Opinion
No. 60142-3-I.
May 27, 2008.
Appeal from a judgment of the Superior Court for King County, No. 05-2-09311-1, Joan E. DuBuque, J., entered March 16, 2007.
Affirmed by unpublished opinion per Becker, J., concurred in by Appelwick and Leach, JJ.
Appellant Dr. Karen Stokes, a member of a limited liability company who was forced out by the other member, is attempting to pursue a derivative claim against the company's attorney. Because Stokes has already sued the other member as well as the company she is now trying to represent, the trial court did not err in concluding that she is not a proper party to bring a derivative lawsuit. We affirm.
Stokes joined with Dr. Dermot Chamberlain in forming a new professional limited liability corporation (PLLC) to provide anesthesia services to Valley General Hospital in Monroe. They selected respondent John Rodda of Inslee, Best, Doezie Ryder to assist in the formation of the company and to provide legal advice. Anesthesia Associates of Monroe (AAM) became a valid legal entity and entered into a three year contract with the hospital in December, 2001.
Relations between Chamberlain and Stokes soured quickly. On April 2, 2002, Chamberlain sent Stokes a letter terminating her from "employment" with AAM and informing her she was not considered a member of AAM. Chamberlain, who was the Chief of Anesthesiology at Valley General Hospital, also terminated Stokes' performance of anesthesia services at the hospital. Several months later, Chamberlain and another doctor, Ashok Shroff, formed a new professional limited liability company: Physicians' Anesthesia of Monroe (PAM).
Stokes sued AAM and Chamberlain in Snohomish County alleging that she was a member of AAM and that she had been wrongfully terminated. She later amended her complaint by adding derivative claims on behalf of AAM against Chamberlain, Shroff, and the new PLLC.
On March 23, 2005, Stokes filed the current derivative action in King County on behalf of AAM against Rodda. The complaint alleges Roddabreached his duty to avoid a conflict of interest and various other duties by assisting Chamberlain to terminate Stokes from AAM, form a new entity, and ensure that the benefit of the hospital contract went to the new entity instead of AAM.
The Snohomish County case was the first of the two cases to be resolved in the trial court. The trial court ruled that Stokes' individual claim for wrongful termination would be tried first, to a jury. The jury would be asked to decide whether Stokes was a member of AAM rather than merely an employee. She would have standing to proceed with the derivative claims on behalf of AAM only if the jury found her to be a member of AAM. The jury trial began in May 2006 and lasted four weeks. The jury determined that Stokes was a member of AAM. The jury found for Stokes in the amount of $64,765 against AAM.
The defendants then moved for summary judgment on Stokes' derivative claims. The trial court granted their motion in November, 2006. Stokes' appeal from the dismissal of the derivative suit in Snohomish County is before this court in Stokes v. Anesthesia Assocs. of Monroe, PLLC, No. 59304-8-I (Wash.Ct.App. May 27, 2008).
In the present case, which Stokes litigated in King County, Rodda moved for summary judgment dismissal in February 2007. The King County Superior Court granted the motion in March, 2007. The clerk's minutes from that hearing state that the court "grants motion for dismissal, finding that Plaintiff is not aproper party to bring a derivative lawsuit." Stokes appeals.
Clerk's Papers at 149 (Clerk's Minutes 3/16/2007 Judge DuBuque).
A member of a limited liability company may bring an action on behalf of the company if those with authority to bring the action have refused to bring the action or an effort to cause them to bring the action is not likely to succeed. RCW 25.15.370. Preliminarily, we note that Stokes stipulated in the Snohomish County action that she did not claim to have a membership interest in AAM that would continue after the end of that trial. Because one who is not a member cannot bring a derivative action, this would seem to end the need for further discussion. However, Rodda refers to this argument only in passing:
See Stokes v. Anesthesia Assocs. of Monroe, PLLC, No. 59304-8-I, slip op. at 8 n. 13 (Wash.Ct.App. May 27, 2008).
The only real factual dispute is that Dr. Stokes is no longer a member of AAM even though she claims she is. That disputed fact, however, is rendered moot by the antagonism between Dr. Stokes and her erstwhile colleagues and the absence of any demonstrable damages.
Brief of Resp't at 16; Clerk's Papers at 24 (Rodda's Motion for Summary Judgment).
Based on the arguments presented to us, we shall assume (without deciding) that Stokes was still a member of AAM in March 2005 when she filed her derivative claims against Rodda.
The derivative action may not be maintained "if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation orassociation." CR 23.1. Rodda contends Stokes cannot fairly and adequately represent the interests of AAM and the other member (Dr. Chamberlain).
In federal courts, abuse of discretion is the standard of review when a derivative claim brought under Fed.R.Civ.Proc. 23.1 is dismissed because of inadequate representation. See Kayes v. Pacific Lumber Co., 51 F.3d 1449, 1464 (9th Cir. 1995). Because Washington's CR 23.1 is essentially identical to Fed.R.Civ.Proc. 23.1, we would probably adopt the same standard of review. But because Rodda's argument that Stokes is not a suitable representative was presented in a motion for summary judgment, rather than in a motion to dismiss, we will review the dismissal de novo in this case.
Even when the more exacting summary judgment standard is applied so that all inferences are taken in favor of Stokes, we see no basis for holding that Stokes is a proper party to bring a derivative suit against Rodda. Stokes begins with the premise that Rodda's conduct, which led to the hospital contract being taken away from AAM and given to the new entity, caused harm to AAM for which a remedy is necessary. The only other shareholder of AAM is Chamberlain, who will continue to enjoy the benefits of the hospital contract because he is a member of the new entity. Stokes deduces that she must be allowed to seek redress for the harm allegedly done to AAM, because no other member is willing to do so.
Rodda responds that Stokes is inimical to the interests of AAM and theother member, Chamberlain, as shown by the fact that she conducted a four week trial against them in Snohomish County on her individual claim for wrongful termination. Stokes replies that a shareholder who brings a derivative suit does not have to be completely fault free. See Wolf v. Frank, 477 F.2d 467 (5th Cir. 1973). As stated in Wolf, whether "plaintiffs were or were not knights in shining armor is irrelevant under Rule 23.1 of the Federal Rules of Civil Procedure, so long as they fairly and adequately represented the shareholders in enforcing the rights" of the corporation in whose name the suit was derivatively filed. Wolf, 477 F.2d at 476. In Wolf, the court determined that the district court did not abuse its discretion when it found that the plaintiffs were fair and adequate representatives even if they had "unclean hands" as a result of violating statutes and rules by selling stock before actually acquiring it. Wolf, 477 F.2d at 476. The court's determination was based, in part, on the conclusion that the plaintiffs' allegedly illegal actions were in no way involved with the transactions for which the district court granted derivative relief. Wolf, 477 F.2d at 476.
Here, by contrast, Stokes' hostility to AAM and Chamberlain is rooted in the same transactions that gave rise to the derivative claim she now seeks to bring against Rodda. She wishes to make Rodda liable for helping Chamberlain to force her out of AAM and for his work in transferring the hospital contract to an entity to which she is unconnected. Given her past hostility to AAM, it is unlikely that Stokes can fairly represent any interests that AAM, now an inactivecompany, might have. She is unable to point to anyone other than herself who could possibly benefit from a finding that the hospital contract should have stayed with AAM. Her personal antagonism toward Chamberlain, and the fact that she pursued a suit against AAM and Chamberlain for terminating her, make it unlikely that she would be scrupulously keeping their interests in mind if allowed to proceed further with this litigation.
There is also the question of adequacy. Stokes does not articulate a coherent theory that explains how AAM has been harmed in any practical sense of the word by losing the hospital contract. She says that AAM stood to gain about a million dollars of profit each year from the contract. But such gains would have been even theoretically possible only if AAM's professional members — herself and Chamberlain — continued to work and earn money for AAM through the hospital contract. Her termination ended that possibility, and she has already been compensated for the damages resulting from her termination. Thus, it does appear that she is attempting to use the vehicle of the derivative suit for the sole purpose of getting another chance to prove that her termination from AAM was wrongful. In this respect, Stokes bears a degree of similarity to the shareholder whose derivative suit was dismissed in Roussel v. Tidelands Capital Corp., 438 F. Supp. 684 (D.C. Ala. 1977). There, the court found that the plaintiff's conduct was designed to fulfill his sworn objective of keeping the defendants in the courthouse "a hell of a long time." Roussel, 438 F. Supp. at 688. While Stokes has not exhibited disregard for fair play as egregiously as the plaintiff in Roussel, her proposed derivative action is vexatious rather than meritorious.
We do not rule out the possibility that in a proper case, one member of a two-member limited liability company could responsibly serve as a derivative plaintiff to safeguard the company's interests, even where the two members have different economic interests. But there are no facts in this case supporting a determination that Stokes would be either "fair" or "adequate" in her representation of AAM in a derivative suit against Rodda. We conclude the trial court did not err in dismissing the suit for lack of a proper party plaintiff.
In addition to arguing that Stokes is not a proper party to bring a derivative claim on behalf of AAM, Rodda argues that her suit fails because of collateral estoppel effects of the Snohomish County lawsuit and because she has failed to establish that AAM experienced any damage as a result of the conduct complained of. Because the case is fully disposed of by our conclusion that Stokes is not a proper party, we do not reach these other arguments.
Affirmed.
WE CONCUR: