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Davis v. Scottish Re Group Ltd.

New York Court of Appeals

November 20, 2017

Paul Davis, Appellant,
v.
Scottish Re Group Limited, et al., Respondents, et al., Defendants.

          Eric Brenner, for appellant.

          Jean-Marie L. Atamian, for respondents.

          FEINMAN, J.

         Plaintiff Paul Davis was an owner of ordinary shares in defendant Scottish Re Group, Limited (Scottish Re), a Cayman Islands company formerly engaged in the business of reinsurance. He asserted both direct and derivative causes of action against Scottish Re, its indirect wholly-owned operating subsidiary Scottish Re (U.S.), Inc. (SRUS), certain members of the Board of Directors of Scottish Re and SRUS, Massachusetts Mutual Life Insurance Company (MassMutual) and the private equity firm Cerberus Capital Management, L.P. (Cerberus), and various entities affiliated with MassMutual and Cerberus. Plaintiff alleged that MassMutual and Cerberus, through certain of their affiliates, worked in concert with Scottish Re directors that were beholden to them to implement a series of transactions that enriched themselves, while causing harm to minority shareholders like plaintiff and to Scottish Re. The only claims relevant to this appeal, as limited by the parties' briefs, are plaintiff's derivative claims.

         Supreme Court dismissed the majority of plaintiff's complaint, including his three derivative causes of action, on two grounds. It held that, under Cayman Islands law, plaintiff had not established standing because he did not seek leave of court to commence a derivative action under Rule 12A of the Rules of the Grand Court of the Cayman Islands. In the alternative, Supreme Court held that plaintiff did not have standing to bring his derivative claims under Cayman Islands common law, which applies the test embodied in the 1843 English case, Foss v Harbottle (2 Hare 461 [1843]).

         The Appellate Division modified, to allow plaintiff to replead two claims not at issue here, and otherwise affirmed based on plaintiff's noncompliance with Rule 12A, holding that the rule applied because it was substantive, rather than procedural [1]. It did not reach the question of whether plaintiff had standing under Foss v Harbottle. The Appellate Division granted leave to appeal and certified the following question: "Was the order of this Court, which modified the order of Supreme Court, properly made?"

         The dispositive issue in this appeal is whether Rule 12A, contained in Order 15 of the Cayman Islands Grand Court Rules 1995 (Revised), [2] is a substantive rule and therefore applies under our choice of law principles, barring plaintiff from bringing his derivative action on behalf of Scottish Re. We hold that Rule 12A is procedural, and therefore does not apply where, as here, a plaintiff seeks to litigate his derivative claims in New York. Accordingly, the order of the Appellate Division, insofar as appealed from, should be reversed, and the matter remitted for consideration of whether plaintiff has standing under Cayman substantive law.

         I.

         Rule 12A, which was introduced into the Cayman Islands

         Grand Court Rules in 1995, addresses shareholder derivative actions, and states, in relevant part:

"(1) This rule applies to every action begun by writ by one or more shareholders of a company where the cause of action is vested in the company and relief is accordingly sought on its behalf (referred to in this rule as a 'derivative action').
(2) Where a defendant in a derivative action has given notice of intention to defend, the plaintiff must apply to the Court for leave to continue the action. [3]
(3) The application must be supported by an affidavit verifying the facts on which the claim and the entitlement to sue on behalf of the company are based.
* * *
(8) On the hearing of the application under paragraph (2), the Court may -
(a) grant leave to continue the action, for such period and upon such terms as the ...

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