EXHIBIT E
Nancie Potter Arellano, OSB #80152
areln@foster.com
Susan T. Alterman, OSB #87081
altes@foster.com
Foster Pepper & Shefelman LLP
101 S.W. Main Street, Fifteenth Floor
Portland, Oregon 97204-3223
Telephone: (503) 221-0607
Facsimile: (503) 221-1510
Roger D. Mellem, OSB #83134
mellr@foster.com
Foster Pepper & Shefelman PLLC
1111 Third Avenue, Suite 3400
Seattle, Washington 98101-3299
Telephone: (206) 447-8917
Facsimile: (206) 749-1989
Attorneys for Defendants/
Counterclaim and Third-Party Plaintiffs
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON
STILWELL ASSOCIATES, L.P., suing derivatively )
on behalf of Oregon Trail Financial Corp., )
)
Plaintiff, )
v. ) Civil No. CV01-740-JE
)
EDWARD H. ELMS, an individual, OREGON TRAIL FINANCIAL ) MEMORANDUM OF LAW IN
CORP., an Oregon corporation, ) SUPPORT OF DEFENDANTS/
) COUNTERCLAIM PLAINTIFFS'
Defendants/Counterclaim Plaintiffs and ) AND THIRD-PARTY PLAINTIFFS'
Third-Party Plaintiffs, ) MOTION TO DISMISS FOR
v. ) FAILURE TO STATE A CLAIM
)
STILWELL ASSOCIATES, L.P., a Delaware limited )
partnership; JOSEPH STILWELL, an individual; STILWELL )
VALUE PARTNERS II, L.P., a Delaware limited )
partnership; and STILWELL VALUE LLC, a Delaware )
limited liability company, )
)
Counterclaim and Third-Party )
Defendants. )
- - - - ------------------------------------------------------
Page 1
I. INTRODUCTION
This is a purported "derivative" action by plaintiff Stilwell Associates,
L.P. ("Stilwell") to compel Oregon Trail Financial Corp. ("OTFC") to remove
Edward H. Elms from its Board of Directors. As to Mr. Elms, the complaint must
be dismissed under Fed. R. Civ. P. 12(b)(6) because, having demanded that OTFC
act against Mr. Elms, Stilwell lost, through waiver, any possibility of suing
him in the name of OTFC. Stilwell's action against OTFC must be dismissed under
Fed. R. Civ. P. 12(b)(6) because Stilwell has not alleged that OTFC's Board
acted improperly in refusing Stilwell's demand and because Stilwell acted
prematurely in filing its complaint. Moreover, Stilwell has not made any
allegations of improper refusal against OTFC with the particularity required by
federal and state law.
II. UNDISPUTED FACTS
The factual background of the parties' dispute is set out in the Answer,
Defenses, Affirmative Defenses, Counterclaims and Third Party Claims ("Answer").
Rather than repeat the extensive discussion of the facts included in the Answer,
this memorandum presents only a brief factual overview.
On May 8, 2001, Stilwell delivered a letter to OTFC's Board of Directors
making alternative demands. Stilwell demanded that the Board either (a) force
Mr. Elms' resignation from the Board on the basis that he allegedly perjured
himself in deposition testimony in a related lawsuit or (b) commence an action
against Mr. Elms pursuant to ORS 60.327 and 60.261 to remove him from the Board.
Stilwell demanded a response within 10 calendar days. Stilwell's May 8 letter
cited no authority for demanding such an expedited response and case law
typically allows corporate boards several months to consider shareholder
demands.
By May 11 the Board had established a committee consisting of all members
of the Board, other than Mr. Elms, to consider Stilwell's demand. The committee
held its first work session on May 18. The committee sought advice from counsel
and copies of all relevant documents. Answer,P. 35. On May 18 the committee
reported by letter to Stilwell's counsel that it needed more time to complete
its investigation and that it would meet again on May 21 for that purpose. Id.
The committee met again on May 21. However, on May 22, without waiting for a
response to its demand, and having given the committee only 13 calendar days (9
business days) to consider the demand, Stilwell filed this derivative action.
Page 2
III. ARGUMENT
A. Federal and Oregon Law Applicable to Derivative Actions in General
A shareholder does not have standing to sue in an individual capacity for
injury to the corporation but may sue derivatively on behalf of the corporation
to seek redress for wrongs committed against the corporation. In re Conduct of
Kinsey, 294 Or. 544, 660 P.2d 660 (1983). A derivative proceeding is an
equitable remedy in which a shareholder asserts on behalf of the corporation a
claim not belonging to the shareholder, but to the corporation. Ross v.
Bernhard, 396 US 531, 534 (1970).
Ordinarily a corporation's management decides whether the corporation will
file a lawsuit. Before bringing a derivative proceeding, a shareholder must
first make a demand on the board of directors, asking the directors to bring
suit to enforce a claim of the corporation, unless such a demand would be
futile. Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d 726, 730 (Del. 1988).
The demand requirement gives the corporation an opportunity to rectify an
alleged wrong without litigation or to file the suit itself. Brehm v. Eisner,
746 A.2d 244, 255 (Del. 2000) (citing Grimes v. Donald, 673 A.2d 1207, 1216-17
(Del. 1996)).
A plaintiff shareholder filing a derivative action must allege with
particularity its efforts, if any, to obtain the action that it desires from the
directors. Fed. R. Civ. P. 23.1. It must also allege why the directors did not
take action or why the plaintiff failed to ask the directors to take action.
Similarly, ORS 60.261(2) provides that the complaint in a derivative action
"must allege with particularity the demand made, if any, to obtain action by the
board of directors and either that the demand was refused or ignored or why a
demand was not made."
Page 3
B. Stilwell's Demand Waives Its Claim of Futility.
Stilwell made a demand on the Board on May 8, 2001; on May 22, while
Stilwell knew that the committee was still investigating Stilwell's demand,
Stilwell sued and alleged that demand would have been futile. But, having made
demand, Stilwell waived the right to allege that demand would have been futile.
Although no Oregon case has interpreted the provisions of ORS 60.261, the
Oregon Supreme Court recognizes demand as an integral part of the derivative
action procedure. See North v. Union Savings & Loan Ass'n, 59 Or. 483, 488; 117
P. 822, 824 (1911). In addition, Oregon courts routinely look to Delaware law in
addressing matters of corporate governance. See, e.g., Klinicki v. Lundgren, 298
Or. 662, 695 P.2d 906 (1985); Chiles v. Robertson, 94 Or. App. 604, 767 P.2d 903
(1989); Stringer v. Car Data Systems, Inc., 314 Or. 576, 841 P.2d 1183 (1991).
The Delaware Supreme Court has held that a stockholder who makes a demand
on the board of directors waives his or her right to claim that demand would be
futile. Spiegel v. Buntrock, 571 A.2d 767, 775 (Del. 1990); Stotland v. GAF
Corp., 469 A.2d 421, 422 (Del. 1983). By making demand, a shareholder tacitly
acknowledges the absence of facts to support a finding of futility. Spiegel, 571
A.2d at 775. Once demand is made, the question of whether demand was excused or
futile becomes moot. Stotland, 469 A.2d at 422. The effect of the demand is to
place control of the derivative litigation in the hands of the board of
directors. Zapata v. Maldonado, 430 A.2d 779, 784 (Del. 1981); Aronson v. Lewis,
473 A.2d 805, 811 (Del. 1984). If the board refuses to take action, the
shareholder may sue the corporation and allege that its board improperly refused
to take action. But having made demand, the shareholder may not then assert that
demand would have been futile. Zapata, 430 A.2d at 784-86.
Page 4
C. Stilwell's Premature Filing Requires Dismissal of Its Complaint.
There is no precise rule on how much time a board must be given to respond
to a demand. A board must be given adequate time to investigate and respond to
the demand. See, e.g., Nussbacher v. Continental Ill. Nat'l. Bank & Trust Co.,
518 F.2d 873, 877 (7th Cir. 1975), cert. denied, 424 U.S. 928 (1976); Mills v.
Esmark, Inc., 91 F.R.D. 70, 72-73 (D. Ill. 1981) (the shareholder must allow the
corporation an "adequate and reasonable amount of time" to respond to the demand
for relief); see also Allison v. General Motors Corp., 604 F. Supp. 1106, 1117
(D. Del. 1985) (two and one-half months not adequate time for board to respond
to demand); Recchion v. Kirby, 637 F. Supp. 1309, 1319 (W.D. Pa. 1986) (two
months not adequate time for board to respond).
Premature filing of a suit after demand frustrates the policy of Fed. R.
Civ. P. 23.1 that an individual shareholder should not usurp the responsibility
of corporate management to decide whether and how to pursue a corporate claim.
Weiss v. Temporary Investment Fund, Inc., 516 F. Supp. 665, 670 n. 13 (D. Del.
1981), aff'd., 692 F.2d 928 (3rd Cir. 1982) vacated and remanded on other
grounds, 465 U.S. 1001 (1984). Premature filing of suits after demand is made is
equivalent to failure to make a demand and warrants dismissal. Allison v.
General Motors Corp., 604 F. Supp. at 1118; Mills v. Esmark, Inc., 91 F.R.D. at
73.
Stilwell sued after giving OTFC 13 days - just 9 business days - to
evaluate and respond to its demand. No board or committee could reasonably be
expected to review the demand, consult with counsel, carefully review six
deposition transcripts, and reach a reasoned result in a matter of this
magnitude in just 9 business days. The amount of time Stilwell gave OTFC to
review the demand was not adequate or reasonable. Stilwell filed its complaint
prematurely. That precipitant act is tantamount to Stilwell's failure to make
demand at all. Stilwell's premature filing warrants dismissal of the complaint.
Page 5
D. OTFC and Elms Must Be Dismissed.
Having demanded that the Board proceed against Mr. Elms, Stilwell's sole
recourse now is to sue OTFC on the basis that its decision to reject the demand
was improper, i.e., not a proper exercise of its business judgment. However,
Stilwell sued OTFC prematurely, i.e., before OTFC rejected the demand; the
complaint accordingly lacks any allegations of improper refusal. Stilwell
contends that OTFC is liable simply because it "failed or refused to abide by
[Stilwell's] Demand." Complaint,P. 14. A corporation, however, is not required
to accede to every shareholder demand. Stilwell's conclusory statement in its
bare-bones complaint is plainly insufficient to state a claim.
Stilwell's real claim seems to be that its should be allowed to sue Mr.
Elms derivatively, on behalf of OTFC, on the basis that demand on OTFC to take
action "is excused because it is futile." Id. On its face Stilwell's complaint
is legally deficient, though, because it also alleges that a demand was actually
made. Id. If many months had passed with no action or response from the Board,
then Stilwell might allege that the Board had effectively rejected Stilwell's
demand, or had improperly failed to consider Stilwell's demand. But in this case
the undisputed facts show that the committee immediately investigated Stilwell's
demand and was continuing its investigation when Stilwell rushed to the
courthouse to file this suit. Stilwell had a choice: it could make a demand,
wait for a decision, and then challenge that decision, or it could sue without
making demand and attempt to show that demand would have been futile. But
Stilwell cannot make a demand and then immediately allege that demand was
futile. By making its demand, Stilwell has conceded that the Board properly
could consider the issues presented and exercise its business judgment in
deciding whether to proceed against Mr. Elms. (1)
- - - - --------
(1) Even if Stilwell had not waived the issue, the complaint still would
be insufficient because it did not allege any circumstances that would
support a finding of futility. Fed. R. Civ. P. 23.1 requires that such
facts be stated with particularity. The complaint is silent on the
issue. Stilwell's silence on this point requires dismissal as to OTFC
under even the most generous reading of the complaint.
Page 6
Fed. R. Civ. P. 12(b)(6) permits dismissal where there is a "lack of a
cognizable legal theory." Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530,
534 (9th Cir. 1984); Chang v Moon, 1992 U.S. Dist., LEXIS 20524, *5; Fed. Sec.
L. Rep. (CCH) P97,209. The complaint against Mr. Elms must be dismissed with
prejudice, and the complaint against OTFC must be dismissed because Stilwell has
not alleged with particularity any wrongful acts of the Board.
E. It Would Be Pointless To Allow Stilwell To Amend Its Complaint Against OTFC
To Allege That the Board's Decision To Reject the Demand Was Improper.
As discussed above, Stilwell's complaint against Mr. Elms must be dismissed
with prejudice. The Court similarly should dismiss Stilwell's complaint against
OTFC without leave to amend.
The business judgment rule allows directors to exercise their good faith
discretion in administering the affairs of the corporation, even at the risk of
an occasional bad business decision. See e.g., McMunn v. ML&H Lumber, 247 Or.
319, 323-24, 429 P.2d 798 (1967); Jackson v. Nicolai-Neppach Co., 219 Or. 560,
587, 348 P.2d 9 (1959). Oregon courts decline to interfere if there are
plausible business reasons for the decision that can be given credence. Iwasaki
v. Iwasaki Bros., 58 Or. App. 543, 547, 649 P.2d 598 (1982); Zidell v. Zidell,
Inc., 277 Or. 413, 418-19, 560 P.2d 1086 (1977).
Similarly, under Delaware law, courts will protect a board's decision to
reject a demand for action if the decision is the product of a valid exercise of
business judgment. Brehm, 746 A.2d at 264 & n. 66. Directors' business decisions
will not be disturbed if they can be attributed to any rational purpose.
Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971).
By making a demand on OTFC's Board, Stilwell placed in the hands of the
Board the decision of whether to bring a lawsuit to remove Mr. Elms. To state a
claim Stilwell must allege that the unanimous decision of the five directors
constituting the independent special committee to refuse to remove Mr. Elms was
tainted by self-interest, fraud or gross negligence. To do so, Stilwell would
have to allege and prove that a majority of the committee was materially
interested in the refusal to bring a suit to remove Mr. Elms. Stilwell has no
claim if it alleges merely that the directors' decision was substantively wrong;
it must allege how the decision was improperly tainted. OTFC submits that
Stilwell cannot meet this burden.
Page 7
IV. CONCLUSION
Plaintiff filed its complaint prematurely - without giving OTFC sufficient
time to respond - and for that reason alone the complaint must be dismissed.
Plaintiff waived any basis for bringing a derivative action against Mr.
Elms by demanding that OTFC remove Mr. Elms from the Board. Stilwell's demand
makes its futility claim moot. Accordingly, the complaint against Mr. Elms must
be dismissed with prejudice.
The complaint against OTFC must be dismissed because plaintiff fails to
allege that OTFC's directors improperly refused plaintiff's demand that OTFC
force Mr. Elms to resign or sue him to force removal. Accordingly, plaintiff's
claim against OTFC must be dismissed, and it should be dismissed with prejudice.
RESPECTFULLY SUBMITTED this 26th day of June, 2001.
/s/ Susan T. Alterman for
-------------------------------------
Nancie Potter Arellano, OSB #80152
Susan T. Alterman, OSB #87081
Foster Pepper & Shefelman LLP
101 S.W. Main Street, Fifteenth Floor
Portland, Oregon 97204-3223
Telephone: (503) 221-0607
Facsimile: (503) 221-1510
Roger D. Mellem, OSB #83134
Foster Pepper & Shefelman PLLC
1111 Third Avenue, Suite 3400
Seattle, Washington 98101-3299
Telephone: (206) 447-8917
Facsimile: (206) 749-1989
Page 8
