Gail B. Warden, in Her Capacity as Trustee of the Trust Established Under Deed of Charles Graham Berwind, Dated February 28, 1963, for the Benefit of David McMichael Berwind, and Derivatively on Behalf of Berwind Pharmaceutical Services, Inc. Linda B. Shappy, in Her Capacity as Trustee of the Trust Established Under Deed of Charles Graham Berwind, Dated February 28, 1963, for the Benefit of David McMichael Berwind, and Derivatively on Behalf of Berwind Pharmaceutical Services, Inc. David McMichael Berwind, Jr., in His Capacity as Trustee of the Trust Established Under Deed of Charles Graham Berwind, Dated February 28, 1963, for the Benefit of David McMichael Berwind, and Derivatively on Behalf of Berwind Pharmaceutical Services, Inc. David McMichael Berwind, in His Capacity as Trustee of the Trust Established Under Deed of Charles Graham Berwind, Dated February 28, 1963, for the Benefit of David McMichael Berwind, and Derivatively on Behalf of Berwind Pharmaceutical Services, Inc. v. M
Gail B. Warden, in Her Capacity as Trustee of the Trust Established Under Deed of Charles Graham Berwind, Dated February 28, 1963, for the Benefit of David McMichael Berwind, and Derivatively on Behalf of Berwind Pharmaceutical Services, Inc. Linda B. Shappy, in Her Capacity as Trustee of the Trust Established Under Deed of Charles Graham Berwind, Dated February 28, 1963, for the Benefit of David McMichael Berwind, and Derivatively on Behalf of Berwind Pharmaceutical Services, Inc. David McMichael Berwind, Jr., in His Capacity as Trustee of the Trust Established Under Deed of Charles Graham Berwind, Dated February 28, 1963, for the Benefit of David McMichael Berwind, and Derivatively on Behalf of Berwind Pharmaceutical Services, Inc. David McMichael Berwind, in His Capacity as Trustee of the Trust Established Under Deed of Charles Graham Berwind, Dated February 28, 1963, for the Benefit of David McMichael Berwind, and Derivatively on Behalf of Berwind Pharmaceutical Services, Inc. v. M
3d 105
No. 00-1364.
United States Court of Appeals, Third Circuit.
Argued January 18, 2002.
Filed April 30, 2002.
Steven L. Friedman (Argued), Dilworth Paxson, Philadelphia, PA, for
Appellants.
Marc J. Sonnenfeld (Argued), Morgan, Lewis & Bockius, Philadelphia,
PA, for Appellees.
Before SCIRICA and ROSENN, Circuit Judges, and KANE, District
Judge.*
OPINION OF THE COURT
SCIRICA, Circuit Judge.
I.
2
In 1993, Graham Berwind made the first of several attempts to buy his brother's
trust's stock in BPSI, offering $29 million. Four years later, he offered $53
million. On both occasions, David Berwind refused because Graham Berwind
had allegedly provided insufficient financial information to assess the value of
the stock. Shortly thereafter, Graham Berwind took actions to resign as trustee
of the David Berwind Trust. According to the complaint, however, he did not
comply with all of the requirements for resigning. Consequently, plaintiffs
allege Graham Berwind remained a trustee, and continues in this capacity.
Six days later, BPSI's Board of Directors approved a "squeeze-out" merger. The
result of this maneuver was that BPSI emerged as a corporation wholly owned
by Berwind Group Partners. Having lost its status as shareholder, the David
Berwind Trust was offered a note worth $82,820,000. The Trust also obtained
the right to seek judicial appraisal of the fair value of its shares, should it view
the note as inadequate. An appraisal hearing was initiated in Philadelphia
Common Pleas Court and is proceeding during the pendency of this appeal.
Plaintiffs allege that, prior to the BPSI "squeeze-out" merger, Graham Berwind
engaged in several transactions that caused the unlawful transfer of value from
BPSI to Berwind Group Partners and other Berwind entities. The result was to
deplete the value of the David Berwind Trust's holdings while increasing
benefits to Graham Berwind.
10
Five of the thirteen counts in the amended complaint are brought on behalf of
BPSI. The other eight are brought on behalf of the David Berwind Trust.
Plaintiffs primarily allege: that Graham Berwind breached his duty of loyalty to
the David Berwind Trust; that defendants violated RICO with schemes to
defraud the trust; that the BPSI directors breached their fiduciary duty of
loyalty to the corporation; and that the directors diverted corporate
opportunities.
11
On April 25, 2000, the District Court granted defendants' motion to dismiss. In
doing so, the Court only provided the following explanation:
12
The Court approves and adopts Defendants' Motion to Dismiss Plaintiff's [sic]
Amended Complaint (Docket No. 12), Defendants' Reply Memorandum in
Support of Motion to Dismiss (Docket No. 19), and Defendant's [sic]
Supplemental Reply Memorandum in Support of Defendants' Motion to
Dismiss (Docket No. 20) which collectively set forth the legal authority which
is dispositive of Plaintiffs' cause of action.
13
14
On remand, the District Court issued an opinion that was a minimally modified
version of one of defendants' legal memoranda the District Court had
previously listed as setting forth the legal authority for its prior order. Rather
than seeking further clarification, we turn to the merits of the appeal.2
II.
16
Because this is an appeal from a dismissal under Rule 12(b)(6), we accept the
factual allegations in the complaint. We may affirm only if it is certain no relief
could be granted under any set of facts that could be proven. Rossman v. Fleet
Bank (R.I.) N.A., 280 F.3d 384, 387 n. 1 (3d Cir.2002). This standard is
especially important here because the District Court adopted defendants'
version of the facts.
III.
17
a. Breach of Trust.
18
Plaintiffs allege Graham Berwind and his associate Bruce McKenney, who was
also named as a trustee of the David Berwind Trust, breached their duties to the
trust owed by virtue of their positions as trustees.
19
Defendants contend these claims fail for two reasons. First, they maintain they
were not trustees at the relevant times, as they had resigned. As noted, plaintiffs
allege these defendants had not effectively resigned as trustees. At this stage,
we must accept the complaint's allegations as true, so this proposed basis for
dismissal fails. Second, defendants point to a provision of the Deed of Trust
that provides:
20
The fact that any trustee may be interested in Berwind Corporation or any of its
subsidiaries as director, stockholder, manager, agent or employee shall not
constitute an adverse or conflicting interest, and the acts of such trustee shall be
judged as if he had no interest in the Corporation.
21
breached a duty owed to the trust and its beneficiaries. Therefore, we will
reverse with respect to plaintiffs' breach of trust claims and leave the precise
effect of the exculpatory provision for the District Court to consider on remand.
22
b. Derivative Claims.
23
24
25
It is undisputed that plaintiffs did not make demand on the board of directors of
BPSI either before filing suit or thereafter. But they contend they should be
excused from the demand requirement because of the catch-22 they allegedly
faced.
26
27
Plaintiffs brought suit on November 22, 1999. Making a prior demand, they
27
28
Although plaintiffs may have properly pled futility in making a prior demand,
Pennsylvania law no longer recognizes a futility exception. But Pennsylvania
law permits a plaintiff to bring derivative claims if irreparable harm to the
corporation would result. Plaintiffs contend they fall within this exception.
29
30
31
Plaintiffs also contend they should not have been required to make demand by
virtue of an exception contained in section 7.01(d) of the ALI Principles.
Section 7.01 was not among those adopted by the Pennsylvania Supreme Court
in Cuker. In that case, however, the Supreme Court invited Pennsylvania courts
to adopt other provisions of the ALI Principles:
32
Our adoption of these sections is not a rejection of other sections not cited. We
have identified and studied the sections which apply to this case and have
adopted those which appear most relevant.
33
The entire publication, all seven parts, is a comprehensive, cohesive work more
than a decade in preparation. Additional sections of the publication, particularly
procedural ones due to their interlocking character, may be adopted in the
future. Issues in future cases or, perhaps, further proceedings in this case might
implicate additional sections of the ALI Principles. Courts of the
Commonwealth are free to consider other parts of the work and utilize them if
they are helpful and appear to be consistent with Pennsylvania law.
34
35
Plaintiffs contend the Pennsylvania Supreme Court would adopt section 7.01
because it interlocks with the adopted sections, it is helpful, and it is consistent
with Pennsylvania law. Section 7.01(d) provides:
36
In the case of a closely held corporation, the court in its discretion may treat an
action raising derivative claims as a direct action, exempt it from those
restrictions and defenses applicable only to derivative actions, and order an
individual recovery, if it finds that to do so will not (i) unfairly expose the
corporation or the defendants to a multiplicity of actions, (ii) materially
prejudice the interests of creditors of the corporation, or (iii) interfere with a fair
distribution of the recovery among all interested persons.
37
38
There are only three Pennsylvania cases addressing section 7.01(d), each from
trial courts. All have adopted the provision.5 Liss v. Liss, No.2063, 2002 WL
576510 (Pa.Ct.C.P.Phila. Mar.22, 2002); Baron v. Pritzker, 52 Pa. D. & C.4th
14, 26-27 (Pa.Ct.C.P.Phila.2001) (excusing demand by treating corporate waste
claim as individual one); Levin v. Schiffman, 54 Pa. D. & C.4th 152, 167
(Pa.Ct.C.P.Phila.2000) (adopting section 7.01(d) and "exercis[ing] its discretion
and treat[ing] all of [plaintiff's] `derivative' claims ... as direct claims for which
demand is not required"). Accord Audio Visual Xperts, Inc. v. Walker, No.
17261-NC, 2000 WL 222152, at *2 (Del.Ch. Feb.18, 2000) (predicting
Pennsylvania Supreme Court would adopt section 7.01(d)).
39
There are good reasons to believe the Pennsylvania Supreme Court would
concur and adopt section 7.01(d). As noted, it invited lower courts to adopt
other sections, especially those, like section 7.01(d), that "interlock[ed]" with
the sections adopted in Cuker, all of which govern the prosecution of derivative
claims. Section 7.01 addresses the classification of a case as a derivative or
individual action. The adoption of section 7.03 made the demand requirement
substantially stricter by narrowing the available exceptions. But the ALI
adopted that provision in light of section 7.01, which allows certain cases to
avoid that requirement. Thus, the close corporation exception closely interlocks
with section 7.03. Consequently, the Pennsylvania Supreme Court's invitation
to adopt other sections seems particularly appropriate here.
40
41
The duty of the board of directors, committees of the board and individual
directors under section 1712 (relating to standard of care and justifiable
reliance) is solely to the business corporation and may be enforced directly by
the corporation or may be enforced by a shareholder, as such, by an action in
the right of the corporation, and may not be enforced directly by a shareholder
or by any other person or group.
42
Because suits brought alleging directors' failure to meet the standard of care
owed to the corporation cannot "be enforced directly by a shareholder,"
defendants contend application of section 7.01(d) would directly contradict this
provision. For this reason, they contend, section 7.01(d) is inconsistent with
Pennsylvania law, and would not likely be adopted by the Pennsylvania
Supreme Court.
43
Cf. Baron, 52 Pa. D. & C.4th at 26 ("Section 7.01(d) sets forth the basis for a
second exception to the demand requirement.").
44
45
Because there may be some lingering uncertainty over the adoption of section
7.01(d) and the appropriateness of applying it in this case, we think this issue is
best left unresolved at this point. The District Court, on remand, should
consider this issue if it proves to be necessary. This matter was not briefed
extensively and this will provide the parties with a chance to do so in light of
the recent statements of Pennsylvania courts.
46
c. RICO claims.
47
Plaintiffs have stated three counts for violation of the Racketeer Influenced and
Corrupt Organizations Act, 18 U.S.C. 1961 et seq. The complaint describes a
scheme to defraud the David Berwind Trust and its trustees over several years.
48
49
50
51
We believe this issue, along with the other RICO pleading issues, is best
resolved by reexamination of the sufficiency of the complaint by the District
Court. We are confident the District Court will permit plaintiffs to amend their
complaint if appropriate. See Fed.R.Civ.P. 15(a) (leave to amend "shall be
freely given"); Eddy v. V.I. Water & Power Auth., 256 F.3d 204, 209 (3d
Cir.2001) ("Unless the opposing party will be prejudiced, leave to amend
should generally be allowed.") (quoting Charpentier v. Godsil, 937 F.2d 859,
864 (3d Cir.1991)). The District Court will be able to consider these issues in
light of any amendments it permits, something we are in no position to do.
52
d. Statute of Limitations.
53
Defendants contend the state law claims for breach of fiduciary duty are wholly
or partially barred by Pennsylvania's applicable two-year statute of limitations.
Plaintiffs acknowledge that some of the events occurred more than two years
before they brought suit. But they contend the statute of limitations should be
tolled because defendants fraudulently concealed information necessary for
recognizing these claims.
54
55
e. Equitable Relief.
56
Even were plaintiffs to prevail, defendants contend they would not be entitled
to equitable relief, because the only post-merger remedy is an appraisal of the
value of the shareholder's prior stake in the company. Defendants cite In re
Jones & Laughlin Steel Corp., 488 Pa. 524, 412 A.2d 1099 (1980), as support
for this proposition. But in Jones & Laughlin, equitable relief was sought after
the merger had occurred. Here the merger occurred after plaintiffs had initiated
this action, a critical distinction. See id. at 1104 ("[O]ur cases recognize[ ] the
right of shareholders to enjoin proposed unfair or fraudulent corporate actions.
In each case where this power was exercised it was in an action in equity
Defendants also contend plaintiffs have alleged no irreparable harm and have
an adequate remedy at law. But the Pennsylvania Supreme Court has permitted
equitable claims along with appraisal remedies where a merger is "fraught with
fraud or fundamental unfairness." Id. at 1103. To the extent defendants contend
that plaintiffs have insufficiently pled fraud or fundamental unfairness, we
leave this matter to the District Court in the first instance.
58
Defendants further argue that even if appraisal is not always the only remedy
available following mergers, it is the only remedy available absent
extraordinary circumstances in the context of a short-form merger. The
Pennsylvania B.C.L. permits corporations to eliminate minority shareholders
without formal shareholder approval when the controlling shareholder controls
at least eighty percent of the company's shares. 15 Pa. Cons.Stat. 1924(b)(1)
(ii). Defendants note the Delaware Supreme Court has eliminated the "entire
fairness" requirement applicable to long-form mergers. Glassman v. Unocal
Exploration Corp., 777 A.2d 242, 248 (Del. 2001). One effect of this holding is
that appraisal is the only remedy available to minority shareholders eliminated
by short-form mergers "absent fraud or illegality." Id. Defendants insist that
because the Pennsylvania B.C.L. was modeled on Delaware law, we should
interpret Pennsylvania law in the same way.
59
60
Nevertheless, we note this case has special features that may require that it be
treated differently from standard short-form merger cases. This is not simply a
dispute between a majority and a minority shareholder in a corporation. Here
the majority shareholder was allegedly controlled by Graham Berwind, who
was also an alleged trustee of the David Berwind Trust. And Berwind
company7 stock was the central holding of the Trust as set up by Charles
Berwind. Thus, Graham Berwind's duty to the trust was not simply that owed
by a majority shareholder to a minority shareholder, but also a duty owed
directly to a trust designed to hold equity in the family business. In these
circumstances, the argument in favor of equitable remedies would appear to
take on a different character from that of a case focused only on a short-form
merger. The resolution of these matters is best reserved for the District Court at
this juncture.
61
f. Remaining Claims.
62
There are other arguments made by parties. But many seem to have been
abandoned; others are clearly ancillary to other arguments or other claims.
These remaining issues are best resolved by the District Court in the context of
its reexamination of the central issues in the case. Accordingly, we will vacate
the remainder of the District Court's opinion.
IV.
63
For the forgoing reasons, we will reverse the dismissal under Federal Rule of
Civil Procedure 12(b)(6) and remand the case to the District Court for
proceedings consistent with this opinion.
Notes:
*
The Honorable Yvette Kane, United States District Judge for the Middle
District of Pennsylvania, sitting by designation
Gail Warden, Linda Shappy, David Berwind, and David Berwind, Jr. are
named as plaintiffs
It appears that the David Berwind Trust and the Berwind Group Partners were
the only shareholders prior to the merger
circumstances surrounding this case do not convince the Court to exercise its
discretionary authority to allow [plaintiff] to proceed as an individual in a direct
action.").
6