re failed to declare and pay dividends for six or more consecutive dividend periods, the PPS holders became entitled to elect two additional directors to the Board of Directors. Under the terms of the COD, “the [additional directors] shall be elected by simple majority at a special meeting called at the request of the holders of record of at least 20% of the Perpetual Preferred Shares or of any other series of Voting Preferred Shares then outstanding” (Klingenberg Aff., Exh. C, COD ¶ 8[b] ). Thus, as the holder of 48% of the PPS, Davis had the right to request a special meeting to select additional directors.
IV. The Corporate Transactions at Issue
By early 2008, Scottish Re made the decision to cease writing new reinsurance business. As a result, the share price of Scottish Re stock declined significantly. By April 2008 its shares were no longer eligible for public trading on NYSE and were delisted on or about April 7, 2008. Scottish Re suspended periodic and ad hoc reporting as required under the Securities and Exchange Act of 1934. Further, it did not continue to prepare and post financial statements on its website as required by the COD (Compl.¶ 34).
A. The Merger
On January 28, 2011, the Cerberus Defendants and the Mass Mutual Defendants proposed to acquire all outstanding Scottish Re ordinary shares in a merger transaction under Cayman law for $0.21 a share (the “Merger”). After receiving the offer, the Board of Scottish Re formed a special committee of directors (“Special Committee”) consisting of defendants Chapman, Butler, Hughes, and Joyal to review the offer. The Special Committee retained legal and financial professionals in connection with the proposed transaction. They retained Cahill Gordon & Reindel LLP (“Cahill”) and Appleby Global (“Appleby”) to act as legal advisors; Houlihan Lokey (“Houlihan”) to act as financial advisor and to evaluate the financial fairness of the offer; and Merrill Lynch, Pierce Fenner and Smith (“Merrill”) to assist in soliciting alternative proposals.
As a result of negotiations with the Cerberus Defendants and the Mass Mutual Defendants, the Special Committee obtained a 43% increase in the offer price, from $0.21 per ordinary share to $0.30 per ordinary share (“Merger Consideration”). The merger agreement (the “Merger Agreement”) required the affirmative vote of a majority of the unaffiliated ordinary shares attending (in person or by proxy) and voting at an extraordinary general meeting convened in Bermuda to approve the Merger. Ultimately, the Special Committee recommended that the Board approve the Merger.
On May 11, 2011, Scottish Re circulated an “Information Statement,” which set forth the background of the Merger and included a copy of the Merger Agreement. The Merger was approved by a majority of the unaffiliated ordinary shareholders. Davis did not dissent. The Merger closed on August 24, 2011 in New York.
B. The Orkney Unwind
In 2005, SRUS required funding to meet a regulator-required reserve in connection with its reinsurance of a block of life insurance policies that had been previously issued (“Orkney Block”) (Klingenberg Aff., Ex A at 19). To raise the funds, Orkney Holdings, LLC was formed as a subsidiary of SRUS. It issued and sold to unaffiliated third parties a series of floating rate notes (“Notes”) in a private offering and the reinsurance liabilities on the block of policies were transferred from SRUS to Orkney Re (id. at 90).
In 2011, Scottish Re entered into agreements to unwind the Orkney Re/Orkney Holdings structure through a recapture of the Orkney Block from Orkney Re for $590 million and subsequent sale of the Orkney Block to a third party, and the contemporaneous discounted repurchase, and cancellation by Orkney Holdings of the Notes, including Notes held by Cerberus affiliates (the “Orkney Unwind”). Scottish Re claimed that, while this transaction would result in a decline in Scottish Re's book value by roughly $150 million, other benefits to Scottish Re and the Orkney entities, such as improvements in their regulatory capital structure, would offset the decline in book value. Scottish Re disclosed the Orkney Unwind in the same Information Statement in which it disclosed the Merger.
Scottish Re asked the same Special Committee that reviewed the Merger to evaluate the fairness of the Orkney Unwind. To assist it, the Special Committee retained Cahill, Houlihan, and Merrill. The transaction was determined by the Special Committee and the Board to be in the best interest of Scottish Re, and was approved. Davis complains that in evaluating the fairness of the $.30 per share consideration to ordinary shareholders pursuant to the Merger, the Scottish Re Directors and their advisors should have incorporated the effect of the Orkney Unwind, including its effect on future cash-flows and book value, into their calculations (Compl.¶ 51). Furthermore, Davis complains that the Scottish Re Directors should have considered the potential profit accruing to the Mass Mutual Defendants and Cerberus Defendants as part of the Merger and the Orkney Transaction (id. ).
C. The “Unfair” Dividend Strategy and “Improper” Redemptions
1. Dividend Strategy
Beginning in early 2011, Scottish Re's financial health improved, so that declaration and payment of a dividend to the PPS holders would not have violated the COD. However, Scottish Re did not declare and pay a dividend until October 9, 2012. Davis alleges that as of October 2012, Scottish Re started pursuing a dividend strategy which was beneficial to controlling shareholders at the expense of minority shareholders. Specifically, the Complaint alleges that Scottish Re, at the behest and control of the other defendants, paid a dividend to ordinary shareholders which was not commensurate with the dividend paid to PPS holders. In particular, the Investors effectively paid themselves upwards of $100 million in dividends, when the total dividends received over the past two years by PPS holders amounted to approximately $1 million.
2. The Redemptions
Scottish Re has made two tender offers to PPS holders, including Plaintiff. The first occurred in 2010 when Scottish Re initiated a tender to repurchase the PPS at $5 per share, rather than the contractual redemption price of $25 per share. Approximately 4% of the outstanding PPS were tendered. Thus, Scottish Re paid approximately $1,000,000 to effect this repurchase. Thereafter, Scottish Re redeemed the PPS shares it had purchased, but not other PPS, including those held by Davis.
In early 2012, Scottish Re acquired approximately 720,000 PPS at a purchase price of $16.00 per share in a privately-negotiated transaction. Shortly thereafter, Scottish Re announced a cash tender offer to purchase all PPS at the same price. Approximately 804,000 shares of PPS were tendered. Finally, Scottish Re acquired approximately 4,400 shares of PPS in open market trades, at an average price of $14.93 per share. Davis alleges that each of the tender offers violated the terms of the COD. Davis further alleges that he did not participate in any of the PPS tender offers and was not offered opportunities to do so.
D. Procedural History
The Complaint which together with the summons was filed on November 20, 2012, asserts ten causes of action: (i) breach of contract against Scottish Re (Counts 1 through 3); (ii) breach of fiduciary duty as against the Scottish Re Directors, the Cerberus Defendants, and the Mass Mutual Defendants (counts 4 and 6); (iii) derivative actions for breach of fiduciary duty and waste as against the Scottish Re Directors, the SRUS Directors, the Cerberus Defendants and the Mass Mutual Defendants (Counts 7, 9 and 10); (iv) aiding and abetting a breach of fiduciary duty as against the Cerberus Defendants and the Mass Mutual Defendants (Count 8); and (v) tortious interference with contract as against the Cerberus Defendants and the Mass Mutual Defendants (Count 5). Each defendant has moved to dismiss the Complaint on multiple grounds.
DISCUSSION
I. Choice of Law
As a threshold issue, the parties dispute which jurisdiction's laws apply to this action. The Defendants argue that under the internal affairs doctrine, Cayman law should apply. Davis argues that the internal affairs doctrine should not be rigidly applied. Instead, New York choice of law rules mandate that the court conduct an interest analysis in order to determine the applicable body of law, and that the internal affairs doctrine is merely one aspect of such analysis. The court agrees that an interest analysis should be applied.
There are material conflicts between New York law and Cayman law. Briefly, the Cayman Islands apply certain specific statutory hurdles to maintaining a shareholder derivative action. Furthermore, Cayman applies a restrictive English common law rule established in Foss v. Harbottle that prevents shareholder derivative actions unless one of four specific exceptions not applicable here are met. New York law applies neither of these requirements. Additionally, Cayman law generally does not recognize fiduciary relationships between majority shareholders and minority shareholders, or between directors and shareholders except in limited circumstances (see Feiner Family Trust v. VBI Corp., 2007 WL 2615448, at *7 [SDNY Sept. 11, 2007] ; see also Meeson Decl. ¶¶ 70–74). New York, on the other hand, recognizes that majority shareholders under certain circumstances, and directors generally, owe fiduciary duties directly to minority shareholders (see Alpert v. 28 Williams Street Corp., 63 N.Y.2d 557, 568–69 [1984] ). Accordingly the court must determine which jurisdiction has the greatest interest in the resolution of this action.
Under the internal affairs doctrine, the jurisdiction of incorporation is the jurisdiction with the greatest interest. “[T]he law of the state of incorporation governs the adjudication of a corporation's internal affairs, including questions as to the relationship between the corporation's shareholders and its directors” (Winn v. Schafer, 499 FSupp2d 390, 393 [SDNY 2007] [internal quotation marks omitted] ). “The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands” (Edgar v. Mite Corp., 457 U.S. 624, 645–46 [1982] ; see also Hart v. General Motors Corp., 129 A.D.2d 179, 184–85 [1st Dept 1987] ). Indeed, “[o]ne of the abiding principles of the law of corporations is that the issue of corporate governance, including the threshold demand issue, is governed by the law of the [jurisdiction] in which the corporation is chartered” (Hart, 129 A.D.2d at 182 ). The importance of this principle has been reaffirmed by both the New York State Court of Appeals (see Diamond v. Oreamuno, 24 N.Y.2d 494, 503 [1969] ) and the United States Supreme Court (see CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69 [1987] ).
The claims asserted in this action are precisely the types of claims to which this rationale applies (Lerner v. Prince, 119 AD3d 122, 128, [1st Dept 2014] [“New York choice-of-law rules provide that substantive issues such as issues of corporate governance ... are governed by the law of the state in which the corporation is chartered”] ). Counts 4, 6, 9 and 10 assert claims for breach of fiduciary duty. Such claims paradigmatically involve the regulation of a corporation's internal affairs. Indeed, in an unrelated action involving breach of fiduciary claims against the directors of Scottish Re, the court in Winn v. Schafer determined that “under New York choice of law rules, Cayman Islands law applies” (499 F Supp 2d at 393 ). Additionally, courts have consistently applied the internal affairs doctrine to claims for waste (Count 7), aiding and abetting a breach of fiduciary duty (Count 8), and breach of a certificate of designation (Counts 1 through 3) (see Feiner Family Trust, 2007 WL 2615448, *4–6 [breach of fiduciary duty claims]; CMIA Partners Equity Ltd. v. O'Neil, 29 Misc.3d 1228[A], at *5 [NY Sup.Ct., N.Y. Cnty 2010] [corporate waste claims]; Aboushanab v. Janay, No. 06–Civ.–13472, 2007 WL 2789511, at *4 [SDNY Sept. 26, 2007] [claims for breach of a certificate of designation] ). Count 10 asserts a double-derivative claim on behalf of SRUS against the SRUS Directors. Davis does not contend that he held any shares of Scottish Re's subsidiary, SRUS. Under the internal affairs doctrine, courts will apply the law of the state of incorporation of the parent company (here, Scottish Re) in determining standing to bring a double derivative claim (see Kostolany v. Davis, No. 13299, 1995 WL 662683, at *3 [Del Ch Nov. 7, 1995] [applying law of Dutch parent corporation to double derivative suit because plaintiff was shareholder of parent, not of Delaware subsidiary] ). Accordingly, the laws of Cayman applies to the issue of standing regarding Count 10 as well.
Given the nature of the claims asserted in this action, Davis' contention that New York has the greater interest in this dispute lacks merit. Indeed, this is precisely the conclusion that the Appellate Division First Department reached in Hart (129 A.D.2d at 184–85 ). The court concludes that Cayman has the greater interest in the outcome of this dispute and that its substantive law governs.
A separate interest analysis would normally apply with regard to Davis' Fifth Cause of Action which alleges tortious interference with a contract, as the internal affairs doctrine is not applicable to this claim. However, because Davis, the Cerberus Defendants, and the Mass Mutual Defendants agree as to the application of New York law to this claim (see Cerberus Def. Br., p. 22 n. 13; see Mass Mutual Def. Br., p. 20 n. 18), such an interest analysis is unnecessary. The Court finds that New York law governs that claim (see also Bravado Int'l Grp. Merch. Servs., Inc. v. Ninna, Inc., 655 FSupp2d 177, 193 n. 14 [EDNY 2009] [finding that where the plaintiff fails to offer adequate facts to guide an interest analysis, courts apply the law of the forum as a default] ).
II. Motion to Dismiss Standards
The motions to dismiss the complaint are based on one or more of five separate subsections of CPLR 3211. The legal standards governing these subsections are as follows.
A. CPLR 3211(a)(1)
To succeed on a motion to dismiss pursuant to CPLR § 3211(a)(1), the documentary evidence submitted that forms the basis of a defense must resolve all factual issues and definitively dispose of the plaintiff's claims (see 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 152 [2002] ; Blonder & Co., Inc. v. Citibank, N.A., 28 AD3d 180 [1st Dept 2006] ). A motion to dismiss pursuant to CPLR § 3211(a)(1) “may be appropriately granted only where the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law [citation omitted]” (McCully v. Jersey Partners, Inc., 60 AD3d 562, 562 [1st Dept.2009] ).
CPLR § 3211(a)(1) does not explicitly define “documentary evidence.” As used in this statutory provision, “documentary evidence' is a fuzzy term', and what is documentary evidence for one purpose, might not be documentary evidence for another” (Fontanetta v. John Doe 1, 73 AD3d 78, 84 [2d Dept 2010] ). “[T]o be considered documentary,' evidence must be unambiguous and of undisputed authenticity” (id. at 86, citing Siegel, Practice Commentaries, McKinney's Cons.Laws of NY, Book 7B, CPLR 3211:10, at 21–22). Typically that means judicial records such as judgments and orders, as well as documents reflecting out-of-court transactions such as contracts, releases, deeds, wills, mortgages and any other papers, “the contents of which are essentially undeniable” (id. at 84–85 ).
B. CPLR 3211(a)(2)
A motion to dismiss pursuant to CPLR § 3211(a)(2) asserts that the court lacks jurisdiction over the subject matter of the claim. “Absence of competence to entertain an action deprives the court of subject matter jurisdiction'; absence of power to reach the merits does not” (Lacks v. Lacks, 41 N.Y.2d 71, 75 [1976] ) [quotations omitted] ).
C. CPLR 3211(a)(3)
Pursuant to CPLR § 3211(a)(3) a cause of action may be dismissed where a party lacks legal capacity or standing to sue. The critical issue in determining whether a party has standing to sue is whether the party has suffered an “injury in fact, which is an actual legal stake in the matter being adjudicated” and ensures that the party seeking review has some concrete interest in prosecuting the action” (Society of Plastic Indus. v. County of Suffolk, 77 N.Y.2d 761, 772 [1991] ).
D. CPLR 3211(a)(7)
On a motion to dismiss a claim pursuant to CPLR 3211(a)(7) for failure to state a cause of action, the court is not called upon to determine the truth of the allegations (see Campaign for Fiscal Equity v. State of New York, 86 N.Y.2d 307, 317 [1995] ; 219 Broadway Corp. v. Alexander's, Inc., 46 N.Y.2d 506, 509 [1979]. Rather, the court is required to “afford the pleadings a liberal construction, take the allegations of the complaint as true and provide plaintiff the benefit of every possible inference [citation omitted]. Whether a plaintiff can ultimately establish its allegations is not part of the calculus in determining a motion to dismiss” (EBC I, Inc. v. Goldman, Sachs & Co., 5 NY3d 11, 19 [2005] ). The Court's role is limited to determining whether the pleading states a cause of action, not whether there is evidentiary support to establish a meritorious cause of action (see, Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275 [1977] ; Sokol v. Leader, 74 AD3d 1180 [2d Dept 2010] ).
While affidavits may be considered on a motion to dismiss for failure to state a cause of action, unless the motion is converted to a CPLR 3212 motion for summary judgment the court will not consider them for the purpose of determining whether there is evidentiary support for properly pleaded claims, but, instead, will accept such submissions from a plaintiff for the limited purpose of remedying pleading defects in the complaint (see Nonnon v. City of New York, 9 NY3d 825, 827 [2007] ; Rovello v. Orofino Realty Co., 40 N.Y.2d 633, 635–636 [1976] ). Affidavits submitted by a defendant will almost never warrant dismissal under CPLR 3211 “unless they establish conclusively that [plaintiff] has no ... cause of action” (Lawrence v. Groubard Miller, 11 NY3d 588, 595 [2008], [citing Rovello, 40 N.Y.2d at 636 ] ). In this posture, the lack of an affidavit by someone with knowledge of the facts will not necessarily serve as a basis for denial of a motion to dismiss.
E. CPLR 3211(a)(8)
CPLR 3211(a)(8) provides that “[a] party may move for judgment dismissing one or more causes of action asserted against him on the ground that ... the court has not jurisdiction of the person of the defendant.” When presented with a motion under CPLR 3211(a)(8), “the party seeking to assert personal jurisdiction, the plaintiff[,] bears the ultimate burden of proof on this issue” (Marist Coll. v. Brady, 84 AD3d 1322, 1322–1323 [2d Dept 2011] ). The party opposing a motion to dismiss need not state all the facts necessary to establish jurisdiction. If evidence of the facts establishing jurisdiction are in the exclusive control of the moving party, CPLR 3211(d) requires only a “sufficient start,” demonstrating that such facts “may exist” to warrant further discovery (see HBK Master Fund L.P. v. Troika Dialog USA, Inc., 85 AD3d 665 [1st Dept 2011] [citing Peterson v. Spartan Industries, Inc., 33 N.Y.2d 463, 467 [1974] ] ).
III. Personal Jurisdiction
Certain defendants move to dismiss for lack of personal jurisdiction as to (1) all of the Scottish Re Directors except Jeffrey Hughes, Raymond Wechsler and Larry Port; (2) the SRUS Directors; and (3) the Benton Entities.
A. Scottish Re
As a matter of due process, in order for a corporation to be amenable to general (all purpose) personal jurisdiction, suit must be brought in either the place of incorporation or principal place of business of the company (see Daimler AG v. Bauman, ––– US––––, 134 S Ct 746, 760 [2014] ). Because Scottish Re is not incorporated in New York and does not maintain its principal place of business here, it is not amenable to general personal jurisdiction in this court under CPLR 301.
The court may assert long-arm jurisdiction over a foreign corporation under CPLR 302(a)(1) where plaintiff's cause of action arises from the transaction of business in New York by the defendant either directly or through its agent (see CPLR 301[a][1] ). The attachment to New York must be “purposeful” and “there must be a substantial relationship between the New York transaction of business and the claim asserted” (Fischbarg v. Doucet, 9 NY3d 375, 380 [2007] ). “Not all purposeful activity ... constitutes a transaction of business' within the meaning of CPLR 302(a)(1) ” (id at 380 ). “It is the nature and quality of these contacts that matter” (id at 382 ).
Count 1 of the Complaint alleges that Scottish Re breached the COD by purchasing and then redeeming some of its PPS through various tender offers and private transactions. Davis alleges that Scottish Re retained a New York firm, DF King & Co., to act as its agent with respect to the February 2010 and May 2012 tender offers. The conduct of Scottish Re's agents may be attributed to it where those agents engaged in purposeful activities in New York on behalf of Scottish Re. Scottish Re's retention of counsel and other professionals with offices located in New York without more, does not lead to a fair inference that significant activity relating to payments made in connection with repurchase and redemption of PPS (Count 1) the Merger (Count 2) or election of directors by PPS holders (Count 3) took place in New York (see Compl. ¶¶ 17, 50, 63). The critical decision of the Board of Directors in May 2011 to merge was made in Bermuda (N.Y.SCEF Doc. No. 78). The Complaint alleges that the transaction documents were prepared and the closing took place in New York (Compl.¶ 17) and that Scottish Re's financial advisors regarding the merger and the Orkney Transaction had their offices in New York. There is no indication in the record that Scottish Re was partial to having its counsel and financial advisors work out of New York as opposed to any other jurisdiction. According to the Complaint, Scottish Re exists under the laws of Cayman and “conducts its business primarily through its operating subsidiaries in the United States, including Defendant SRUS” (Compl.¶ 5). “Defendant SRUS is ... organized ... under the laws of Delaware with its principal place of business in Charlotte, North Carolina” (id. ¶ 6). Presumably, the transactions about which Plaintiff complains occurred in Cayman and/or North Carolina. The Complaint does not allege that the redemptions occurred in New York.
As further grounds for New York jurisdiction, Plaintiff asserts “the Investors [the Mass Mutual Defendants and the Ceberus Defendants] scheme to usurp control over Scottish Re [and][b]ecause Defendant Ceberus is headquarted in New York City, meetings and communications relating to the scheme occurred [in New York]” (Opp Br., p. 24). Nowhere does Plaintiff allege that Scottish Re was engaged in the transaction of relevant business out of the offices of one or more of its investors. Accordingly, Plaintiff has not shown that the matters of which he complains arose out of any purposeful transaction of business in New York within the meaning of CPLR 302(a)(1). However, Plaintiff is entitled to conduct limited discovery addressed to the issue of jurisdiction and will be granted a continuance for this purpose (see CPLR 3211[d] ).
Plaintiff also emphasizes that the PPS and ordinary shares of Scottish Re were listed on the NYSE, that Davis purchased the PPS and ordinary shares via the NYSE, and that he consummated those transactions via wire transfers from banks located in New York County. He adds that Scottish Re's share custodian, Depository Trust Corporation, and its nominee shareholder, Cede & Co., have their principal places of business in New York. None of these speak to where the COD was negotiated and executed, where Scottish Re conducted its business or where it solicited and redeemed the PPS. They do not evidence any substantial relationship between the transaction (i.e. repurchase decisions) and Plaintiff's claims.
Count 2 of the Complaint alleges that Scottish Re breached the COD by distributing the merger consideration to ordinary shareholders when no dividends had been paid to the PPS holders, including Davis. This claim centers on and arises out of the allegedly improper Merger transaction. The Complaint alleges Scottish Re's direct participation in the Merger transaction, which was governed by New York law and closed at the offices of Scottish Re's attorneys in Manhattan (Compl.¶¶ 43, 68). However, the decision of the Board and vote of the shareholders took place elsewhere (in Bermuda). The allegation that the Merger Agreement was governed by New York law and that the ministeral act of completing the closing occurred in New York is sufficient to support the grant of a continuance to allow Plaintiff to conduct jurisdictional discovery (see CPLR 3211[d] ).
B. The Scottish Re Directors and the SRUS Directors
Davis asserts that personal jurisdiction over the Scottish Re Directors and the SRUS Directors exists pursuant to CPLR 301, 302(a)(1), and 302(a)(3). This court does not have general personal jurisdiction over any of the SRUS Directors nor the majority of the Scottish Re Directors (see CPLR 301 ). Jeffrey Hughes and Raymond Wechsler are the only individual defendants who are alleged to reside in New York. Larry Port, who is represented by counsel, has not contested personal jurisdiction and therefore may be deemed to have consented to or waived the issue of lack of personal jurisdiction (see, e.g., Cadlerock Joint Venture, L.P. v. Kierstedt, 119 AD3d 627, 628 [2d Dept 2014] ). Accordingly, this Court has personal jurisdiction over Mr. Hughes, Mr. Port and Mr. Wechsler.
Port, Finke and Rollings were all represented by Quinn Emmanuel Urquhart & Sullivan LLP at the time of the filing of their motion to dismiss, although Rollings ultimately obtained his own counsel. The motion, however, only moves to dismiss on the grounds of lack of personal jurisdiction with respect to Finke and Rollings.
Under CPLR 302(a)(1), a corporate director is subject to specific jurisdiction if he conducts business in New York on an individual basis, as distinct from conducting business on behalf of a corporation (Laufer v. Ostrow, 55 N.Y.2d 305, 313–14 [1982] ; see also Pramer S.C.A. v. Abaplus Int'l Corp., 76 AD3d 89 [1st Dept 2010] ). There are no allegations in the Complaint that any of the Scottish Re Directors or the SRUS Directors conducted business on an individual basis in New York. The directors approved the Merger Agreement on behalf of Scottish Re and not their own behalf. The Complaint also fails to allege that any of the directors attended the closing in New York. Plaintiff's agency theory is also fatally flawed because the directors did not retain agents in their individual capacities. Accordingly, the SRUS Directors and the Scottish Re Directors other than Messrs Port, Hughes and Wechsler are not amenable to personal jurisdiction under CPLR 302(a)(1).
In order for this court to assert jurisdiction over a defendant pursuant to CPLR 302(a)(3), the defendant must commit a tortious act outside New York that “caused an injury to a person or property in New York” (Penguin Grp. (USA) Inc. v. Am. Buddha, 16 NY3d 295, 302 [2011] ). New York courts apply the situs-of-the-injury test to determine whether the tortious act caused injury in New York. “When an alleged injury is purely economic, the place of injury usually is where the plaintiff resides and sustains the economic impact of the loss” (Oddo Asset Mgt. v. Barclays Bank PLC, 36 Misc.3d 1205[A] [NY Sup.Ct., N.Y. Cnty 2010], quoting Proforma Partners v. Skadden Arps Slate Meagher & Flom, 280 A.D.2d 303 [1st Dept 2001] ).
Davis resides in Mexico. He contends that he maintains a separate financial base in New York, which accordingly should be construed to be the situs of his injury. In support thereof, Davis relies on Lang v. Paine, Webber, Jackson & Curits, Inc., 582 F.Supp. 1421 [SD N.Y.1984]. That reliance is misplaced. The court in Lang analyzed where a claim accrued in the context of applying New York's borrowing statute (see id. at 1425–1426 ). Lang was a citizen of Canada residing in Ottawa, but the court found that he maintained a separate financial base in Massachusetts which was where he suffered economic injury (see id. ). In a strategic attempt to move assets to the United States for specific business reasons relating to the economic climate in Canada, Lang maintained an account in Massachusetts from which he directed all of his financial activity (id. ). Under those exceptional circumstances, the Lang court held that he maintained a separate financial base in Massachusetts which qualified as the situs of the injury (id. ). Davis has neither alleged nor demonstrated any sort of unusual circumstances “that would warrant application of this extremely rare' exception to the general rule that a Plaintiff suffers economic injury ... in its state of residence (Metropolitan Life Ins. Co. v. Stanley, Index No. 651360/2012, N.Y. Slip Op. 31544[U] [NY Sup.Ct., N.Y. Cty. July 8, 2013] ). Moreover, Lang pre-dates Global Financial Corp. v. Triarc Corp., 93 N.Y.2d 525, 530 [1999], where the Court of Appeals reiterated the general applicability of the residence standard. The situs of the injury in this case is Mexico and CPLR 302(a)(3) long-arm jurisdiction does not apply.
Accordingly, this court lacks personal jurisdiction over any of the Scottish Re Directors or SRUS Directors except for Jeffrey Hughes, Raymond Wechsler, and Larry Port.
C. The Benton Entities
This court also lacks personal jurisdiction over the Benton Entities. As a preliminary matter, the court does not have general jurisdiction over any of these entities pursuant to CPLR 301. Benton I is a limited partnership formed and existing under Cayman law (Compl.¶ 19). Benton II & Benton III are limited partnerships organized and existing under the laws of Delaware (Compl. ¶ ¶ 10–11. Thus, “[t]o establish jurisdiction under CPLR 301, however, the foreign entity must engage in a continuous and systematic course of activity in this State” (Landoil Res. Corp. v. Alexander & Alexander Servs., Inc., 77 N.Y.2d 28, 36 [1990] ). “The traditional indicia that courts rely upon in deciding whether a foreign corporation is doing business' in New York include: the existence of an office in New York; the solicitation of business in the state; the presence of bank accounts and other property in the state; and the presence of employees of the foreign defendant in the state” (Alberta & Orient Glycol Co. Ltd. v. Factory Mut. Ins. Co., No. 603150/05, 2007 WL 6881693, at *4 [NY Sup.Ct., N.Y. Cnty. April 24, 2007] [internal quotations omitted] ). The Complaint fails to allege that the that the Benton Entities are doing business in New York sufficient for this court to assert general personal jurisdiction over them. Indeed, the Mass Mutual Defendants have submitted an unrebutted affidavit demonstrating that none of the facts enunciated above exist on which to base jurisdiction over the Benton Entities (see Francis Aff.).
Additionally, for all of the reasons discussed in Section III.B., supra, the court cannot exercise specific personal jurisdiction over the Benton Entities under CPLR 302(a)(3). Under the situs-of-the-injury test, the place of injury for purposes of the claims asserted against the Benton Entities is Mexico where Davis resides.
Lastly, there is no jurisdiction over the Benton Entities under CPLR 302(a)(1). In an effort to show jurisdiction with regard to the transaction of business by the Benton Entities in New York, Davis alleges that Cerberus is based in New York, and because Cerberus is the architect of an alleged conspiracy, some unspecified meetings and communications in furtherance of the conspiracy must have happened in New York. These allegations do not indicate whether or how the Benton Entities were specifically involved in any such meetings. Alternatively, Davis contends that the Benton Entities executed the Merger Agreement in New York. However, unlike Counts 1 and 2 against Scottish Re, the claims against the Benton Entities do not arise from the terms of the Merger Agreement, or any breach thereof. Instead they arise from the provision of allegedly inaccurate information to shareholders prior to the shareholders' vote to approve the Merger. Accordingly, the relationship between the transaction of business in New York by the Benton Entities and the claims asserted against them is insufficient to support an exercise of personal jurisdiction in this court on the basis of CPLR 302(a)(1) (see SPCA of Upstate New York, Inc. v. Am. Working Collie Ass'n, 18 NY3d 400, 404 [2012] [“[T]here must be a substantial relationship' between [the purposeful] activities and the transaction out of which the cause of action arose”] ); see also McNellis v. American Box Bd. Co., 53 Misc.2d 479, 483 [NY Sup Ct, Onondaga Cnty.1967] [“the mere existence of a contract, even if executed in New York,” was insufficient for purposes of CPLR 302(a)(1) ] ).
Davis requests that he be permitted to take jurisdictional discovery pursuant to CPLR 3211(d) (Pl.Br. § IV.D). For reasons discussed below, all of the claims except the first and second causes of action (asserted against Scottish Re only) are subject to dismissal on other grounds. Therefore, jurisdictional discovery as to individuals and entities other then Scottish Re is not warranted.
IV. Breach of Contract Claims (Counts 1 through 3)
Counts 1 and 2 adequately plead claims for breach of contract. Count 3 does not. To sustain a breach of contract cause of action, plaintiffs must allege facts showing each of the following elements: (1) an agreement; (2) plaintiff's performance; (3) defendant's breach of that agreement; and (4) damages sustained by plaintiff as a result of the breach (see Kraus v. Visa Intl Serv Assn, 304 A.D.2d 408 [1st Dept 2003;]Furia v. Furia, 116 A.D.2d 694, 695 [2d Dept 1986] ). “As a general rule, contracts remain separate unless the history and subject matter shows them to be unified” (National Union Fire Ins. Co. of Pittsburgh, Pa. v. Williams, 223 A.D.2d 395, 396 [1st Dept 1996], quoting Ripley v. International Rys. of Cent. Am., 8 N.Y.2d 430, 438 [1960] ). “The fundamental rule of contract interpretation is that agreements are construed in accord with the parties' intent ... and [t]he best evidence of what parties to a written agreement intend is what they say in their writing.... Thus, a written agreement that is clear and unambiguous on its face must be enforced according to the plain terms, and extrinsic evidence of the parties' intent may be considered only if the agreement is ambiguous [internal citations omitted]” (Riverside South Planning Corp. v. CRP/Extell Riverside LP, 60 AD3d 61, 66 [1st Dept 2008], aff'd 13 NY3d 398 [2009] ). Whether a contract is ambiguous presents a question of law for resolution by the courts (id. at 67 ).
In accordance with these principles, a court should interpret a contract “so as to give full meaning and effect to the material provisions” (Beal Savings Bank v. Sommer, 8 NY3d 318, 324 [2007], quoting Excess Ins. Co. Ltd. v. Factory Mut. Ins. Co., 3 NY3d 577, 582 [2004] ). “A reading of a contract should not render any portion meaningless.... Further, a contract should be read as a whole, and every part will be interpreted with reference to the whole; and if possible it will be so interpreted as to give effect to its general purpose' “ (id. at 324–325, quoting Matter of Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 352, 358 [2003] ). When a contract is negotiated between sophisticated business entities negotiating at arm's length, “courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include” (Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 NY3d 470, 475 [2004] [internal quotation omitted] ).
A. Count 1
Count 1 of the Complaint alleges that Scottish Re breached the COD by purchasing and then redeeming some of the PPS through various tender offers and private transactions. Scottish Re contends that this claim finds no support in the language of the COD, and therefore fails as a matter of law. However, the COD requires that partial redemptions must be pro rata or via some other “fair and equitable method” (Klingenberg Aff., Exh. C, COD ¶ 5[e] ) (such that Scottish Re would have been required to repurchase certain of Davis' shares). The Complaint alleges that Scottish Re failed to repurchase the shares on a pro rata basis, that the manner in which Scottish Re performed the partial redemption was not otherwise “fair and equitable,” and that Davis suffered damages as a result (Compl.¶¶ 26, 83, 89–90). Taking these allegations as true, as the court must on a motion to dismiss, Davis has adequately pleaded a claim for breach of contract.
B. Count 2
Count 2 of the Complaint alleges that Scottish Re breached section 3 of the COD by distributing the Merger consideration to ordinary shareholders when no dividends had been paid to the PPS holders, including Davis. Scottish Re contends that this claim must fail because the Investors (not Scottish Re) funded the consideration that was distributed to the ordinary shareholders. However, section 3 of the COD provides that “[s]o long as any Perpetual Preferred Shares remain outstanding for any Dividend Period, ... no Ordinary Shares or other Junior Shares shall be purchased, redeemed or otherwise acquired for consideration by the Company, directly or indirectly ... during such Dividend Period” (Klingenberg Aff., Exh. C, COD ¶ 3 [emphasis added] ). The Complaint alleges that the consideration provided to the ordinary shareholders constituted an indirect purchase of the outstanding common shares through SRGL Benton Ltd. Whether the consideration was paid “by the Company” cannot be decided on a CPLR 3211 motion to dismiss. Count 2 adequately pleads a claim for breach of section 3 of the COD.
C. Count 3
Count 3 of the Complaint alleges that Scottish Re breached the COD by failing to facilitate the election of additional directors by the PPS holders following the non-payment of dividends to the PPS for six consecutive payment periods. The COD provides that “the [additional directors] shall be elected by simple majority at a special meeting called at the request of the holders of record of at least 20% of the Perpetual Preferred Shares or of any other series of Voting Preferred Shares then outstanding” (Klingenberg Aff., Exh. C, COD ¶ 8[b] ). Thus, in order for this obligation on the part of Scottish Re to arise, the PPS holders, like Davis, were required first to request a special meeting at which the election of additional board members could have been considered. The Complaint does not allege that any such request was made. Davis, who owned more than 20% of the PPS at the time, could have made the request on his own but chose not to do so. Accordingly, the complaint fails to allege that Scottish Re breached this provision of the COD. Having failed to plead a cause of action for breach of contract, the Third Cause of Action must be dismissed.
V. Breach of Fiduciary Duty Claims Pleaded as Derivative Claims (Counts 7, 9 and 10)
The breach of fiduciary duty claims pleaded as derivative claims must be dismissed for several reasons. First, Davis failed to comply with the requirements of Cayman law for commencing a derivative action. Specifically, Davis failed to seek leave of court as required by Grand Court of the Cayman Islands Order 15, Rule 12A (“Rule 12A”). As Justice Bransten of this court recently held in Arc Capital LLC v. Kalra, 2013 N.Y. Slip Op 31316[U] (N.Y.Sup Ct, N.Y. Cnty, June 18, 2013), Rule 12A is a substantive rule that must be applied in this court under New York choice of law rules. Thus, Davis' failure to comply with Rule 12A is fatal to his derivative claims. Second, the English Common Law doctrine established in Foss v. Harbottle, [1843] 2 Hare 461, and applied under Cayman laws, deprive Davis of standing to pursue derivative claims as against the Scottish Re Directors. None of the exceptions to this doctrine are applicable. Accordingly, Counts 7, 9, and 10 of the Complaint must be dismissed.
A. Standing to Bring Derivative Claims Under Rule 12A
Davis' failure to comply with Rule 12A deprives him of standing to pursue derivative claims. For this reason, Counts 7, 9 and 10 of the Complaint must be dismissed. Rule 12A, which applies to every shareholder derivative action, provides in pertinent part:
Although the Seventh Cause of Action for waste is not denominated as a derivative claim, Davis concedes that it is in fact a derivative claim (Pl. Br., p. 46[“[T]he seventh cause of action for waste ... unequivocally alleges a harm to Scottish Re itself and states a valid derivative claim for waste, not subject to dismissal.”] ).
(2) Where a Defendant in a derivative action has given notice of intention to defend, the Plaintiff must apply to the Court for leave to continue the action. (3) The application must be supported by an affidavit verifying the facts on which the claim and the entitlement to sue on behalf of the company are based. (4) Unless the Court otherwise orders, the application must be issued within 21 days after [the date when notice of intention to defend was given]....
As Justice Bransten found in Arc Capital, Rule 12A “is a substantive, rather than procedural rule because the underlying remedy is extinguished if Plaintiff fails to file an application to continue—that is, it envelopes both the right and the remedy' “ (ARC Capital, LLC, 2013 N.Y. Slip Op 31316[U] at *3). Since the rule is substantive, under New York choice of law rules and the internal affairs doctrine, the law of the forum of incorporation, i.e. Cayman, governs. Rule 12A requires Plaintiff to seek leave of the Cayman court before proceeding with a derivative action. Having failed to timely seek such leave, Davis has no standing to assert derivative claims.
Davis nonetheless argues that Rule 12A is procedural, and therefore inapplicable. He contends that the Cayman courts categorize and interpret Rule 12A as a procedural rule as it is “intended to govern claims pending in the Grand Court, and [is] therefore principally concerned with remedies rather than the existence of underlying rights” (Pl.Br., p. 17). Citing the scope of the Grand Court Rules' as expressed in Order 1, Rule 2(1), Davis claims that in ARC Capital, the court never grappled with this description (id. ). However, as Justice Bransten indeed noted, “[u]nder New York choice of law rules, this state is not bound to adopt the choice of law classification that the Cayman Islands may have selected for the Grand Court Rule” (Arc Capital, 2013 N.Y. Slip Op 31316[U], at *3). Davis contends that Order 1, Rule 2 is not merely a classification, but rather a geographical limitation on the scope of the rules. This argument misses the mark. Regardless of whether Rule 12A has any sort of geographical limitation, noncompliance with it extinguishes a right, i.e. the underlying remedy of bringing a derivative claim on behalf of a Cayman corporation. Accordingly, because Rule 12A “envelop[es] both the right and the remedy,” it is substantive under New York law and must be applied under New York choice of rules (see Tanges v. Heidelberg N. Am., Inc., 93 N.Y.2d 48, 56 [1999] ).
Davis also contends that even if Rule 12A is substantive, it is not applicable here because certain prerequisites to its application have not been met. First, Davis claims that Rule 12A applies only to actions begun by “writ” and no such writ has been filed in this action. Second, Davis asserts that the defendant corporation must give notice of intention to defend, which is a very specific document sent to the defendant as part of an “acknowledgment of service” form used only in the Grand Court of the Cayman Islands. This argument fails. Davis chose to bring these derivative claims in New York rather than in Cayman in violation of Rule 12A. He cannot fault the defendants for his own failure to initiate the action by writ in Cayman or for not completing paperwork that is unavailable in this forum. Moreover, the record indicates that Davis never served the defendants with the proper “acknowledgment of service form.” He cannot now fault them for failing to complete it.
B. Application of Foss v. Harbottle Against Scottish Re Directors
Davis' lack of standing to bring derivative claims aside, the principles established in Foss v. Harbottle bars pursuit of these derivative action. Under English common law, (and therefore Cayman law) derivative actions are “governed by the rule in Foss v. Harbottle .... That rule provides that derivative claims are owned and controlled by the company, not its shareholders, and that a shareholder is not permitted to bring a derivative action on behalf of that company” (Winn v. Schafer, 499 FSupp 2d 390, 396 [SDNY 2007] ). There are four exceptions to the rule which would permit a shareholder to bring a derivative action: “(1) if the conduct infringed on the shareholder's personal rights; (2) if the conduct would require a special majority to ratify; (3) if the conduct qualifies as a fraud on the minority'; or (4) if the conduct consists of ultra vires acts.” Here, Davis asserts only that the “fraud on the minority” exception applies. This exception has two elements which the plaintiff must plead and prove: “first, the alleged wrongdoers must have control' over a majority of the stock with voting rights, and second, those wrongdoers must have committed fraud' “ (id. ).
Because Davis cannot establish the element of “control,” the fraud on the minority exception is inapplicable. Davis has not alleged that the Scottish Re Directors held a majority of the voting shares. Indeed, in a closely analogous case, a federal court in New York dismissed derivative claims against Scottish Re's then-directors because the allegations demonstrated that a majority of the voting shares were held by investors other than the directors (see Winn, 499 F.Supp.2d at 398 ). The Complaint specifically alleges that the Cerberus Defendants and the Mass Mutual Defendants collectively acquired a majority of Scottish Re voting rights in 2007, and held this interest until April 2011 when they acquired full ownership of the Scottish Re ordinary shares through the Merger (Compl.¶ 22). Of note, the Complaint does not allege that the Scottish Re directors individually held a controlling share of voting rights in Scottish Re. These facts necessarily imply that the Scottish Re Directors did not have control' over a majority of the stock with voting rights during this period. Thus, the element of control' is not alleged, and the “fraud on the minority” exception cannot be invoked to save these claims as against the Scottish Re Directors.
Although not essential to the result because both prongs of the test must be satisfied for a fraud on the minority exception to apply, Plaintiff has not alleged facts sufficient to support the second prong either. There are no allegations that the Scottish Re Directors “benefit [ted] themselves at the expense” of Scottish Re (Daniels v. Daniels, [[1978] Ch 406, 414; see Meeson Reply Decl. ¶¶ 30–37; see also Shenwick, 106 AD3d at 639 ). Absent evidence that the Scottish Re Directors engaged in self-dealing at the expense of Scottish Re with respect to the transactions at issue, the “fraud on the minority” exception is inapplicable.
Nonetheless, Davis asserts that the directors had “control” over a majority of Scottish Re's voting shares by virtue of their allegedly conspiratorial relationship with the majority shareholders, who do have voting control. Davis bases his theory on the majority shareholders' nomination and employment of certain of the Scottish Re Directors. However, under the laws of Cayman, the fact that a director has been nominated or employed by a majority shareholder does not give the director the voting power of the shareholder (see Schultz v. Reynolds & Newport Ltd., 1992–93 CILR 59, 79–80 [director lacked control, even though his employer was the indirect sole shareholder, because director personally lacked voting control]; Meeson Reply Decl. ¶¶ 52–60).
Accordingly, Counts 7, 9 and 10 must be dismissed as against all defendants for lack of standing for two separate and independent reasons: (1) failure to comply with Rule 12A and (2) under Foss v. Harbottle.
VI. Breach of Fiduciary Duty Claims Pled as Direct Claims (Counts 4 and 6)
The breach of fiduciary duty claims in Counts 4 and 6 are improperly asserted as direct claims. Under the laws of Cayman, these claims can only be understood as derivative claims. Therefore, Counts 4 and 6 must be dismissed for the same reasons that counts 7, 9, and 10 will be dismissed.
Although pleaded as direct claims, Counts 4 and 6 are derivative causes of action. Only Scottish Re, or a shareholder suing derivatively on Scottish Re's behalf, may bring claims which seek to redress alleged harms done to Scottish Re (see Druck Corp. v. The Macro Fund (U.S.) Ltd., No. 02–CIV–6164, 2007 WL 258177, at *2 [SDNY Jan. 29, 2007] [applying Cayman law] ). To determine whether a claim is derivative or direct, the law of Cayman looks to whether the shareholder's loss is merely “a reflection of the loss suffered by the company” and “would be made good if the company had enforced its full rights against the party responsible” (see Johnson v. Gore Wood & Co., [2002] 2 AC 1, 36 [internal quotation omitted] ).
Count 4 relates to the allegedly improper distribution of corporate assets. In short, Plaintiff complains that assets of Scottish Re were distributed through improper dividend payments and that he was harmed as a result. The payment of improper dividends is a harm to Scottish Re itself. Davis cannot assert this claim on his own behalf. Davis nonetheless contends that Count 4 alleges harm only to the minority shareholders and as such states a direct claim. However, regardless of Davis' ultimate injury, the essence of the claim is that the corporation itself suffered a harm through the improper distribution of its assets (see Johnson, [2002] 2 AC at 62).
Count 6 concerns the defendants' decision to enter into the Merger Agreement and whether the Scottish Re Directors took appropriate steps to maximize shareholder value. Davis asserts damages in the form of being underpaid for his shares in connection with the Merger. He contends that had the Defendants not caused Scottish Re to take actions which allegedly harmed the company, Scottish Re's assets would have been more valuable. As a result, Scottish Re shares would have warranted a higher Merger consideration. Accordingly, under Plaintiff's own theory of damages, the Complaint alleges loss of Scottish Re's assets which is a harm to the corporation and Count 6 is properly understood as a derivative claim. The rule under Cayman law is clear: “claims based on breach of fiduciary duty ... that result in the diminution of share value belong to the corporation and can only be brought by it or a shareholder suing derivatively” (Druck, 2007 WL 258177, at *2 ). Davis' arguments to the contrary must fail.
As discussed above, Davis lacks standing to assert derivative claims as against any of the defendants by virtue of his non-compliance with Rule 12A as well as application of the rule in Foss v. Harbottle. Thus, because Counts 4 and 6 are properly understood as derivative claims, those claims must be dismissed for lack of standing.
VII. Tortious Interference (Count 5)
Count 5 of the Complaint alleges a claim for tortious interference with contract against the Cerberus Defendants and the Mass Mutual Defendants. To prove a claim for tortious interference with contract, the plaintiff must show: (1) the existence of a valid contract; (2) defendant's knowledge of the contract; (3) defendants' intentional procurement of the third-party's breach without justification; (4) actual breach of the contract; and (5) damages caused by breach of the contract (Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 424 [1996] ); Kronos, Inc. v. AVX Corp., 81 N.Y.2d 90 [1993] ). The claim in this case fails for two reasons: first, the Complaint does not allege any specific conduct by the Cerberus Defendants or the Mass Mutual Defendants aimed at procuring breach of a contract; second, the Complaint does not plead that the contract would not have been breached “but for” the conduct of the Cerberus Defendants and/or the Mass Mutual Defendants.
As to the first, the Complaint fails to allege any conduct by the targeted defendants aimed at procuring Scottish Re's breach of the COD. Davis cites to three allegations in the Complaint which he contends are sufficient to support the claim for tortious interference: (1) that the “Investors” (defined to include the Cerberus Defendants and the Mass Mutual Defendants) pursued an unfair dividend policy to deprive PPS holders of their rights so as to force them to sell (Compl.74–75); (2) that the Investors caused Scottish Re to redeem the PPS in violation of the COD (Compl.79, 84); (3) and that the Investors prevented the PPS holders from electing directors.
This last allegation refers to the Cerberus Defendants and the Mass Mutual Defendants attempted procurement of the breach of contract complained of in Count 3 of the Complaint. Because the breach of contract claim in Count 3 must be dismissed for failure to state a cause of action, this last allegation is of no moment.
With regard to paragraphs 74 and 75 of the Complaint, the allegations are conclusory and lack the required specificity. Davis assumes that the Investors were involved with the complained of dividend payments without alleging facts that would support that assumption. In paragraph 74, Davis asserts that Scottish Re paid a dividend to PPS holders on October 9, 2012 to pay “one-time lip service to the COD” and then concludes that in actuality, it was the Investors who took this step in order to “disenfranchise all other shareholders.” Paragraph 75 then states that immediately after the one-time dividend was paid, Scottish Re began pursuing an unfair dividend strategy and again states in conclusory terms that the Investors paid a dividend to themselves as ordinary shareholders that was not commensurate with the dividend paid to the PPS holders. There is no factual allegation in the Complaint that would (taken as true) substantiate the Investors involvement with the dividend payments. Because there are no factual allegations to fill this logical void, the allegations are deemed conclusory and not entitled to be taken as true.
Paragraphs 79 and 84 of the Complaint are similarly conclusory and lacking in specificity. These paragraphs contain no allegations as to what steps the Cerberus Defendants or the Mass Mutual Defendants took to procure the allegedly improper redemptions. Paragraph 84, for example, states that “[o]n information and belief, the tender offers were an attempt by [Scottish Re], controlled by the Investors and the Defendant Directors, to redeem the PPS at a price significantly lower than the $25 per share price established under the terms of the COD ...” (Compl.¶ 84). There are no specific factual allegations as to how the Cerberus Defendants or Mass Mutual Defendants controlled or caused Scottish Re to take the complained of actions. Because the Complaint fails to allege the defendants intentional procurement of Scottish Re's breach, Count 5 must fail.
As to the second reason for dismissal, the Complaint fails to plead that the contract would not have been breached “but for” the conduct of the Cerberus Defendants or the Mass Mutual Defendants. Davis contends that a claim for tortious interference does not require an allegation that the Defendants' conduct was the sole proximate cause of the alleged harm. However, the Complaint must plead that Scottish Re's breach would not have happened “but for” the actions of the Investors (One Madison FM, LLC v. 18 East 23rd Street Realty Company LLC, Index No. 600423/2010, 2013 WL 582256, at *3 [NY Sup Ct, N.Y. Cnty Feb 11, 2013] ). The Complaint contains no such allegations. Therefore, Count 5 must fail for this additional reason.
VIII. Aiding and Abetting a Breach of Fiduciary Duty (Count 8)
Because Davis' underlying breach of fiduciary duty claims are derivative in nature, his aiding and abetting claim is also derivative (see ABF Capital Mgmt. v. Askin Capital Mgmt., L.P., 957 F Supp 1308, 1331 [SDNY 1997] ). Therefore, for all of the reasons discussed above, Davis lacks standing to assert the aiding and abetting claim. This claim shall be dismissed.
CONCLUSION
The motions to dismiss the Complaint are granted to the extent of (1) dismissing Count 3 for failure to state a cause of action; (2) dismissing all derivative claims (Counts 4, 6, 7, 8, 9, and 10) as against each defendant for lack of standing under Rule 12A and under Foss v. Harbottle; (3) dismissing the entire Complaint as against the Scottish Re Directors (other than Port, Hughes, and Wechsler), the SRUS Directors, and the Benton Entities for lack of personal jurisdiction; and (4) dismissing Count 5 as against the Investors for failure to state a cause of action, and as against the Benton Entities on the additional ground of lack of personal jurisdiction. That branch of the motion of Scottish Re as seeks dismissal of Counts 1 and 2 shall be continued to permit discovery on the issue of personal jurisdiction. Accordingly, the Complaint will be dismissed as against all defendants except Scottish Re for the various reasons I have summarized.
It is hereby
ORDERED that the Complaint is DISMISSED as to the Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth and Tenth Causes of Action; and it is further
ORDERED that branch of the motion of Scottish Re to dismiss the First and Second Causes of Action (motion sequence 004) is continued pending the outcome of discovery on the issue of jurisdiction which discovery shall commence without delay; and it is further
ORDERED that counsel for the remaining parties shall appear for a preliminary conference on Tuesday, November 18, 2014 at 9:30 AM in Part 49, Courtroom 252, 60 Centre Street, New York, New York which preliminary conference may be adjourned upon stipulation of counsel provided there is agreement as to the discovery schedule and court approval by November 13, 2014.
This constitutes the decision and order of the court.