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Carro v. Barra

United States District Court, E.D. Michigan, Southern Division

March 28, 2018

DANIEL J. CARRO, Plaintiff,
v.
MARY T. BARRA, et al., Defendants.

          OPINION AND ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS

          ROBERT H. CLELAND, UNITED STATES DISTRICT JUDGE

         In February 2014, nominal Defendant General Motors (“GM”) announced the first of what would be several recalls of vehicles with defective ignition switches. Tumult followed: lawsuits (including this one), a criminal investigation, Congressional investigations, and government fines-activity largely focused on holding responsible those who had known about the defect but failed to disclose it, a defect alleged to have resulted in deaths and undoubtedly having resulted in financial loss to GM measured in the millions.

         Plaintiff Daniel J. Carro is a GM shareholder. He brings this action as a purported shareholder derivative suit against GM and the individual Defendants. He claims that the individual Defendants breached their fiduciary duties and that GM's board of directors wrongfully refused his demand to bring suit against them on behalf of GM's shareholders. (Dkt. #24.) Currently pending before the court are motions to dismiss by the individual Defendants (Dkt. #25) and GM (Dkt. #26). Plaintiff has filed responses (Dkt. ##28, 27) and Defendants replies (Dkt. ##30, 31). The court has determined that a hearing is unnecessary. E.D. Mich. L.R. 7.1(f)(2). For the following reasons, the court will grant both motions.

         I. BACKGROUND

         After the initial ignition switch fallout, Plaintiff sent a letter to the GM board of directors in April 2015 alleging that GM directors and officers had violated their fiduciary duties to GM because they had not detected, publicized, or addressed the ignition switch problem sooner. He demanded that GM's board file suit. The board, in lieu of an immediate response, said it would put Plaintiff's demand on hold; there was a shareholder derivative class action alleging similar facts ongoing in the Delaware Court of Chancery, and the board wanted to await the outcome of a pending motion to dismiss. The Delaware court granted dismissal in June 2015. It held that the shareholder plaintiffs in that case had not pled sufficient facts to demonstrate a “futility of demand” as required under Delaware Chancery Court Rule 23.1. In re Gen. Motors Company Derivative Litig., No. 9627, 2015 WL 3958724, at *17 (Del. Ch. June 26, 2015) (“I find that there is not a substantial likelihood of personal liability on the part of a majority of the Board, excusing demand, and the Motion to Dismiss should be granted for failure to comply with Rule 23.1.”). The Delaware plaintiffs appealed that decision, prompting GM's board to again put Plaintiff's demand on hold.

         Plaintiff filed his initial complaint in this court in February 2016. He in part alleged that GM's board had not acted reasonably or in good faith in refusing to consider his demand. (Dkt. #1 Pg. ID 5.) The day after his complaint was filed, the Delaware Supreme Court affirmed-in a one sentence decision-the Chancery Court's dismissal of the Delaware plaintiffs' claims. In re Gen. Motors Co. Derivative Litig., No. 392, 2015, 2016 WL 552651 (Del. Feb. 11, 2016).

         A few weeks later, GM's board informed Plaintiff that it would finally consider his demand. It denied his request in June 2016, informing him by letter that the board had refused his litigation demand. Plaintiff requested various documents and reports referenced in the demand refusal letter, but the GM board declined to provide them. Plaintiff eventually moved this court for an order requiring GM to produce the documents. (Dkt. #16.) The court denied the motion. (Dkt. #20.) Plaintiff then filed his amended complaint. (Dkt. #24.)

         Plaintiff asserts that the individual Defendants are liable for breaches of their fiduciary duties, and that the board wrongfully refused to hold these individuals to account. He points to various acts GM took during the ignition switch fallout: (1) following an investigation by the National Highway Traffic Safety Administration (“NHTSA”) into GM's handling of the defect, GM entered into a Consent Order with that agency; GM admitted that it had violated the Safety Act and agreed to pay the maximum civil penalty of $35 million; (2) GM hired Anton Valukas to conduct an investigation into the affair, and Valukas provided an account of GM's institutional failures (the “Valukas Report”); (3) some of the individual Defendants “admitted” wrongdoing in various public statements; (4) GM entered into a Deferred Prosecution Agreement (“DPA”) with the U.S. Attorney for the Southern District of New York; under the terms of that agreement, GM stipulated to an “Acceptance of Responsibility, ” wherein it admitted that it “failed to disclose to its U.S. regulator and the public a potentially lethal safety defect that caused airbag nondeployment in certain GM model cars, and that GM further affirmatively misled consumers about the safety of GM cars afflicted by the defect.” (Dkt. #24 Pg. ID 294-95); (5) GM settled a lawsuit alleging that it and two of the individual Defendants committed securities fraud: it agreed to pay $300 million “without even awaiting the outcome of its pending motion to dismiss” (Dkt. #27 Pg. ID 440); and (6) as compensation to personal injury plaintiffs, GM has offered around $600 million in settlement funds. In light of this conduct, Plaintiff says in essence, someone must be at fault.

         II. STANDARD

         A complaint filed in federal court must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim for relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The court views the complaint in the light most favorable to the plaintiff, and it accepts all well-pleaded factual allegations as true. Tackett v. M & G Polymers, USA, LLC, 561 F.3d 478, 488 (6th Cir. 2009). It need not, however, “accept as true legal conclusions or unwarranted factual inferences.” Direct, Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007).

         The court primarily considers the allegations in the complaint in determining a Rule 12(b)(6) motion. But “matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint, also may be taken into account.” Amini v. Oberlin College, 259 F.3d 493, 502 (6th Cir. 2001) (quoting Nieman v. NLO, Inc., 108 F.3d 1546, 1554 (6th Cir. 1997)). Furthermore, “when a document is referred to in the pleadings and is integral to the claims, it may be considered without converting a motion to dismiss into one for summary judgment.” Commercial Money Ctr. v. Ill. Union Ins. Co., 508 F.3d 327, 335-36 (6th Cir. 2007).

         Shareholder derivative suits involve additional pleading requirements. Fed.R.Civ.P. 23.1. Under Rule 23.1(b)(3), a shareholder must “state with particularity” any attempts “to obtain the desired action from the directors or comparable authority.” Where a shareholder plaintiff makes a litigation demand on the board of directors, the plaintiff “tacitly concedes the independence of a majority of the board to respond.” Levine v. Smith, 591 A.2d 194, 212 (Del. 1991) (quoting Spiegel v. Buntrock, 571 A.2d 767, 777 (Del. 1990)), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, 253 (Del. 2000). And so the business judgment rule applies: when a board refuses a demand, “the only issues to be examined are the good faith and reasonableness of its investigation.” Spiegel, 571 A.2d at 777. Of course a plaintiff's through-demand concession of the board's independence is not a for-all-purposes concession; “[f]ailure of an otherwise independent-appearing board or committee to act independently is a failure to carry out its fiduciary duties in good faith or to conduct a reasonable investigation.” Scattered Corp. v. Chicago Stock Exch., Inc., 701 A.2d 70, 75 (Del. 1997), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, 253 (Del. 2000). That is, “a board that appears independent ex ante may not necessarily act independently ex post in rejecting a demand.” Id.

         In short, Rule 23.1 imposes on a plaintiff the burden to allege particularized facts “rais[ing] a reasonable doubt that (1) the board's decision to deny the demand was consistent with its duty of care to act on an informed basis, that is, was not grossly negligent; or (2) the board acted in good faith, consistent with its duty of loyalty.” Ironworkers Dist. Council of Philadelphia v. Andreotti, No. 9714, 2015 WL 2270673, at *24 (Del. Ch. May 8, 2015), aff'd 132 A.3d 748 (Del. 2016); see also Levine v. Liveris, 216 F.Supp.3d 794, 808 (E.D. Mich. 2016) (Ludington, J.). “The pleading burden imposed by this standard is a heavy one . . . .” Id. While the “pleader is not required to plead evidence, ” the pleader must still set forth “particularized factual statements that are essential to the demand.” Brehm, 746 A.2d at 254.

         “[W]hether the failure to make a demand is excused must be determined under the substantive law of the state of incorporation.” McCall v. Scott, 239 F.3d 808, 815 (6th Cir. 2001). GM is incorporated in Delaware. (Dkt. #24 Pg. ID 261.)

         III. DISCUSSION

         His litigation demand having been rejected, Plaintiff seeks to hold current and former GM officers and executives liable for breaches of their fiduciary duties. GM moves to dismiss on the basis that Plaintiff's litigation demand was not wrongfully refused. The individual Defendants move to dismiss on the added basis that Plaintiff has not sufficiently pleaded facts demonstrating their liability.

         A. Nominal Defendant General Motors

         Nominal Defendant GM moves to dismiss on the basis that Plaintiff has not met his burden to plead particularized facts showing that the business judgment rule has been overcome. In response, Plaintiff sets forth seven bases allegedly showing that the board was grossly negligent or acted in bad faith.[1]

         “[G]ross negligence is conduct that constitutes reckless indifference or actions that are without the bounds of reason.” McPadden v. Sidhu, 964 A.2d 1262, 1274 (Del. Ch. 2008). The fiduciary duty of care does not require that a board of directors be informed of every fact that might factor into a decision; rather, a board is responsible “for considering only material facts that are reasonably available.” Brehm v. Eisner, 746 A.2d 244, 259 (Del. 2000) (emphasis original). Gross negligence is a difficult claim to plead because “there is obviously no prescribed procedure that a board must follow.” Levine v. Smith, 591 A.2d 194, 214 (Del. 1991), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, 253 (Del. 2000).

         Bad faith, on the other hand, “requires conduct that is qualitatively different from, and more culpable than” gross negligence. Stone v. Ritter, 911 A.2d 362, 369 (Del. 2006) (citing In re Walt Disney Co. Deriv. Litig., 906 A.2d 27 (Del.2006)). The Delaware Supreme Court has identified the three “most salient” examples of bad faith conduct: “where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act.” In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del.2006). Bad faith requires the directors to “have acted with scienter, i.e., with a motive to harm, or with indifference to harm that will necessarily result from the challenged decision.” Andreotti, 2015 WL 2270673, at *27. The plaintiff must also show more than some reason to believe that a derivative lawsuit would be successful: “[a] board may in good faith refuse a shareholder demand to begin litigation even if there is substantial basis to conclude that the lawsuit would eventually be successful on the merits.” In re INFOUSA, Inc. Shareholders Litig., 953 A.2d 963, 986 (Del. Ch. 2007).

         Under these standards, Plaintiff's purported reasons to find gross negligence and bad faith fail for the reasons set forth below.

         i. Reconciliation with the Deferred ...


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