SCOTLAND, P. J.
The Emergency Medical Services System and the Prehospital Emergency Medical Care Personnel Act (EMS Act; Health Saf. Code, § 1797 et seq.) was enacted in 1980 to "provide the state with a statewide system for emergency medical services" and to "ensure the provision of effective and efficient emergency medical care" to the people of California. (Stats. 1980, ch. 1260, § 7, pp. 4261-4277; Health Saf. Code, §§ 1797.1, 1797.6, subd. (a); further section references are to the Health and Safety Code unless otherwise specified.)
Through the EMS Act, the Legislature created essentially a two-tiered regulatory system "governing virtually every aspect of prehospital emergency medical services." ( County of San Bernardino v. City of San Bernardino (1997) 15 Cal.4th 909, 915 [ 64 Cal.Rptr.2d 814, 938 P.2d 876] (hereafter County of Santa Bernardino).) The first tier is occupied by the Emergency Medical Services Authority (the Authority), a division of the California Health and Human Services Agency, "which is responsible for the coordination and integration of all state activities concerning emergency medical services." (§ 1797.1; see § 1797.100.) The second tier of governance is "a local EMS agency" (§ 1797.200), which is responsible for, among other things, "(1) planning, implementing, and evaluating an emergency medical services system `consisting of an organized pattern of readiness and response services based on public and private agreements and operational procedures' (§ 1797.204); (2) developing a formal plan for the system in accordance with the Authority's guidelines and submitting the plan to the Authority on an annual basis (§§ 1797.250, 1797.254); [and] (3) `consistent with such plan, coordinat[ing] and otherwise facilitat[ing] arrangements necessary to develop the emergency medical services system' (§ 1797.252)." ( County of San Bernardino, supra, 15 Cal.4th at p. 916.)
In this case, we are called upon to determine whether a county may contractually designate a local EMS (emergency medical services) agency to administer some of the requirements of the EMS Act, while reserving for another local EMS agency all of the remaining statutory powers and duties not covered by the agreement.
The short answer is "no." As we will explain, the EMS Act authorizes a county to designate "a local EMS agency" (§ 1797.200), not two such agencies sharing the statutory powers and duties of chapter 4 of the EMS Act.
We are also asked to decide whether the Authority has the statutory power to disapprove a local EMS agency's designation of an exclusive operating area through the grandfathering provision of section 1797.224 of the EMS Act, which states in part: "A local EMS agency may create one or more exclusive operating areas in the development of a local plan, if a competitive process is utilized to select the provider or providers of the services pursuant to the plan. No competitive process is required if the local EMS agency develops or implements a local plan that continues the use of existing providers operating within a local EMS area in the manner and scope in which the services have been provided without interruption since January 1, 1981. A local EMS agency which elects to create one or more exclusive operating areas in the development of a local plan shall develop and submit for approval to the [A]uthority, as part of the local EMS plan, its competitive process for selecting providers and determining the scope of their operations."
The short answer is "yes." As we will explain, an exclusive operating area (EOA) is "an EMS area or subarea defined by the emergency medical services plan for which a local EMS agency, upon the recommendation of a county, restricts operations to one or more emergency ambulance services or providers of limited advanced life support or advanced life support." (§ 1797.85.) The creation of an EOA is an "`important administrative tool for designing an EMS system'" because "an EOA permits local EMS agencies to offer private emergency service providers protection from competition in profitable, populous areas in exchange for the obligation to serve unprofitable, more sparsely populated areas." ( Valley Medical Transport, Inc. v. Apple Valley Fire Protection Dist. (1998) 17 Cal.4th 747, 759 [ 72 Cal.Rptr.2d 647, 952 P.2d 664] (hereafter Apple Valley), quoting County of San Bernardino, supra, 15 Cal.4th at pp. 931-932.) Because the local EMS agency is required by the EMS Act to "annually submit an emergency medical services plan for the EMS area to the [A]uthority" (§ 1797.254), which plan must include the subject of transportation of emergency medical patients (§§ 1797.76, 1797.103, subd. (c), 1797.70, 1797.72), and because the Authority possesses the statutory authority to reject a local EMS plan if "the plan is not concordant and consistent with applicable guidelines or regulations, or both the guidelines and regulations, established by the [A]uthority" (§ 1797.105, subd. (b)), it follows that the Authority has the statutory power to reject a local EMS agency's creation of an EOA as part of the transportation portion of the local EMS plan, regardless of whether that EOA was created through a competitive process or grandfathering.
We also reject the claim that the judgment must be reversed because, in interpreting the "manner and scope" language of section 1797.224, the Authority relied on an invalid underground regulation not promulgated in compliance with the Administrative Procedure Act (Gov. Code, § 11340 et seq.).
BACKGROUND
In August 1991, Butte County entered into an agreement with Northern California Emergency Medical Services, Inc. (Nor-Cal EMS), designating Nor-Cal EMS to "administer certain local emergency medical services as specified" in the agreement and to "administer certain `local EMS agency' requirements called for under [the EMS Act]." (Italics added.) Paragraph 3 of the agreement provides that Butte County "delegates only those functions enumerated in this agreement to [Nor-Cal EMS] and which may be delegated pursuant to [s]ections 1797.94 and 1797.200; and for those purposes only, [Nor-Cal EMS] shall act as the local EMS agency." (Italics added.)
The vast majority of local EMS agency functions are enumerated in the agreement. For instance, paragraphs 5 and 6 of the agreement state that Nor-Cal EMS "shall plan, implement and evaluate an emergency medical services system in accordance with the provisions of the [EMS] Act, consisting of an organized pattern of readiness and response services based upon public and private agreements and operational procedures ([see §] 1797.204)." Those paragraphs also require Nor-Cal EMS to have a "licensed physician and surgeon as Medical Director to provide medical control and to assure medical accountability throughout the planning, implementation and evaluation of the EMS system" (see § 1797.202). And the agreement makes Nor-Cal EMS responsible for, among other things, "submit[ting] an [annual] emergency medical services plan for [Butte County] to the [Authority]" (see §§ 1797.250, 1797.254) and, "consistent with such plan, coordinat[ing] and otherwise facilitating] arrangements necessary to develop the emergency medical services system" (see § 1797.252).
Conspicuously absent from the agreement is enumeration of the authority to "create one or more exclusive operating areas in the development of a local plan" pursuant to section 1797.224. The apparent intent of the contracting parties was to create a bifurcated system in Butte County consisting of two local EMS agencies. Nor-Cal EMS would be responsible for all local EMS agency functions delineated in the agreement, while the Butte County Public Health Department would retain the statutory authority to create EOA's pursuant to section 1797.224. Such an intent was expressed by Chester L. Ward, M.D., the Butte County Health Officer: "Butte County has . . . designated [Nor-Cal EMS] as the [local EMS agency] for limited purposes. However, [Nor-Cal EMS] is not the local EMS [a]gency relative to exclusive operating areas of and within Butte County. For that purpose, the Butte County Public Health Department is the [local EMS agency]."
It appears that Nor-Cal EMS concurred in this understanding of the contract, as reflected in a letter Nor-Cal EMS sent to the Authority "clarify[ing] the intentions of Butte County and [Nor-Cal EMS] regarding the establishment of [EOA's]" and attaching a Butte County Board of Supervisor's draft resolution explaining that, "in the development of a local plan, the Butte County Health Officer act[ed] . . . [to] formally establish[] [EOA's]" pursuant to section 1797.224.
In June 1992, on behalf of the Butte County Public Health Department, Dr. Ward issued an order (the EOA order) directing that the county's local EMS plan be amended to establish EOA's pursuant to section 1797.224. Among other things, Dr. Ward found that "[b]efore January 1, 1981 and continuing through the present, the County of Butte has been divided into five (5) operating areas for the provision of emergency medical services to the citizens of Butte County"; "[t]hese [EOA's] have not changed significantly in scope or geographic area since prior to January 1, 1981"; "[w]ithin each area, one or more operators have been providing emergency medical services, on an exclusive basis, prior to January 1, 1981, and continuously to the present, as those relevant terms have been defined by the [Authority]"; "[e]ach of the service operators providing service within each of the designated [EOA's] have [ sic] provided emergency medical services to the citizens of Butte County within each EOA in the same manner and scope since at least January 1, 1981"; and, "pursuant to [section] 1797.224, no competitive process for selection of exclusive operators is required in that this plan will continue the use of existing providers operating within the [c]ounty in the manner and scope in which the services have been provided without interruption since January 1, 1981." In accordance with these findings, Dr. Ward ordered that "the current and present operators providing service within [their respective EOA's] be deemed the exclusive operators within each area."
Three of the five EOA's established by the Butte County Public Health Department are at issue in this appeal — the area surrounding Chico (Zone 1), the area surrounding Paradise (Zone 2), and the area surrounding Oroville (Zone 3).
Zone 1 had been serviced by Enloe Medical Center (Enloe) and First Responder Emergency Medical Services, Inc. (First Responder), since 1978. This area of operation remained "essentially unchanged," except for "minor changes in 1987 due to overlapping of service to certain areas of the map where thick lines had been drawn which left some room for dispatch interpretation." Zone 2 had been serviced by First Responder since 1997 when First Responder purchased Paradise Ambulance Service, which had serviced the area from 1980 to 1997. This area of operation expanded in 1987 to include Butte College, which until then had been serviced by the Chico area providers. Zone 3 had been serviced by First Responder since 2002, when First Responder purchased the service from Oroville Hospital Ambulance which had serviced the area from 1982 to 2002, having acquired it from Oroville Ambulance, which had serviced the area from 1972 to 1982.
First Responder went by the name Chico Ambulance until 1980, and then by the name Chico Paramedic Rescue until 1991, when it was incorporated under the name First Responder.
In July 1992, Dr. Ward submitted to the Authority an amendment to Butte County's EMS plan establishing the EOA's, along with "copies of correspondence [Dr. Ward] had received from each current provider, attesting to their service times and levels." He "requested that [the Authority] approve [the] plan and confirm [the Butte County Public Health Department's] ability to grandfather the current providers into the [EOA's]."
Acknowledging that "authority for the administration of the emergency ambulance services program has been retained by the Butte County Health Department," the Authority directed Dr. Ward to provide more information about "the continuity of providers within the zones for which grandfathering is proposed" and "a complete description of [Butte County's] transportation system[,] justification for the use of zones, both clinically and economically[, and] identification of the level of exclusivity [the Butte County Public Health Department] would be granting." The record does not reveal whether the Butte County Public Health Department responded to the Authority's request for more information.
In April 1993, the Butte County Counsel sent a letter to the attorney for a prospective ambulance operator explaining the county's view that EOA's were established by Dr. Ward's EOA order and that the Authority's approval was not required. As Butte County interpreted section 1797.224, a local EMS agency may create EOA's either through a competitive bid process or through grandfathering; and only when a competitive bid process is used is the local EMS agency required to obtain the approval of the Authority. Thus, because Dr. Ward established EOA's through grandfathering, the county believed that approval of the Authority was not required. However, this letter also expressed the position that Dr. Ward's EOA order was meant to be an "interim" measure, and that there would eventually be "a formal addition to the local EMS plan calling for competitive bidding."
In December 1993, Nor-Cal EMS wrote to the Authority in order to "clarify the intentions of Butte County and [Nor-Cal EMS] regarding the establishment of [EOA's] by means of the grandfathering provisions of [s]ection 1797.224." Nor-Cal EMS explained that "establishment of new services in Butte County have [ sic] been temporarily put on hold. This will allow time for the development of a competitive bid process, as referenced in [section] 1797.224."
In January 1994, the board of supervisors passed resolution No. 94-12, which (1) formally adopted the findings and conclusions of Dr. Ward set forth in the EOA order, (2) purported to formally amend Butte County's local EMS plan by "creating the [EOA's] set forth in [the EOA order] and establishing the current operators in those areas as exclusive operators," subject to the qualification that "[t]he installation of the operators within the [EOA's] is intended as an interim measure," and (3) established a schedule providing for a competitive process for each of Butte County's five zones of operation. However, Butte County never actually implemented the competitive bid process called for by this resolution.
In March 1996, the interim health officer of the Butte County Public Health Department, after consulting with the emergency medical care committee and Nor-Cal EMS, issued an order (second EOA order) finding that "the maintenance of [EOA's] and the continued utilization of the current providers as exclusive providers within those areas is proper and appropriate for the same reasons as set forth in Dr. Ward's [EOA order]," and directing "that the currently established operating areas remain in place and that the current exclusive operators now installed as exclusive providers remain so installed as exclusive providers and that no competitive bid process is either required nor in the best interest of the citizens of [Butte County] at this time."
The following month, the board of supervisors passed resolution No. 96-40, which rescinded the schedule providing for a competitive bid process that was set forth in resolution No. 94-12. By this resolution, the board expressed Butte County's position that (1) section 1797.224 gives the Butte County Public Health Department, as the local EMS agency with respect to the establishment of EOA's, "the authority to create one or more [EOA's] in the development of a local plan"; (2) "no competitive bid process is required for the selection of exclusive operators within [EOA's] if the local EMS agency develops or implements a local plan that continues the use of existing providers within the county in the manner and scope in which services have been provided without interruption since January 1, 1981"; and (3) "the EMS Act unequivocally establishes that the local EMS agency, not the Board of Supervisors, may establish an [EOA] as such a decision is a professional, not a political determination. . . ."
In March 2000, Nor-Cal EMS submitted Butte County's EMS plan to the Authority, including the EOA's ordered by the Butte County Public Health Department, and then submitted additional revisions in 2001.
In July 2001, the Authority approved the plan, except for the section grandfathering the existing emergency service providers into their respective EOA's. In the Authority's view, the December 1993 letter from Nor-Cal EMS to the Authority and resolution No. 94-12, both expressing the intention to establish a competitive process for choosing exclusive operators in Butte County, "changed the scope and manner of operation, [and] therefore, `grandfathering' the Chico, Oroville, and Paradise zones is not possible." In response, an attorney representing Butte County sent a letter to the Authority explaining that, while resolution No. 94-12 called for a timed sequence of competitive bidding, this competitive process was vacated by resolution No. 96-40; therefore, "the `scope and the manner' of [Butte County's] operation" was not altered by resolution No. 94-12. However, the Authority held firm to its position regarding grandfathering, explaining that the "scope and manner [of operation] had changed because [Butte County's] EMS transportation plan [had] changed."
In 2004, Byron Parsons, CEO of First Responder, convinced the Butte County Counsel to press the Authority a final time for its position regarding grandfathering. In April 2004, the county counsel wrote to Parsons stating the county "accepts and intends to comply with the [Authority's] position regarding issues of exclusivity and grandfathering."
In March 2005, Parsons met with David Reade, chief of staff to Assembly-member Doug LaMalfa, concerning the grandfathering issue in Butte County. The Authority then sent Reade a letter explaining that "to establish exclusive zones and install the providers that were serving the county in 1992 would require a clear determination of eligibility for exclusivity. To date, however, the lack of pertinent and sufficient supporting evidence has hindered such a declaration. [Section 1797.224] states that services must have been provided, without interruption, since January 1, 1981. Since that date, three services in the Chico, Oroville, and Paradise areas have changed ownership, and, in the Paradise area, three different owners have operated the ambulance service. Sufficient documentation has never been submitted to the [Authority] to verify whether these purchases were reorganizations of the existing entity. [¶] In addition, in researching this issue further, it appears that a significant boundary change was made to the [Paradise area]. In 1987, the Butte College campus was incorporated into the zone, adding a daytime population of over 10,000 students. Absent substantive supporting documentation over 13 years, these changes appear to have further modified the `manner and scope' of operations, as described in [section 1797.224], and would preclude granting exclusivity to these providers in those areas." This letter was copied to Parsons.
In response, Parsons brought to the Authority's attention a 1992 letter it had sent to San Luis Obispo County's local EMS agency in which the Authority explained a "[c]hange in ownership, in and of itself, would not prevent a county from grandfathering an existing operation into an [EOA]." Parsons also brought to the Authority's attention a 1992 letter it had sent to Sonoma County's local EMS agency in which the Authority explained that "policy decisions regarding the exclusivity or non-exclusivity of emergency ambulance operations and in the creation of [EOA's] are decisions made by the local EMS agency," and that "[c]hanges to the status of exclusivity are within the legal authority of the local EMS agency to plan, implement, and evaluate an EMS system." Parsons also d statement, by omitting a material fact, or by making a partial disclosure that is materially misleading." Pfeffer, 965 A.2d at 684 (quotation marks and ellipsis omitted).
Delaware case law generally treats the duty of disclosure as one that applies to directors or, in some cases, majority shareholders. E.g., Malone, 722 A.2d at 9 ("This Court has held that a board of directors is under a fiduciary duty to disclose material information when seeking shareholder action."); Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992) ("[D]irectors of Delaware corporations are under a fiduciary duty to disclose fully and fairly all material information within the board's control when it seeks shareholder action."); Wayne Cnty. Emp. Ret. Sys. v. Corti, Civ. Act. No. 3534-CC, 2009 WL 2219260, at *8 (Del. Ch. July 24, 2009) ("When a board of directors seeks shareholder action, the fiduciary duty of disclosure, which is a specific application of the duties of care and loyalty, requires that the board disclose fully and fairly all material information within the board's control.") (internal quotation marks omitted),aff'd, 996 A.2d 795 (Del. 2010). The parties have not cited to any case in which an officer of a Delaware corporation has been held liable for breaching a duty of disclosure by failing to disclose material information not included in a proxy statement.
In addition, in Metro Communication Corp. BVI v. Advanced Mobilecomm Techs. Inc., the Delaware Court of Chancery held that managers of a limited liability corporation could be liable for failing to correct prior statements they subsequently learned were false. 854 A.2d 121, 153 (Del. Ch. 2004).
However, in 2009, the Delaware Supreme Court held that officers of Delaware corporations, "like directors, owe fiduciary duties of care and loyalty," to their corporation, and those fiduciary duties "are the same as those of directors." Gantler, 965 A.2d at 708-09. In so holding, the court explicitly noted that it was simply reiterating a well-established principle of Delaware law.Id. at 709 n. 36 ("That officers and directors of Delaware corporations have identical fiduciary duties has long been an articulated principle of Delaware law.") (citing Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939)).
The Gantler court's comment that officers' fiduciary duties are "the same as those of directors" was contained in a discussion of the duty of loyalty. The court was also presented with duty of disclosure claims. In the opinion containing the judgment reversed by the Delaware Supreme Court, the Court of Chancery specifically noted that the plaintiffs had asserted a disclosure claim against the directors of a corporation, as well as one individual who was an officer but not a director. Gantler v. Stephens, Civ. Act. No. 2392-VCP, 2008 WL 401124, at *19 n. 135 (Del. Ch. Feb. 14, 2008). Those plaintiffs argued to the Court of Chancery that the officer could be liable on a duty of disclosure theory because he was a "filing person" under the federal securities laws. Id. The Court of Chancery ultimately did not address whether this was a viable theory because it dismissed the plaintiffs' complaint on other grounds. Id. In reversing the dismissal, the Delaware Supreme Court likewise did not address the issue. However, in its discussion of the plaintiffs' duty of disclosure claim, the court reiterated the "well-settled" rule "that `directors of Delaware corporations [have] a fiduciary duty to disclose fully and fairly all material information within the board's control when it seeks shareholder action.'" Gantler, 965 A.2d at 710 (emphasis added).
There is no indication that in remarking about the duties of officers, the Delaware Supreme Court was imposing on officers, whose duties, responsibilities and authority may be relatively limited in this context, a duty to disclose to shareholders material facts that were omitted from a proxy statement. Such a duty could encourage a series of independent communications from officers to shareholders, instead of one message from the single body tasked with managing the affairs of Delaware corporations: the board of directors. It therefore appears that Delaware law did not require the BofA Officers to disclose to shareholders material information that was omitted from the Joint Proxy.
Delaware law also recognizes that a separate violation of fiduciary duty can occur "[w]hen the directors are not seeking shareholder action, but are deliberately misinforming shareholders about the business of the corporation, either directly or by a public statement. . . ." Malone, 722 A.2d at 14. Even assuming this duty did apply to the BofA Officers, the Derivative Plaintiffs' claims were based on omissions, not deliberate misinformation. (Deriv. Compl. ¶¶ 314, 337.)
The BofA Officers' motion to dismiss is granted with respect to the Derivative Plaintiffs' duty of disclosure claims.
b. Alleged Decision to Retract the Invocation of the MAC Clause.
Aside from their non-disclosure claims, plaintiffs also allege that the BofA Officers breached their fiduciary duty when they "fail[ed] to invoke the MAC clause or otherwise terminate or renegotiate the Merger even though they knew and had determined that it was in BofA's best interests to do so." (Deriv. Compl. ¶ 314(e).) Specifically, the Derivative Complaint alleges that during November and December 2008, several BofA Officers discussed whether BofA could invoke the MAC clause (Deriv. Compl. ¶ 181), sought and rendered legal advice regarding the MAC clause, (Deriv. Compl. ¶ 182), and ultimately received advice that grounds existed for invoking the MAC clause (Deriv. Compl. ¶ 184). At some point between December 17 and 21, two of the BofA Officers, Price and Brinkley, are alleged to have formed an opinion that BofA would prevail in a lawsuit over the MAC clause. (Deriv. Compl. ¶ 187.) These allegations are sufficient only to support an inference that these defendants were evaluating BofA's positions regarding the MAC clause. They are not sufficient to state a plausible claim that these defendants acted with "reckless indifference," a "deliberate disregard" of the BofA shareholders, or that the BofA Officers acted disloyally.Tomczak, 1990 WL 42607, at *12.
According to the Derivative Complaint, the BofA board decided to invoke the MAC clause on December 21, 2008. (Deriv. Compl. ¶ 188.) It is also alleged that the board reversed this decision on December 22, 2008, after Secretary Paulson allegedly threatened to "remove BofA's management and Board from their offices." (Deriv. Compl ¶¶ 188, 196.) Although the Derivative Complaint alleges that certain BofA Officers attended the December 22 meeting at which Lewis "formally sought the Board's concurrence with management's decision" not to invoke the MAC clause, and that there was "no dissent from the consensus" at that meeting (Deriv. Compl. ¶ 196), there is no allegation that the BofA Officers other than Lewis advised the board to reverse its decision.
The Derivative Plaintiffs have not plausibly alleged that the BofA Officers breached their fiduciary duty with regard to the claims arising from the BofA board's decision not to invoke the MAC.
C. Derivative Plaintiffs Have Failed to State a Claim for Unjust Enrichment.
The Derivative Complaint asserts a claim of unjust enrichment against the BofA Officers. The defendants argue that North Carolina law applies to plaintiffs' claim for unjust enrichment because BofA's principal place of business is in North Carolina and most of the BofA Officers are citizens of North Carolina. (Deriv. Compl. ¶¶ 42, 59-65.) Plaintiffs do not specifically deny that North Carolina law applies, but they cite to Delaware authority in their opposition brief. I need not decide which state's law applies, as there is no conflict between the applicable laws of the two jurisdictions. Rogers v. Grimaldi, 875 F.2d 994, 1002 (2d Cir. 1989) (a federal court exercising supplemental jurisdiction applies the choice of law rules of the forum state); In re Allstate Ins. Co. (Stolarz), 81 N.Y.2d 219, 223 (N.Y. 1993) ("The first step in any case presenting a potential choice of law issue is to determine whether there is an actual conflict between the laws of the jurisdictions involved.").
Under North Carolina law, a plaintiff must adequately allege that the defendant has been enriched "at another's expense under circumstances that, in equity and good conscience, call for an accounting by the wrongdoer." Ellis Jones, Inc. v. W. Waterproofing Co., Inc., 66 N.C. App. 641, 646 (N.C. Ct. App. 1984). Under Delaware law, unjust enrichment is the "unjust retention of a benefit to the loss of another, or the retention of money or property of another against the fundamental principles of justice or equity and good conscience." Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988). Under both states' laws, unjust enrichment occurs when a person has been enriched, to the detriment of another, under unfair or inequitable circumstances.
According to the Derivative Complaint, the BofA Officers were unjustly enriched because they "failed to achieve BofA's business and financial goals except in an illegitimate and unlawful manner," and therefore, "the incentive compensation payments" to these defendants "were not properly awarded for the work performed and results achieved." (Deriv. Compl. ¶ 330.) Plaintiffs seek the return of any incentive compensation awarded to these defendants. (Deriv. Compl. ¶ 330.)
Plaintiffs have not alleged that the BofA Officers benefitted from the unlawful conduct alleged in the Derivative Complaint. Plaintiffs have not alleged that the "incentive compensation" the BofA Officers received was tied to the consummation of the merger with Merrill. Similarly, plaintiffs do not allege what "BofA's business and financial goals" were, let alone how the alleged wrongdoing asserted in the Derivative Complaint helped the BofA Officers achieve those goals. Because plaintiffs have failed to allege facts showing why it would be unfair or inequitable to allow the BofA Officers to retain their incentive compensation, their claim for unjust enrichment is dismissed for failure to state a claim.
In addition, demand is not excused for this claim. The Derivative Plaintiffs did not name the BofA Directors in the unjust enrichment claim. (Deriv. Compl. ¶¶ 325-31.) There are no allegations in the Derivative Complaint connecting the board to the alleged unjust enrichment of the officers. Plaintiffs do not allege that the board set the compensation levels for the "incentive compensation" at issue. Even if the members of the Compensation and Benefits Committee set the incentive compensation for the BofA Officers, the Derivative Plaintiffs have not pled particular facts creating a reasonable doubt that the majority of the board (even excluding Lewis) who were not members of that committee could have exercised their disinterested and independent business judgment in considering a demand to file suit. Rales, 634 A.2d at 934. Demand for the unjust enrichment claim, therefore, is not excused.
D. Derivative Plaintiffs Have Failed to State a Claim for Contribution.
Plaintiffs assert a claim for contribution against the BofA Directors and Officers. The BofA Derivative Defendants cite Delaware law on contribution. The Derivative Plaintiffs do not dispute that Delaware law applies.
Under Delaware law, the right of contribution is governed by the Uniform Contribution Among Tort-feasors Law, 10 Del. Code Ann. § 6301, et seq. The "inherent requirement" of a claim for contribution "is that the parties are joint tortfeasors who share a `common liability.'" Builders Managers, Inc. v. Dryvit Sys., Inc., No. Civ. A. 00C11111JEB, 2004 WL 304357, at *2 (Del. Super. Ct. Feb. 13, 2004). According to the Derivative Complaint, the BofA Derivative Defendants have "exposed BofA to a significant liability under various federal and state laws," causing BofA to suffer a "substantial harm." (Deriv. Compl. ¶¶ 333-34.) Plaintiffs have not alleged facts showing that BofA has suffered any liabilities under federal or state laws, or what "substantial harm" has been done to BofA
as a result of its joint tortfeasance with the BofA Directors and Officers. Plaintiffs' bare recitation of the elements of this cause of action does not satisfy the pleading requirements of Rule 8(a), and this claim is dismissed. Twombly, 550 U.S. at 555. In addition, under Delaware law, a "joint tort-feasor is not entitled to a money judgment for contribution until he or she has by payment discharged the common liability or has paid more than his or her pro rata share thereof." 10 Del. Code Ann. § 6302(b). Plaintiffs have not alleged any payment made by BofA to discharge a common liability of BofA and the BofA Derivative Defendants.
E. Demand Is Not Excused for the Derivative Plaintiffs' Breach of Fiduciary Duty and Professional Negligence Claims Against the Financial Advisors.
Plaintiffs assert claims for breach of fiduciary duty and professional negligence against the Financial Advisors. The Rales test applies to these claims because they do not challenge a BofA board decision. Rales, 634 A.2d at 934 n. 9 ("For example, if a stockholder brings a derivative suit alleging that a third party breached a contract with the corporation, demand should not be excused simply because the subject matter of the suit — the third party's breach of contract — does not implicate the business judgment rule."); see also In re Trump Hotels S'holder Derivative Litig., No. 96 Civ. 7820 (DAB), 2000 WL 1371317, at *11 (S.D.N.Y. Sept. 21, 2000).
In Count II of the Derivative Complaint, plaintiffs allege that the Financial Advisors "owed BofA and its shareholders the duty to perform due diligence necessary to accurately and reliably determine whether the terms of the proposed Merger and exchange ratio were fair from a financial point of view to BofA and continued to be fair." (Deriv. Compl. ¶ 317.) According to plaintiffs, the Financial Advisors breached this duty by "fail[ing] to perform the due diligence necessary under the circumstances" and, therefore, their fairness opinions "had no reasonable basis in fact, were false and misleading." (Deriv. Compl. ¶ 319.) In Count III, plaintiffs allege that the Financial Advisors "failed to exercise the care that a professional employed to render" a fairness opinion would have employed given the circumstances and, therefore, the fairness opinions "had no reasonable basis in fact," and were false and misleading. (Deriv. Compl. ¶¶ 322-23.)
Although plaintiffs allege that the Financial Advisors owed a duty to BofA to determine whether the terms of the merger continued to be fair to BofA from a financial point of view, this continuing obligation is expressly refuted by the words of both fairness opinions. Both opinions explicitly state that they are limited to addressing fairness "as of the date hereof," which was September 14, 2008. (Joint Proxy at C-2, D-3.)
These claims, therefore, arise from the same facts and circumstances as the plaintiffs' breach of fiduciary duty claim against the BofA Directors and Officers for approving the merger. Given my conclusion that the BofA board was disinterested and independent, and that plaintiffs had failed to plead particular facts showing that the BofA board committed a non-exculpated breach of fiduciary duty in approving the merger, I conclude that at the time the Derivative Complaint was filed, the BofA board could have "properly exercised its independent and disinterested business judgment in responding to a demand" on these claims.Rales, 634 A.2d at 934. The demand requirement, therefore, is not excused, and these claims are dismissed pursuant to Rule 23.1.
F. Derivative Plaintiffs Fail to State a Direct Claim Against the BofA Directors and Officers for Breach of Fiduciary Duty.
In addition to asserting derivative claims, the Derivative Plaintiffs also assert one direct claim. They allege that the BofA Derivative Defendants breached their fiduciary duties to the BofA shareholders by failing to "correct, update, or supplement the disclosures in the Proxy Statement" and by concealing "the fact of an authorized $5.8 billion in bonuses to be paid to Merrill executives." (Deriv. Compl. ¶ 358.) According to the Derivative Complaint, these breaches deprived the shareholders "of their right to cast an informed vote at the Shareholder Vote on the Merger on December 5, 2008." (Deriv. Compl. ¶ 359.) As a recovery, plaintiffs seek "the amounts which BofA spent to negotiate the transaction and prepare the [Joint Proxy], including $20 million in fees to the [Financial Advisors], over $100 million in fees to the Wachtell law firm, and tens of millions of dollars in [expenses for] printing and disseminating the [Joint Proxy], tallying votes, and otherwise implementing the solicitation of shareholders." (Deriv. Compl. ¶ 360.)
Plaintiffs have not alleged a causal connection between the harm alleged — denial of their right to vote — and the damages they seek. Plaintiffs do not allege that if the BofA defendants had not breached their fiduciary duties, these costs would not have been incurred. Instead, plaintiffs allege that the harm they suffered was from casting votes that were not fully informed. But, as plaintiffs concede, the costs they seek to recover because of these alleged breaches "would have been incurred [by BofA] regardless [of] whether shareholders had voted the Merger down and/or the Merger had been rescinded or the Merger price renegotiated." (Deriv. Pls. Opp. Br. at 48.) Put differently, the Derivative Complaint does not plausibly allege that BofA would have avoided these costs if the Joint Proxy contained more fulsome and complete disclosures. Thus, plaintiffs' claim for damages is not "logically and reasonably related," In re J.P. Morgan Chase Co. S'holder Litig., 906 A.2d 766, 773 (Del. 2006), to the harm they are alleged to have suffered — denial of the right to cast a fully informed vote. Plaintiffs' direct claim is therefore dismissed.
Because I have dismissed plaintiffs' direct claim, I need not reach the issue of whether there is an impermissible conflict of interest between the plaintiffs' derivative and direct claims.See Fed.R.Civ.P. 23.1(a) ("The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of shareholders or members who are similarly situated in enforcing the right of the corporation or association."); see also St. Clair Shores Gen. Emps. Ret. Sys. v. Eibler, No. 06 Civ. 688 (SWK), 2006 WL 2849783, at *7 (S.D.N.Y. Oct. 4, 2006) ("Courts in this Circuit have long found that plaintiffs attempting to advance derivative and direct claims in the same action face an impermissible conflict of interest."); Tuscano v. Tuscano, 403 F. Supp. 2d 214, 223 (E.D.N.Y. 2005) ("Any individual claims raised by a shareholder in a derivative action present an impermissible conflict of interest."); Wall St. Sys., Inc. v. Lemence, No. 04 Civ. 5299 (JSR), 2005 WL 292744, at *3 (S.D.N.Y. Feb. 8, 2005) ("[A]n individual shareholder has a conflict of interest, and therefore cannot adequately represent other shareholders, when he simultaneously brings a direct and derivative action."); Ryan v. Aetna Life Ins. Co., 765 F. Supp. 133, 135 (S.D.N.Y. 1991) (stating that "the existence of an actual conflict disqualifies a plaintiff from acting as representative" in derivative and direct capacities, and "courts in this District have applied a strict standard in scrutinizing simultaneous direct and derivative actions for signs of conflict").
G. This Action Will Not Be Stayed or Dismissed in Favor of the Delaware Action.
A separate stockholder derivative action is currently pending in Delaware Court of Chancery, In re Bank of America Corporation Stockholder Derivative Litigation, C.A. No. 4307-VCS (the "Delaware Action"). That action asserts a claim against the BofA board for breach of fiduciary duty and a claim for waste of corporate assets against the directors and others. (Delaware Action Compl. ¶¶ 157-164, attached as Exhibit C to the Declaration of Kevin L. Oufnac, dated February 8, 2010.) As alternative relief, the BofA Derivative Defendants ask the Court to abstain from exercising jurisdiction over this action because it is substantially similar to the Delaware Action.
Both parties agree that in determining whether abstention is appropriate, the Court should apply the six-factor test set forth in Colorado River Water Conservation District v. United States, 424 U.S. 800, 817 (1976). See Vill. of Westfield v. Welch's, 170 F.3d 116, 120 (2d Cir. 1999) ("Abstention under Colorado River applies where, as in the instant case, state and federal courts exercise concurrent jurisdiction simultaneously.") (quotation marks omitted). "To determine whether abstention under Colorado River is appropriate, a district court is required to weigh six factors, with the balance heavily weighted in favor of the exercise of jurisdiction." Id. at 121 (quotation marks omitted). Those six factors are: "(1) the assumption of jurisdiction by either court over any res or property; (2) the inconvenience of the federal forum; (3) the avoidance of piecemeal litigation; (4) the order in which jurisdiction was obtained; (5) whether state or federal law supplies the rule of decision; and (6) whether the state court proceeding will adequately protect the rights of the party seeking to invoke federal jurisdiction." Id. No one factor is dispositive. Id. Because abstention is "an exception to a court's normal duty to adjudicate a controversy properly before it, the district court's discretion must be exercised within the narrow and specific limits prescribed by the particular abstention doctrine involved." Dittmer v. Cnty. of Suffolk, 146 F.3d 113, 116 (2d Cir. 1998). "Thus, there is little or no discretion to abstain in a case which does not meet traditional abstention requirements."Id.
I assume, for these purposes, that the Delaware Action is a parallel state-court proceeding. The first factor favors the exercise of jurisdiction, because this is not an in rem action.Vill. of Westfield, 170 F.3d at 122 ("[T]he absence of a res points toward exercise of federal jurisdiction.") (quotation marks omitted; alteration incorporated).
Turning to the second and third factors, this forum is not inconvenient to the defendants as they already are litigating a claim arising out of substantially similar facts in this forum. The mere potential for conflicting outcome between the two actions does not justify abstention under the "piecemeal litigation" factor. Colorado River, 424 U.S. at 816.
The fourth factor tips in favor of abstention because, according to plaintiffs' brief, jurisdiction was obtained by the Delaware court on January 22, 2009, and by this Court on January 28, 2009. Additionally, the Delaware action already has progressed beyond the motion to dismiss stage. (Portnoy Dec. Ex. C.)
The fifth factor favors exercising federal jurisdiction. State law applies the rule of decision on the remaining breach of fiduciary duty claims, and on the demand requirement, but federal law applies the rule of decision on the remaining Section 14(a) claims. Vill. of Westfield, 170 F.3d at 124 ("[T]he presence of federal issues strongly advises exercising federal jurisdiction."). Here, I view this as a significant consideration because important federal policies are implicated.
Finally, regarding the sixth Colorado River factor, there is nothing before the Court to indicate that the Delaware court is an inadequate vehicle for the plaintiffs' protection, which counsels in favor of abstention.
Although some of the factors favor abstention, the test is not mechanical, and I conclude that on balance, abstention is not warranted.
H. Derivative Plaintiffs May File a Motion Requesting Leave to Amend.
The Derivative Plaintiffs have requested leave to amend the Derivative Complaint. The Court should "freely give leave" to amend a complaint "when justice so requires." Fed.R.Civ.P. 15(a)(2). Plaintiffs argue that leave to amend "is well warranted here, where new information emerges almost every day from the SEC and [New York Attorney General] investigations, media reports, and Congressional hearings." (Deriv. Pls. Opp. Br. at 58.) Plaintiffs, however, have not identified any information that they would include in an amended complaint. Therefore, plaintiffs' request for leave to file an amended complaint is denied without prejudice. Plaintiffs' may file a motion to amend their Derivative Complaint within 20 days of the date of hereof. Should plaintiffs choose to file such a motion, they should consider whether an impermissible conflict exists. See supra note 21.
X. LETTERS OF FEBRUARY 2010 PLAY NO PART IN THE CONSIDERATION OF THESE MOTIONS.
I briefly address a flurry of submissions made by the parties in February and March 2010, which purported to advise Judge Chin of a complaint filed by the New York Attorney General and developments in a separate SEC action. No party argues that the reported developments have a preclusive effect on this case. They play no part in this Memorandum and Order. The relevance of those proceedings, if any, may be revisited at a later point.
CONCLUSION
The Securities Complaint states Section 10(b) and Rule 10b-5 claims against Lewis, Thain, BofA and Merrill for alleged misstatements related to the bonus arrangement, and against Lewis and BofA for alleged omissions related to the bonus arrangement. The Securities Complaint states claims under Section 14(a) and Rule 14a-9 against Lewis, Thain, BofA, Merrill and the BofA directors as to the bonus arrangement. It also states claims under Section 14(a) and Rule 14a-9 against all defendants arising out of their failure to disclose Merrill's fourth quarter 2008 losses. Because the foregoing claims survive, the Securities Complaint states a claim for control person liability pursuant to Section 20(a) of the `34 Act. Finally, the Securities Complaint states claims under the `33 Act based on the alleged misstatements and omissions concerning Merrill's bonus payments.
The motions to dismiss are GRANTED as to the Securities Complaint's other theories of liability. (MDL Docket # 59, 62, 64.)
The Derivative Complaint does not state a claim against the Financial Advisors, and their motion to dismiss is GRANTED. (MDL Docket # 92.)
The Derivative Complaint states Section 14(a) and Rule 14a-9 claims against the BofA Directors for misstatements and omissions related to the bonus arrangement and for failing to disclose Merrill's fourth quarter 2008 losses. The BofA Directors have not moved to dismiss the breach of fiduciary duty claims arising from their actions or omissions after they approved BofA's acquisition of Merrill. The BofA Derivative Defendants' and nominal
defendant BofA's motions to dismiss are GRANTED with respect to the other theories of liability asserted in the Derivative Complaint. (MDL Docket ## 118, 127.) The Derivative Plaintiffs may file a motion to amend within 20 days.
The motion to certify a question to the Delaware Supreme Court is DENIED. (MDL Docket # 210.)
SO ORDERED.