In a March 29, 2011 order (here), Southern District of New York Judge Jed Rakoff granted the defendants’ motions to dismiss a pair of subprime-related derivative lawsuits that had been brought against certain directors and officers of Merrill Lynch. Because the plaintiffs — former shareholders of Merrill Lynch who became BofA shareholders at the time of BofA’s January 2009 acquisition of Merrill—asserted their claims in the capacities as BofA shareholders, both lawsuits represented so-called double derivative suits. A copy of Judge Rakoff’s March 29 ruling can be found here.
Judge Rakoff granted the motions to dismiss because he concluded that the plaintiffs had failed to show that BofA’s board was” so involved in the underlying wrongdoing alleged in the derivative complaint that it could not impartially consider a demand to pursue claims against the Merrill officers and directors.”
Both lawsuits sought to assert claims against the defendants for the “unprecedented losses” Merrill had experienced “as a result of its aggressive investment in collateralized debt obligations.” A detailed review of the underlying facts can be found here. In an earlier ruling, Judge Rakoff had previously ruled that the plaintiffs lacked standing to assert derivative claims on Merrill’s behalf because they were no longer Merrill shareholders. His prior ruling was without prejudice to their refilling their claims in their capacities as BofA shareholders.
The plaintiffs refilled their complaints seeking to compel BofA’s board to force its Merrill subsidiary to bring claims against certain Merrill directors and officers in connection with Merrill’s reckless investments. The key difference in the two actions is that in the first action (referred to as the “Derivative Action”), the plaintiffs allege that they are not required to bring a demand that BofA’s board bring the action against the Merrill officials, whereas in the second action (the “Lambrecht Action”), the plaintiffs had presented a demand which the BofA board had refused.
Judge Rakoff concluded that both actions should be dismissed, noting that
The Court does not take this step lightly, for the allegations of the complaint, if true, describe the kind of risky behavior by high-ranking financiers that helped created the economic crisis from which so many Americans continue to suffer. But a derivative action is brought for the benefit of the company, and nothing here alleged in the complaints raises a reason to doubt that the board of the relevant company, BofA, was at all times fairly positioned to determine whether bringing an action against Merrill’s former directors and officers was in the company’s interests.
With respect to the Derivative Action, Judge Rakoff specifically concluded that the plaintiffs had “failed to make a legally adequate showing” that the BofA board was so involved in the underlying wrongdoing “that it could not impartially consider a demand to pursue claims against the Merrill officers and directors.”
With respect to the Lambrecht Action, Judger Rakoff concluded that the plaintiffs had “failed to carry the considerable burden of showing that the BofA’s Board’s decision not to bring a lawsuit against the Merrill officers and directors was made in bad faith or was based on an unreasonable investigation.”
Some time ago, as discussed here, Merrill Lynch settled for $475 million dollars the related securities class action lawsuit that had been filed on behalf of Merrill’s shareholder. Merrill also at the same time agreed to settle the related ERISA liability suit for an additional $75 million. In addition, Merrill agreed to settle the related securities suit that had been brought by its bondholders for $150 million, as discussed here. These settlements represent $700 million in aggregate.
However, Merrill and its successor in interest BofA declined to settle the related derivative litigation, and Judge Rakoff’s decision dismissing the derivative litigation appears to vindicate that decision.
Judge Rakoff’s ruling is interesting if for no other reason that the unusual posture of the double derivative suit, where the demand to pursue the claims against the former directors and officers of a subsidiary must be directed against the board of the parent company.
The ruling is also interesting because it illustrates just how difficult it is to overcome the initial pleading hurdles in a derivative suit. Judge Rakoff concluded that the initial pleading requirements had not been satisfied notwithstanding allegations that Judge Rakoff himself said “describe the kind of risky behavior by high-ranking financiers that helped create the economic crisis from which so many Americans continue to suffer. “ The clear implication is that even allegations of egregious behavior will not suffice if the demand requirements have not been satisfied or proved inapplicable.
Judge Rakoff’s analysis of the BofA board’s rejection of the Lambrecht plaintiffs’ suit demand is particularly interesting. In reviewing the substance of the reasons the BofA board gave for rejecting the demand, Judge Rakoff noted that the rejection letter the board had sent “belies plaintiff’s assertions” that the rejection was cursory and the letter itself mere boilerplate. In support of this conclusion, he noted that the board had reasoned that taking up the litigation as the Lambrecht plaintiffs demanded would have undermined Merrill’s defenses in the securities litigation and in the ERISA litigation. The letter also reflected the board’s conclusion that the cost of the urged litigation might well any benefit that might reasonably be expected. These types of considerations often are present when these types of demands are presented to boards, and Judge Rakoff’s analysis seems to confirm that it these kinds of considerations are appropriate for boards to take into account in rejecting litigation demands.
Finally, Judge Rakoff rejected the plaintiffs suggestions that the response letter irself showed that consideration of the litigation demand was cursory, noting that” there is no prescribed procedure a board must follow in responding to a demand letter.”
I have in any event added the ruling to my running tally of subprime-related dismissal motions rulings, which can be accessed here.
Nate Raymond’s March 29, 2011 Am Law Litigation Daily article about Judge Rakoff’s decision can be found here.
Special thanks to the securities litigation group at Skadden for forwarding me a copy of Judge Rakoff’s ruling. Skadden represented Bank of America and Merrill Lynch in the two derivative suits.
An International D&O Resource. I know from conversations with readers that one issue of recurring concern is finding resources on which to rely in connection with the non-U.S. exposures of directors and officers. With that concern in mind, I am pleased to link here to the recently completed paper by my friend Perry Granof. The paper, which is entitled “The Top 10 Non-US-Jurisdictions Based Upon Maturity and Activity” (here) analyzes the ten non-U.S. jurisdictions that Perry believes have the most evolved systems with respect to the liabilities of directors and officers. The list also includes three ‘up-and-coming” jurisdictions, as well.