United States District Court, E.D. Michigan, Southern Division
DANIEL J. CARRO, Plaintiff,
MARY T. BARRA, et al., Defendants.
OPINION AND ORDER GRANTING DEFENDANTS' MOTIONS TO
H. CLELAND, UNITED STATES DISTRICT JUDGE
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
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.
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.
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,
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.)
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.
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).
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).
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.
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.
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.)
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.
Nominal Defendant General Motors
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
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).
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).
these standards, Plaintiff's purported reasons to find
gross negligence and bad faith fail for the reasons set forth
Reconciliation with the Deferred ...