Board of Trustees of City of Hialeah Employees' Retirement System v. Mendes et al

Filing 114

ORDER DENYING PLAINTIFF DAVE LUCIA'S MOTION FOR AN ORDER TO SHOW CAUSE WHY DEFENDANTS SHOULD NOT BE SANCTIONED by Hon. William Alsup denying 100 Motion for Order to Show Cause.(whalc2, COURT STAFF) (Filed on 2/22/2013)

1
2
3
4
5

IN THE UNITED STATES DISTRICT COURT

6
FOR THE NORTHERN DISTRICT OF CALIFORNIA
7
8
9

11
For the Northern District of California

United States District Court

No. C 11-05692 WHA

10

IN RE DIAMOND FOODS, INC.
DERIVATIVE LITIGATION
This Document Relates to:

12

All Actions.

ORDER DENYING PLAINTIFF
DAVE LUCIA’S MOTION FOR
AN ORDER TO SHOW CAUSE
WHY DEFENDANTS SHOULD
NOT BE SANCTIONED

/

13
14

INTRODUCTION

15

This shareholder derivative action was dismissed for lack of subject-matter jurisdiction

16

and judgment was entered in May 2012. Plaintiff Dave Lucia appealed. While the appeal has

17

been pending, Lucia filed a motion seeking an order to show cause why defendants and their

18

counsel should not be sanctioned for engaging in settlement discussions in related derivative

19

actions currently pending in various state and federal courts. For the reasons stated below, the

20

motion is DENIED.

21
22

STATEMENT
One of the problems in both putative class action and putative derivative actions is the risk

23

of a collusive settlement, meaning one in which the interests of the absent class member or

24

shareholder are sold short while the lawyer obtains a handsome fee from defendants. One way in

25

which this can be attempted is where a defense counsel learns of potentially disqualifying

26

information against the putative representative and approaches a plaintiff’s counsel with an offer

27

to not reveal the information to the judge and to not oppose class certification on that ground in

28

exchange for a sweetheart settlement. In this way the defendant wipes the class-wide liability off
its books for less than fair value while the lawyer walks away with a nice fee. Most plaintiff’s

1

counsel would not engage in such a compromise but, sadly, this type of collusion occurs more

2

often than it should.

3

As a check against this problem, the undersigned judge gives early notice in all putative

4

class and derivative actions that counsel may not engage in settlement negotiations until (i) after a

5

class has been certified, and the representative has been found adequate, and class counsel has

6

been appointed or (ii) interim counsel has been appointed under Rule 23(g)(3) (see, e.g., order

7

scheduling hearing on motions to appoint lead plaintiff, filed in this case at Docket No. 9;

8

transcript of case management conference at Docket No. 50). Once the representative and

9

counsel are so appointed, of course, it becomes his or her duty to consider the advisability (or not)
of settlement on behalf of a class. After the representative and class counsel are vetted under

11
For the Northern District of California

United States District Court

10

Rule 23, any settlement will be untainted by compromises based on standing or qualifications and

12

will be based on the potential merits of the class claims and other legitimate considerations such

13

as the cost of class-wide litigation. Put differently, why should a class member’s claim be

14

compromised on account of a lack of standing or other disqualifying characteristics of a supposed

15

representative? It should not be, of course, and any class settlement should be based on the

16

potential merits and other legitimate considerations of cost.

17

The instant action is a shareholder derivative action brought by plaintiffs Board of

18

Trustees of City of Hialeah Employees’ Retirement System (“Hialeah”) and David Lucia against

19

a number of Diamond Foods, Inc.’s current and former officers and directors, principally based on

20

the company’s accounting for payments to walnut growers. In conformance with the practice

21

described above, the Court early on advised counsel in this putative derivative action not to

22

engage in settlement discussions until after, if ever, the case went forward under Rule 23.1. By so

23

doing, the Court was trying to guard against a compromise of potentially legitimate representative

24

claims via discount for lack of subject-matter jurisdiction. In fact, the Court eventually ruled that

25

subject-matter jurisdiction was lacking due to the failure to state a claim under Section 14(a) of

26

the Exchange Act. As subject-matter jurisdiction was premised on that federal claim, the Court

27

declined to exercise supplemental jurisdiction over the remaining state law claims, particularly

28
2

1

“[i]n light of the fact that there are [already] almost identical state suits pending before Judge

2

Richard Kramer . . . ” (Dkt. No. 90). That order and judgment are now on appeal.

actions in state courts. As noted in the Court’s May 29 order granting the motion to dismiss,

5

there were a number of identical state lawsuits pending in California state court, which were filed

6

prior to Lucia’s federal derivative action. Those suits have since been consolidated in an action

7

before Judge Richard Kramer in San Francisco County Superior Court, captioned In re Diamond

8

Foods, Inc. Shareholder Derivative Litigation, No. CGC-11-515895 (Cal. Super. Ct. 2011).

9

Following this Court’s dismissal of the federal derivative action, plaintiffs Lucia and Hialeah

10

filed derivative actions in Delaware Court of Chancery, which consolidated their actions. In

11
For the Northern District of California

Meanwhile, however, the same defendants (or some of them) have been sued in other

4

United States District Court

3

addition to the Delaware and California state court actions, there is a related securities fraud class

12

action pending before the undersigned judge. In re Diamond Foods, Inc. Sec. Litig., No. 11-cv-

13

5386-WHA (N.D. Cal. 2011). That action has passed the Rule 12 and lead plaintiff stages, but

14

not the class certification stage. Finally, there is an action in Delaware Chancery Court under

15

Delaware state law related to inspection demands for books and records. Astor BK Realty Trust

16

v. Diamond Foods, Inc., No. 7272-ML (Del. Ch. 2012).

17

Although the instant case is entirely on appeal now, counsel for plaintiff Lucia have now

18

brought a motion herein asking the Court to issue an order to show cause why defendants should

19

not be held in contempt for engaging in settlement discussions with counsel in these other

20

actions. If another derivative action has been allowed to go forward by another judge, then it

21

would be the duty of counsel in that action to at least consider settling the corporation’s claim just

22

as it would be his or her duty to consider preparing the case for a full-blown trial. The order in

23

the instant action postponing settlement negotiations was aimed at doing so until after it was

24

determined that the representative herein was in a position to negotiate on the merits without

25

discount for extraneous matters unique to the representative such as lacking subject-matter

26

jurisdiction. If some other representative in some other proceeding has already cleared that

27

hurdle or otherwise has the green light from that judge to negotiate as a representative, then let

28

them do so. The order herein only barred negotiation before the instant parties to the instant case.
3

1

It did not and does not purport to bar representative negotiations between parties being supervised

2

by another judge elsewhere. Any such settlement would have to be approved by that judge, not

3

the undersigned. This is not a situation, as far as can be judged on this record, where those parties

4

contrived jurisdiction elsewhere in order to evade the order herein, for the other state court

5

derivative actions were already pending before plaintiffs filed this federal “me-too” derivative

6

action.

7
8

For the foregoing reasons, the motion is DENIED. The hearing scheduled for February 28
is VACATED.

9
IT IS SO ORDERED.

11
For the Northern District of California

United States District Court

10

12

Dated: February 22, 2013.

WILLIAM ALSUP
UNITED STATES DISTRICT JUDGE

13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
4