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Bresalier v. Good

United States District Court, D. Delaware

March 30, 2017

SAUL BRESALIER, derivatively on behalf of DUKE ENERGY CORPORATION, Plaintiff,
v.
LYNN J. GOOD, MICHAEL G. BROWNING, DANIEL R. DIMICCO, JOHN H. FORSGREN, ANN MAYNARD GRAY, JAMES H. HANCE, JR., JOHN T. HERRON, JAMES T. RHODES, JAMES B. HYLER, JR., HARRIS DELOACH, JR., CARLOS A. SALADRIGAS, WILLIAM E. KENNARD, E. MARIE MCKEE, RICHARD A. MESERVE, JAMES E. ROGERS, G. ALEX BERNHARDT, E. JAMES REINSCH, WILLIAM BARNET III, and PHILIP R. SHARP, Defendants, and DUKE ENERGY CORPORATION, Nominal Defendant.

          Sidney S. Liebesman and Lisa Zwally Brown, MONTGOMERY, McCRACKEN, WALKER & RHOADS, LLP, Wilmington, DE

          Richard D. Greenfield and Ann M. Caldwell, GREENFIELD & GOODMAN, LLC, New York, NY Attorneys for Plaintiff.

          Kenneth J. Nachbar, Susan W. Waesco, and Alexandra M. Cumings, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, DE Jack B. Jacobs, SIDLEY AUSTIN LLP, Wilmington, DE Steven M. Bierman, Andrew W. Stern, and Elizabeth A. Espinosa, SIDLEY AUSTIN LLP, New York, NY Attorneys for Defendants.

          MEMORANDUM OPINION

          STARK, U.S. District Judge:

         I. INTRODUCTION

         Plaintiff Saul Bresalier, a Duke Energy Corporation ("Duke" or the "Company") shareholder, filed this derivative action against defendants Lynn J. Good, Michael G. Browning, Daniel R. Dimicco, John H. Forsgren, Ann Maynard Gray, James H. Hance, Jr., John T. Herron, James T. Rhodes, James B. Hyler, Jr., Harris DeLoach, Jr., Carlos A. Saladrigas, William E. Kennard, E. Marie McKee, Richard A. Meserve, James E. Rogers, G. Alex Bernhardt, E. James Reinsch, William Barnet III, and Philip R. Sharp (collectively, the "Director Defendants"[1]), as well as Nominal Defendant Duke (together with the Director Defendants, "Defendants"). (D.L 1 ("Compl.")) Bresalier alleges breach of fiduciary duty, waste of corporate assets, breach of the duty of loyalty, and unjust enrichment claims, arising from "wrongdoing which took place during the time [the Director Defendants] held office and/or served as . . . director[s] of Nominal Defendant Duke." (Id. ¶¶ 1, 88-109)

         On January 15, 2016, Defendants moved to dismiss under Federal Rules of Civil Procedure 23.1 and 12(b)(6). (D.I. 25) In response to Defendants' motion to dismiss, Bresalier filed a motion pursuant to Federal Rule of Civil Procedure 12(d), urging the Court to convert Defendants' motion to one for summary judgment. (D.I. 28) The parties agreed to suspend briefing on Defendants' motion to dismiss until the Court ruled on Bresalier's motion to convert. (D.I. 32) The parties then briefed the motion to convert, which the Court denied from the bench during a hearing held on June 15, 2016. (See D.I. 44 at 31-34; D.I. 46) The Court now turns back to Defendants' motion to dismiss, which the parties have fully briefed (see D.I. 47, D.I. 50, D.I. 51) and argued at a hearing held on December 20, 2016 (see D.I. 59 ("Tr.")).[2]

II. BACKGROUND

         This lawsuit arises from the Duke Board's refusal of Bresalier's March 24, 2015 pre-suit demand letter. (See D.I. 24, Ex. A (the "Demand")) The Demand outlined Bresalier's concerns regarding three main issues.

         First, the Demand alleged that certain Duke officers and directors breached their fiduciary duties by mismanaging Duke's coal ash basin at its Dan River energy plant in North Carolina, resulting in the third-worst coal ash spill in the nation's history, in February of 2014. (See Compl. ¶ 25; Demand at 2-5) The Dan River spill and Duke's mismanagement of coal ash at other locations in North Carolina led to criminal charges against three Duke subsidiaries, all of which pled guilty in May 2015 to a total of nine negligence-based misdemeanor violations of the Clean Water Act, and which further agreed to pay $102 million in fines and implement environmental compliance plans that would be subject to oversight by a court-appointed monitor paid for by Duke. (See Compl. ¶¶ 25-30; Demand at 2-3) A Joint Statement of Facts filed with the U.S. District Court for the Eastern District of North Carolina after the sentencing hearing "contains numerous and highly material facts to which Duke's General Counsel admitted on behalf of the Company and its Board, whose members authorized and directed such admissions." (Compl. ¶ 30) The Dan River spill also led to enforcement actions by North Carolina's Department of Environmental and Natural Resources ("DENR"), seeking to hold Duke responsible for cleanup costs at Duke's 14 coal ash sites in North Carolina; $25 million in fines stemming from these enforcement actions have already been assessed, and the total cleanup costs are estimated to be $10 billion. (Id. ¶¶ 31-38) The Demand also referenced a governmental investigation into "the nature of [Duke's] contacts with the DENR with respect to Duke's North Carolina facilities." (Demand at 3 (internal quotation marks omitted))

         Second, the Demand alleged that the Director Defendants breached their fiduciary duties with regard to Duke's 2012 merger with Progress Energy, Inc. The Director Defendants were accused of "orchestrat[ing] a scheme to defraud Progress shareholders into believing that [Progress CEO] Bill Johnson . . . would be the CEO of the combined, post-Merger company" through the "charade of giving Johnson a multi-year, multi-million dollar contract, " only to then fire Johnson "within hours after the Merger closed, replacing him with [Defendant] Rogers." (Demand at 6) This "not only subjected Duke to a reported potential liability of more than $40 million in breach of contract damages to Mr. Johnson, " but also led to a costly shareholder lawsuit, Nieman v. Duke Energy Corporation et al, C.A. No. 3:12-cv-00456-MOC-DSC (W.D. N.C. filed Jan. 29, 2013), which Duke eventually settled for $146 million, $26 million of which was not covered by insurance.[3] (Demand at 5-6)

         With respect to these first two issues, Bresalier demanded that the Board "commence litigation against any and all persons and entities who are responsible for the transgressions, violations of law, and damages sustained by the Company as a result of the misconduct summarized in [the Demand] letter." (Compl. ¶ 68; Demand at 8)

         Third, the Demand expressed concerns about Duke's political action committee, DUKEPAC, and asserted that "any direct or indirect political contributions using Duke's funds ... that can have no conceivable benefit for the Company would be demonstrably improper . . . [and] would only serve to provide personal contact with politicians and further the personal political preferences of Board members." (Demand at 9) Bresalier demanded greater transparency from the Board and DUKEPAC as well as an overhaul of the Company's policies in that regard. (See Compl. ¶ 54)

         The Board referred the Demand to a review committee (the "Committee"), which had already been formed to address an earlier shareholder demand letter containing some similar allegations. (See Compl. ¶ 70; D.l. 47 at 5) The Committee consisted of four of the Director Defendants - DeLoach, Forsgren, Gray, and Kennard - and Gibson Dunn & Crutcher LLP ("Gibson Dunn") served as its legal counsel.[4] (Id. ¶¶ 70-71) On May 15, 2015, Bresalier's counsel wrote to the Committee's counsel requesting information on "the bona fides of the selection and work of the [Committee], " a copy of any Board resolutions related to the Committee's creation and Gibson Dunn's retention, and a copy of the other demand being considered by the Committee. (Compl. ¶¶ 72-73; D.I. 24-1, Ex. B) After getting no response, on May 25, 2015, Bresalier's counsel sent another letter to the Committee, seeking a response to his May 15 letter. (Compl. ¶ 74; D.I. 24-1, Ex. C) The Committee's counsel responded to Bresalier's counsel's letters on May 31, 2015, stating that the Demand had not been rejected, the investigation was ongoing, and the Committee hoped to complete it within three months. (Compl. ¶ 74; D.I. 34, Ex. A) Bresalier's counsel then sent an e-mail on July 3, 2015, reiterating his unanswered questions about the Committee and its investigation and offering to meet with the Committee, but he received no response. (Compl. ¶¶ 74-75; D.I. 24-1, Ex. D)

         On September 4, 2015, the Committee informed Bresalier that his Demand had been refused by the Board based on the Committee's report and recommendation. (D.I. 47, Ex. C (the "Rejection Letter") at 2) The Rejection Letter, which provided the names of the Committee members (see Id . at 1), addressed as demands only the allegations regarding Duke's coal ash management and the Duke-Progress merger. With regard to the former, the letter informed Bresalier:

[T]he Committee concluded that the Company's directors and officers did not breach their fiduciary duties with respect to coal ash management. The Committee also considered a number of other factors that weighed against bringing litigation, including the low chances of success; the substantial costs of litigation; the unavailability of directors' and officers' liability insurance to satisfy any successful claim; the substantial remedial efforts taken by the Company to overhaul its approach to coal ash management; and the likelihood that litigation would distract key personnel, many of whom spend a substantial amount of time overseeing and implementing the remedial efforts enacted by the Company.

(Id. at 2 (footnote omitted)) The Rejection Letter also cited the guilty pleas to misdemeanor violations of the Clean Water Act and stated that the Committee's investigation was "[i]nformed by the resolution of the government's investigation." (Id. at 2)

         With respect to the other issues raised in the Demand, the Committee advised Bresalier that it had determined that the "statute of limitations had run on any claims for breaches of fiduciary duty the Company could bring" with regard to the 2012 Duke-Progress merger. (Id. at 2 n.3) Finally, the Committee did not make any recommendation to the Board regarding Bresalier's "general concerns regarding Duke's political contributions and related practices" because the Demand's generalized statements on this topic did not "constitute a formal demand under Delaware law." (Id. at 1 n. 1)

         Bresalier filed his Complaint on October 30, 2015, asserting claims for (1) breaches of fiduciary duty by the Director Defendants with respect to their mismanagement of coal ash, their replacement of Johnson with Rogers as CEO, and Duke's and DUKEPAC's political contributions; (2) breaches of the duty of candor with regard to a "materially deceptive proxy statement [issued] in connection with Duke Energy's 2015 annual meeting of shareholders, " which led to the initiation of securities litigation in North Carolina;[5] (3) breaches of fiduciary duty and waste with regard to the Committee's purportedly "sham" investigation and wrongful refusal of the Demand; and (4) unjust enrichment resulting from the alleged wrongdoing. (See Compl. ¶¶ 37, 45-46, 50, 60-62, 69-71, 88-109)

         Defendants move to dismiss, arguing that (1) the Complaint failed to plead with particularity sufficient facts to raise a reasonable doubt as to the good faith and reasonableness of the Committee's investigation and the Board's refusal of the Demand, and (2) with respect to claims not raised in the Demand, the Complaint failed to plead demand futility or, in the alternative, failed to state a claim. (D.I. 47 at 3) Defendants rely in part on the Rejection Letter, which they attached as an exhibit to their opening brief. (See D.I. 47, Ex. C)[6]

         For the reasons that follow, the Court will grant Defendants' motion in part and deny the motion in part.

         III. ...


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