Schartz v Parish, 2016 WL 7231613 (N.D. Ill. Dec. 14, 2016).
In this action, the United States District Court, Northern District of Illinois, granted Plaintiff Brian Schartz’s (“Plaintiff”) motion to remand finding the Class Action Fairness Act’s (“CAFA”) internal affairs doctrine applied to the Plaintiff’s Breach of Fiduciary duty and Unjust Enrichment claims which were solely alleged against a Wisconsin corporation and the allegations solely involved directors and/or officers of a Wisconsin corporation.
Plaintiff, a shareholder, brought a putative class action in State Court alleging defendants violated Wisconsin Business and Corporation Law (“WBCL”) by merging Aspen Park Pharmaceuticals, Inc. (“Aspen Park”) into defendant Female Health Company (“Female Health”) without the affirmative vote of at least two thirds of the shareholders. Plaintiff included in his complaint breach of fiduciary duty claims brought against Female Health’s pre-merger directors, aiding and abetting breach of fiduciary duty claims brought against Female Health’s post-merger directors, and unjust enrichment claims brought against the defendants Mitchell S. Steiner and Harry Fisch.
The defendants removed the action to the federal court pursuant to CAFA. The plaintiff moved to remand the action to state court, which the District Court granted.
The defendants contended they met the threshold elements for removal under CAFA, showing the class consisted of at least 100 class members, no defendant was a State, State official or government entity, the citizenship of at least one class member was different from that of any defendant, and the aggregate amount in controversy exceeded $5 million. The defendants showed the amount in controversy exceeded $5 million because the plaintiff alleged he and other class members had suffered significant damages as a result of the merger. Specifically, the defendants showed Female Health had over 29 million shares outstanding and the stock dropped from $1.82 to $.95 per share during the first announcement of the merger through the closing date, contending that any damages based on those estimates exceeded the sum of $5 million.
Plaintiff argued his claims were expressly excluded from CAFA jurisdiction, as he solely asserted claims relating to the internal affairs of Female Health because the violations arose under Wisconsin law, which was where Female Health was incorporated. Female Health argued the Plaintiff’s fiduciary duty claim did not solely relate to the internal affairs of Female Health and did not solely involve Wisconsin law. The District Court noted that the internal affairs doctrine states that “only one State should have the authority to regulate a corporation’s internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands.”
The defendants contended Plaintiff’s allegation required the District Court to interpret Delaware law due to the nature of the merger and cited to Delaware case law in support of their contention. Plaintiff alleged a breach of fiduciary duty claim against the individual defendants who were Female Health’s officers and/or directors at all relevant times up to and including the merger transaction. He further alleged the defendants breached their fiduciary duties by consummating the merger transaction in violation of the WBCL because they failed to obtain the affirmative vote of at least two-thirds as statutorily required. Plaintiff thus alleged that his breach of fiduciary duty claim was solely alleged against Female Health, a Wisconsin corporation, and the allegations solely involved directors and/or officers of a Wisconsin corporation. The District Court found Plaintiff’s breach of fiduciary duty claim did not allege a violation of Delaware law nor would it require it to interpret Delaware law. The District Court thus opined the breach of fiduciary duty claim was governed solely by Female Health’s state of incorporation, Wisconsin and the internal affairs doctrine exception applied to those claims.
Additionally, defendants argued Plaintiff’s aiding and abetting a breach of fiduciary duty claims and unjust enrichment claims did not solely relate to the internal affairs of Female Health and did not solely involve Wisconsin law. Plaintiff argued the claims derived solely from the internal affairs of Female Health and actions by its officers and/or directors under the laws of Wisconsin. The District Court noted the aiding and abetting claim could not exist without the underlying allegation of breach of fiduciary duty, which was governed by Wisconsin law. The District Court ruled the aiding and abetting breach of fiduciary duty claim fell within the internal affairs doctrine and was governed solely by Wisconsin law and the exception applied to those claims.
Finally, the defendants argued Plaintiff’s unjust enrichment claims did not solely relate to the internal affairs of Female Health and did not solely involve Wisconsin law. Plaintiff contended Female Health was incorporated in Wisconsin, and because he brought the instant action under his role as a shareholder, Wisconsin law governed the claims. The District Court found that under the choice of law provisions, the internal affairs doctrine applied to the unjust enrichment claims as well. Similarly, the District Court found Plaintiff’s allegations fell within the scope of the internal affairs doctrine and arose under the laws of Wisconsin, and the exception applied.
Accordingly, the District Court granted the motion to remand.
By: Yaron Shaham