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RYAN v. AETNA LIFE INS. CO.

May 31, 1991

J. RICHARD RYAN, ON BEHALF OF HIMSELF AND OTHERS SIMILARLY SITUATED, AND IN THE RIGHT OF VHA ENTERPRISES, INC., PLAINTIFF,
v.
AETNA LIFE INSURANCE CO., VOLUNTARY HOSPITALS OF AMERICA INC., ALAN J. CHAMISON, JACK M. COOK, ROBERT L. HARRIS, EMMETT R. JOHNSON, ROBERT W. O'LEARY, EUGENE L. STEP, JAMES K. ELROD, ROBERT V. HANSBERGER, EDMUND F. KELLY, CHARLES C. LINDSTROM, E. GEORGE MIDDLETON, JR., MICHAEL D. STEPHENS, CHARLES T. BELL, J. ROBERT BUCHANAN, ROBERT M. HARRELL, SAMUEL T. WALLACE, SHELDON S. KING, C. THOMAS SMITH, GORDON M. SPRENGER, JAMES F. VICKERY, AND VHA ENTERPRISES, INC., DEFENDANTS.



The opinion of the court was delivered by: Leisure, District Judge.

ORDER AND OPINION

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 derivative nature.

BACKGROUND

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 Enterprises.*fn1

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.

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 the sale.

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).

DISCUSSION

I. Conflict of Interest

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 of Enterprises.

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 ...


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