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United States District Court, Northern District of California

March 21, 2003


The opinion of the court was delivered by: Vaughn R. Walker, United States District Judge.


Plaintiff commenced this shareholder derivative action in San Mateo County superior court on May 3, 2002. See Compl (Doc #1, Exh A). Defendant Credit Suisse First Boston Corporation (CSFB) answered on May 20, 2002. See CSFB Ans (Doc #1, Exh B). At the time CSFB filed its answer, neither CSFB nor any other defendant — in particular, no in-state defendant — had been served. See Not of Rem (Doc #1) at 2, ¶ 3. The next day, CSFB removed the action on diversity grounds, before plaintiff could serve any defendant alleged to be a citizen of California for purposes of jurisdiction. See Not of Rem (Doc #1).

On November 5, 2002, plaintiff filed a first amended complaint (FAC) in this court. Doc #59. Plaintiff then moved to transfer venue to the Southern District of New York. Doc # 28. On November 19, 2002, plaintiff's motion was denied. Doc #60. Defendants then separately filed motions to dismiss. See Docs ##61, 63, 67. Because the argument advanced in the motion to dismiss filed by CSFB and joined by Robertson Stephens, Inc (Robertson Stephens) (Docs ##61, 62) had the potential to result in dismissal of the complaint in its entirety, the parties stipulated and the court ordered that hearing on the motions to dismiss filed by the individual and nominal defendants would be deferred until the court ruled on CSFB's motion. See Doc #74.

This order, therefore, addresses only CSFB's motion to dismiss (Doc #61). For the reasons detailed-below, that motion (Doc #61) is GRANTED. Because the court finds this matter suitable for determination without oral argument, the hearing scheduled for March 27, 2003, is VACATED. See Civ LR 7-1(b).


In the FAC, plaintiff alleges that CSFB and Robertson Stephens (collectively, underwriter defendants) acted as lead underwriters for the initial public offering (IPO) of common stock in nominal defendant Openwave Systems, Inc (Openwave). The FAC alleges that the underwriter defendants worked with Openwave deliberately to underprice the shares issued in the IPO. See FAC (Doc #59), ¶ 40-52. As a result of this underpricing, the FAC alleges that the underwriter defendants were able to secure large profits for favored customers at a cost to Openwave of as much as $96 million. See id, ¶ 88. The FAC states causes of action against the individual defendants for breach of fiduciary duty, unjust enrichment and negligence and against the underwriter defendants for breach of fiduciary duty, unjust enrichment and breach of the duties of agent to principal. See id, ¶ 81-120.

Tellingly, the FAC nowhere alleges that plaintiff owned shares of Openwave stock on or before the date of the Openwave IPO, June 10, 1999. By its nature, the wrongful conduct alleged in the FAC — the improper fixing of Openwave's opening stock price — must have occurred, if at all, on or before that date. See FAC, ¶ 12, 76.


In considering a motion to dismiss under FRCP 12(b)(6), the court must take the material allegations of the complaint as true and construe them in the light most favorable to plaintiff. See Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir 1998). The court should dismiss a cause of action only if it "appears beyond doubt that the plaintiff can prove no set of facts in support of its claim which would entitle him to relief." Conley v. Gibson, 355 41, 45-46 (1957). The court is not "required to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." Sprewell, 266 F.3d at 988 (citing Clegg v. Cult Awareness Network, 18 F.3d 752, 754-55 (9th Cir 1994)). It is accordingly improper "[to] assume that [plaintiff] can prove facts that [he] has not alleged." Associated General Contractors of California, Inc v. California State Council of Carpenters, 459 U.S. 519, 526 (1983).

Federal Rule of Civil Procedure 23.1 sets forth the procedural requirements for bringing a derivative action in federal court. It requires, inter alia, that "the complaint * * * shall allege [] that the plaintiff was a shareholder * * * at the time of the transaction of which the plaintiff complains * * *." FRCP 23.1. This rule has consistently been read to state an additional requirement that plaintiff must retain ownership of shares of the stock at issue for the duration of the lawsuit: the so-called continuous share ownership requirement. See Lewis v. Chiles, 719 F.2d 1044, 1048 (9th Cir 1983).

Under the doctrine first articulated in Erie Railroad Co v. Tompkins, 304 U.S. 64 (1938), a federal court sitting in diversity applies federal law to procedural matters and the law of the state in which it sits to substantive matters. See, id at 78; Gasperini v Center for Humanities, 518 U.S. 415, 427 (1996). The goals of the Erie doctrine are to discourage forum-shopping between state and federal courthouses and to minimize the unfairness inherent in a system in which non-resident parties have access to' a forum unavailable to resident parties. See Guaranty Trust Co fo New York v. York, 326 U.S. 99, 109 (1945); Hanna v. Plumer, 380 U.S. 460, 467 (1965). The effect of Erie is to guarantee that "a federal court adjudicating a state-created right solely because of the diversity of citizenship of the parties is for that purpose, in effect, only another court of the State." Guaranty Trust, 326 US at 108.

In Kona Enterprises, Inc v. Estate of Bishop, 179 F.3d 767 (9th Cir 1999), the Ninth Circuit established that "Rule 23.1's continuous share ownership requirement is procedural in nature and thus applicable in diversity actions." Id at 769 (internal citation omitted); see also Sax v. World Wide Press, 809 F.2d 610, 613 (9th Cir 1987). As the Lewis court had earlier explained in discussing the implications of Rule 23.1, "Congress has the power to fashion rules of procedure which affect the manner in which state-created rights are enforced in federal courts." Lewis, 719 F.2d at 1048 n 4 (9th Cir 1983) (citing Hanna, 380 US at 460 ff).

The court of appeals in Kona held that plaintiffs' "failure to own stock in [nominal defendant] contemporaneously with bringing suit deprives them of standing to pursue their claims derivatively." See Kona, 179 F.3d at 769. The appellate panel rejected plaintiffs' arguments that they should be accorded equitable standing and confirmed the district court's holding that plaintiffs lacked standing to pursue their derivative claims. See id at 770. The grounds for equitable standing asserted by plaintiffs and rejected by the court of appeals in Kona — based on case law involving bank foreclosures and corporate mergers — are not applicable to the instant action.

Plaintiff has alleged no facts supporting' an inference that he owned Openwave stock at the time of the IPO. Indeed he candidly concedes that he "does not satisfy the contemporaneous [share] ownership requirement of [FRCP] 23.1." Pl Opp (Doc #75) at 1. That fact is precisely the reason plaintiff filed the original complaint in state court, because California law allows for an exception to the contemporaneous share ownership requirement under certain conditions. Section 800(b)(1) of the California Corporations Code permits a derivative plaintiff who cannot demonstrate stock ownership at the time of the alleged wrongful conduct nevertheless to proceed with an action in state court if that plaintiff can demonstrate that:

(i) there is a strong prima facie case in favor of the claim asserted on behalf of the corporation, (ii) no other similar action has been or is likely to be instituted, (iii) the plaintiff acquired the shares before there was a disclosure to the public or to the plaintiff of the wrongdoing of which plaintiff complains, (iv) unless the action can be maintained the defendant may retain a gain derived from defendant's willful breach of a fiduciary duty, and (v) the requested relief will not result in unjust enrichment of the corporation or any shareholder of the corporation, and [the plaintiff has met the other requirements for bringing such an action].

"The Supreme Court has never resolved the issue whether Rule 23.1(1) acts as a bar in a diversity case where state law permits a noncontemporaneous shareholder to maintain a derivative action." Lewis, 719 F.2d at 1048 n4. As discussed above, however, Ninth Circuit case law establishes that the requirements of FRCP 23.1 are procedural, hence applicable in a diversity action. Since plaintiff, by his own admission, cannot meet one of the two requirements, plaintiff lacks standing to pursue this action in this court.

Plaintiff's quandary is this: He filed an action in state court seeking to take advantage of the exception to the contemporaneous share ownership requirement embodied in California Corporations Code § 800(b)(1). Before he was able to effect service on the in-state defendants in this action, CSFB removed the matter to federal court. Because plaintiff is a Florida resident, diversity is complete and remand unobtainable. Yet plaintiff lacks standing to pursue this action in federal court, because he is barred from doing so by a federal rule the Ninth Circuit has held to be procedural, thus applicable in diversity actions.

Rather than arguing that he possesses standing to proceed further in this court, plaintiff argues that the court should remand the action to avoid the complete extinction of plaintiff's case as a result of defendant's strategic reliance on the federal removal statute and the Federal Rules of Civil Procedure. In the alternative, plaintiff argues that the court should dismiss this action without prejudice.

In support of remand, plaintiff cites the suggested resolution of this problem in Wright & Miller: "the district court should be encouraged to remand a case for failure to comply with Rule 23.1(1) rather than to dismiss it. The scope of the current federal statute authorizing the remand of cases appears sufficiently broad to give the court discretion to accomplish this." C Wright and A Miller, 7C Fed Prac & Proc Civ 2d (Wright and Miller) § 1829 (2002).

Plaintiffs' reliance on this suggestion is misplaced, however, as it in turn relies on an interpretation of a superceded portion of the federal removal statute. Prior to the 1988 Amendments to 28 U.S.C. § 1447, subsection (c) read, "If at any time before final judgment it appears that the case was removed improvidently and without jurisdiction, the district court shall remand the case * * *." 28 U.S.C. § 1447 (c) (1964) amended by 28 U.S.C. § 1447 (c) (1988). That provision currently reads, "If at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded." 28 U.S.C. § 1447 (c). The argument set forth in Wright & Miller rests on an expansive reading of the former language that would allow a court to remand a case for lack of personal jurisdiction or something closely resembling it. See Wright & Miller, § 1829 n34. Under the version of § 1447(c) currently in force, this avenue is blocked and remand at this juncture unavailable for any reason other than the lack of subject matter jurisdiction, which plaintiff cannot demonstrate here.

Plaintiff concedes the court's subject matter jurisdiction based on diversity and also concedes his own lack of standing to pursue this derivative action in federal court. Dismissal is appropriate accordingly. See Holly Sugar Co v. Goshen Co Cooperative Beet Growers Ass'n, 725 F.2d 564, 567-68 (10th Cir 1984); Ribbens International SA de CV v. Transport International Pool, Inc, 45 F. Supp.2d 982. 984 n 2 (CD Cal 1999).

Plaintiff's second argument is that dismissal should be without prejudice. The court concurs. The Ninth Circuit has directed that an order dismissing a complaint pursuant to FRCP 12(b)(6) "should * * * inform the plaintiff of the reason for dismissal so that he can make an intelligent choice as to amending." Bonanno v. Thomas, 309 F.2d 320, 322 (9th Cir 1962) (internal citation omitted). The Bonnano court accordingly reversed the district court's dismissal without leave to amend. See id. In cases in which a plaintiff's case is subject to dismissal for a defect in the pleadings, district courts follow the practice prescribed by Bonnano and furthermore, guided by FRCP 15, routinely dismiss with leave to amend to correct the identified defect(s) in the pleadings. See FRCP 15; Allen v. City of Beverly Hills, 91 F.2d 367, 373 (9th Cir 1990)

Had plaintiff served an in-state defendant prior to the time CSFB filed its answer and sought immediate removal, plaintiff could not have been forced into a federal forum of CSFB's choosing. See 28 U.S.C. § 1441 (b) ("Any [civil action not founded on or arising out of a constitutional claim] shall be removable only if none of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought;" emphasis added); see also FAC (Doc #59), ¶ 9 ("Plaintiff does not allege, either directly or indirectly, any violation of any federal statute, regulation, rule or, order * * *."). Under these circumstances, the court concludes that CSFB's motion to dismiss (Doc #61) must be GRANTED, but that dismissal should be without prejudice to plaintiff's either am ending the complaint to state a claim cognizable in federal court or — what seems more likely — commencing a new action in state court.


For the reasons stated above, CSFB's motion to dismiss (Doc #61) is GRANTED. The FAC is dismissed without prejudice.



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