The opinion of the court was delivered by: Leisure, District Judge.
This case arises from events surrounding the sale of an asset
by defendant VHA Enterprises, Inc. ("Enterprises") to defendant
Aetna Life Insurance Co. ("Aetna"). Plaintiff J. Richard Ryan
("Ryan"), a minority shareholder, seeks to bring a derivative
suit on behalf of Enterprises, and, simultaneously, a class
action against Enterprises and other defendants. Defendants now
move the Court for dismissal of plaintiff's complaint on the
grounds that: (1) plaintiff cannot simultaneously pursue the
derivative and class actions because of a conflict of interest;
(2) plaintiff has not adequately pled demand futility; and (3)
plaintiff has attempted to assert Counts III through VIII as
both derivative and direct claims, in spite of their strictly
Enterprises is a Delaware corporation with its principal
executive offices in Irving, Texas. Its shareholders include
approximately 569 individuals; 260 not-for-profit hospitals; 22
corporate investors; and defendant Voluntary Hospitals of
America ("VHA"). VHA is, in turn, a corporation owned by some
97 not-for-profit hospitals. VHA is the majority shareholder in
Enterprises, with 63% of the voting shares. Defendants include
Enterprises, individual members of its board of directors, VHA,
and Aetna. Plaintiff is a minority shareholder of Enterprises.
While no motion for class certification has yet been filed,
plaintiff seeks to represent a class of minority shareholders
consisting of the individual and corporate shareholders of
This action arises out of a transaction in which Enterprises'
50% share of PARTNERS National Health Plans ("PARTNERS") was
redeemed by Aetna, its former 50% partner. According to
defendants, "PARTNERS acts as a manager for and has ownership
interests in Health Maintenance Organizations and Preferred
Provider Organizations and offers integrated health care
delivery and benefit plans built on networks of hospitals at
the core of which are VHA hospitals." Memorandum in Support of
Defendants' Motion to Dismiss the Amended Complaint ("Def.
Mem.") at 4. Prior to the sale of the PARTNERS' interest in May
of 1990, PARTNERS constituted one of Enterprises' major assets.
On April 20, 1990, plaintiff commenced this action, alleging,
derivatively, on behalf
of Enterprises, and directly, on behalf of himself and the
proposed class of minority shareholders, that VHA, Aetna and
others violated federal proxy laws and breached their fiduciary
duties to Enterprises and the minority stockholders. Plaintiff
also moved for a preliminary injunction enjoining Aetna's
intended acquisition of Enterprises' interest in PARTNERS. This
Court denied the injunction in an order and opinion dated May
At a shareholders' meeting on May 1, 1990, the shareholders
of Enterprises approved the sale to Aetna. The sale closed on
May 21, 1990. On June 7, 1990, plaintiff filed an amended
complaint (the "Amended Complaint") containing both class and
derivative claims. Plaintiff alleges that the sale of PARTNERS
was imposed upon Enterprises and its minority shareholders by
VHA, in conspiracy with, and aided and abetted by, Enterprises'
board of directors and Aetna. Plaintiff further alleges that
Aetna obtained PARTNERS for inadequate consideration, and that
VHA was rewarded for its role by valuable side benefits from
Plaintiff and his counsel seek to represent both the proposed
class and Enterprises. Plaintiff concededly has made no demand
for action upon Enterprises' board of directors.
Defendants now move to dismiss the Amended Complaint on the
following grounds: (1) that plaintiff is not an adequate
representative for both the class and derivative claims,
pursuant to Federal Rules of Civil Procedure 23(a)(4) and 23.1;
(2) that plaintiff has failed to plead demand futility with
requisite particularity, pursuant to Rule 23.1; and (3) that
the claims pleaded as direct in Counts III through VIII fail to
state a claim, pursuant to Fed.R.Civ.P. 12(b)(6).
Federal Rule of Civil Procedure 23(a)(4) requires, as one of
the prerequisites to a class action in federal court, that "the
representative will fairly and adequately protect the interests
of the class." Similarly, Rule 23.1, which governs
shareholder's derivative actions, states that "[t]he derivative
action may not be maintained if it appears that the plaintiff
does not fairly and adequately represent the interests of the
shareholders . . . similarly situated in enforcing the right of
the corporation." See also Caan v. Kane-Miller Corp., No. 71
Civ. 878 (S.D.N.Y. Dec. 12, 1974) (similar considerations apply
under Rules 23 and 23.1). Thus, while plaintiff's motion to
certify the class is not yet before the Court, his derivative
action cannot proceed if a conflict of interest disables him
from fairly and adequately representing the other shareholders
Defendants contend that the courts of this District have
formulated a per se rule that prohibits a plaintiff from
pursuing simultaneous direct and derivative actions under the
circumstances of the instant case. Plaintiffs argue that no
such per se rule exists, and that the weight of authority,
largely from other Circuits, is against a per se rule.
Both sides agree, however, that the existence of an actual
conflict disqualifies a plaintiff from acting as representative
in these dual capacities. Without determining whether a true
per se rule exists, this Court concludes, after a review of the
case law, that courts in this District have applied a strict
standard in scrutinizing simultaneous direct and derivative
actions for signs of conflict. See, e.g., Kamerman v.
Steinberg, 113 F.R.D. 511 (S.D.N.Y. 1986) (class certification
denied where plaintiffs also brought derivative claims);
Petersen v. Federated Development Co., 416 F. Supp. 466, 475 n.
6 (S.D.N.Y. 1976) (assumption that plaintiff bringing
individual and derivative claims cannot fairly represent
shareholders); Caan, supra (individual and ...