Donnawell v. Hamburger et al

Filing 58

MEMORANDUM Opinion and Order Signed by the Honorable George M. Marovich on 6/25/2013.(tg, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

JAN DONNAWELL, derivatively on
behalf of DEVRY, INC.

)
)
)
Plaintiff,
)
) No. 12 C 9074
v.
)
) Judge George M. Marovich
)
DANIEL HAMBURGER, CHRISTOPHER )
B. BEGLEY, DAVID S. BROWN, GARY )
BUTLER, CONNIE R. CURRAN,
)
DARREN R. HUSTON, WILLIAM T.
)
KEEVAN, LYLE LOGAN, JULIA A.
)
McGEE, FERNANDO RUIZ, HAROLD T. )
SHAPIRO, RONALD L. TAYLOR,
)
and LISA W. WARDELL,
)
)
Defendants,
)
)
and
)
)
DEVRY, INC.,
)
)
Nominal Defendant.
)
MEMORANDUM OPINION AND ORDER
Plaintiff Jan Donnawell (“Donnawell”) filed a shareholder derivative complaint against
individual defendants Daniel Hamburger (“Hamburger”), Christopher B. Begley, David S.
Brown, Gary Butler, Connie R. Curran, Darren R. Huston, William T. Keevan, Lyle Logan, Julia
A. McGee, Fernando Ruiz, Harold T. Shapiro, Ronald L. Taylor and Lisa W. Wardell and
against nominal defendant DeVry Inc. (“DeVry”). The individual defendants are members of the
Board of Directors of DeVry. Defendants have filed a motion to stay this case and a motion to

dismiss. For the reasons set forth below, the Court denies the motion to stay and grants the
motion to dismiss.
I.

Background
At some point, DeVry adopted the Incentive Plan of 2005 and the Amended and Restated

Incentive Plan of 2005 (the “2005 Plan”). Under the 2005 Plan, the company was allowed to
award stock options to certain employees of the company. The company could not, however,
make an award of stock options under the 2005 Plan that exceeded 150,000 shares of DeVry
stock per person per year. Notwithstanding the limit in the 2005 Plan, DeVry granted CEO
Daniel Hamburger (“Hamburger”) stock options of 184,100 shares in August 2010, 170,200
shares in August 2011 and 255,425 shares in August 2012.
Based on these stock options awards, DeVry shareholder Milton Pfeiffer (“Pfeiffer”)
filed a shareholder derivative suit in the Circuit Court of DuPage County on October 15, 2012.
Pfeiffer alleged that the Board of DeVry breached its fiduciary duty in awarding stock options in
excess of the limits of the 2005 Plan (Count I), that the stock option awards were a waste of
corporate assets (Count II) and that the awards constituted unjust enrichment to CEO Hamburger
(Count III).
Less than a month later, on November 12, 2012, plaintiff Donnawell filed her shareholder
derivative suit here. Donnawell, like Pfeiffer in state court, challenges the stock options awarded
to Hamburger in amounts greater than 150,000 shares under the 2005 Plan. Like Pfeiffer alleged
in state court, Donnawell alleges that the Board members breached their fiduciary duty by
granting awards in excess of 150,000 shares (Count I), that the Board members wasted corporate
assets (Count III) and that the awards unjustly enriched Hamburger (Count V). Donnawell also

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makes two additional claims that Pfeiffer did not make in his state-court case. In Count IV,
Donnawell asserts that the individual defendants violated Section 14(a) of the Securities
Exchange Act by including false or misleading statements in a Form DEF 14A proxy statement
(the “2012 Proxy”) that it filed with the Securities and Exchange Commission (“SEC”) and
distributed to DeVry shareholders. Specifically, Donnawell alleges that “the 2012 Proxy was
false and misleading because it falsely implied that that [sic] gains on the stock options awarded
to defendant Hamburger will be entitled to tax deductibility under section 162(m), when in fact
the violation of the 150,000 share limit put at risk the tax deductibility of such awards and the
gains thereon.” (Donnawell Complt. ¶ 41). In Count II, Donnawell alleges that defendants
breached their fiduciary duty “by disseminating the 2012 Proxy, which they knew contained
material omissions . . .” (Donnawell Complt. ¶ 59).
Defendants have filed two motions. First, defendants move the Court to stay this case on
the grounds of Colorado River abstention. Second, defendants move to dismiss this suit. With
respect to their motion to dismiss, defendants argue that three of Donnawell’s claims are moot
and that the other two fail to state a claim upon which relief may be granted.
In connection with defendants’ argument that three claims are moot, defendants have
admitted that Donnawell is correct that the 2005 Plan limited stock option awards to 150,000
shares per person per year. They have also admitted that DeVry erred by making stock option
awards to Hamburger in excess of 150,000 per year under the 2005 Plan. Finally, defendants
have put forth evidence that DeVry has already corrected the problem. Specifically, DeVry
determined that the grants in excess of 150,000 were ineffective and proceeded to grant
Hamburger stock options within the limits. Effectively, DeVry changed the grants so that

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Hamburger was awarded stock options of 150,000 shares under the 2005 Plan for the year 2010;
150,000 shares under the 2005 Plan for the year 2011; and 150,000 shares under the 2005 Plan
for the year 2012. In addition to the awards under the 2005 Plan, DeVry also granted Hamburger
stock options of 87,910 shares for the year 2012 under a different plan, the 2003 Stock Incentive
Plan.
Finally, the Court takes judicial notice of the fact that, on or about June 7, 2013, a statecourt judge decided that Pfeiffer’s state-court claims are moot and that the case will be dismissed
after the judge rules on Pfeiffer’s motion for attorneys’ fees.
II.

Discussion
A.

Motion to stay

Defendants ask the Court to abstain from hearing this case because a similar case is
pending at the Circuit Court of DuPage County. The Court may, under certain circumstances,
abstain from hearing a case over which it has jurisdiction. In Colorado River Water
Conservation Dist. v. United States, 424 U.S. 800 (1976), the Supreme Court explained that:
there are principles unrelated to considerations of proper constitutional
adjudication and regard for federal-state relations which govern in situations
involving the contemporaneous exercise of concurrent jurisdictions, either by
federal courts or by state and federal courts. These principles rest on
considerations of ‘[w]ise judicial administration, giving regard to conservation of
judicial resources and comprehensive disposition of litigation.’ Generally, as
between state and federal courts, the rule is that ‘the pendency of an action in the
state court is no bar to proceedings concerning the same matter in the Federal
court having jurisdiction.
Colorado River, 424 U.S. at 817 (internal citations omitted) (emphasis added). The reason the
state suit is no bar to the federal suit is “the virtually unflagging obligation of the federal courts
to exercise the jurisdiction given them.” Id. The “duty to exercise jurisdiction rests on ‘the

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undisputed constitutional principal that Congress, and not the Judiciary, defines the scope of
federal jurisdiction within the constitutionally permissible bounds.’” Adkins v. VIM Recycling,
Inc., 644 F.3d 483, 496 (7th Cir. 2011) (quoting New Orleans Public Serv., Inc. v. Council of
City of New Orleans, 491 U.S. 350, 359 (1989)).
In Colorado River, the Supreme Court noted that it would be appropriate for the federal
court to abstain if the state suit involved property. It also explained that “a federal court may
also consider such factors as the inconvenience of the federal forum; the desirability of avoiding
piecemeal litigation; and the order in which jurisdiction was obtained by the concurrent forums.”
Colorado River, 424 U.S. at 818. “Only the clearest of justifications will warrant dismissal.” Id.
at 819.
Before it abstains, a district court must consider whether the two suits are parallel. If
they are, the court considers, “(1) whether the state has assumed jurisdiction over property; (2)
the inconvenience of the federal forum; (3) the desirability of avoiding piecemeal litigation; (4)
the order in which jurisdiction was obtained in the concurrent forums; (5) the source of
governing law; (6) the adequacy of state-court action to protect the federal plaintiff’s rights; (7)
the relative progress of state and federal proceedings; (8) the presence or absence of concurrent
jurisdiction; (9) the availability of removal; and (10) the vexation or contrived nature of the
federal claim.” AXA Corporate Solutions v. Underwriters Reinsurance Corp., 347 F.3d 272, 278
(7th Cir. 2003). In AXA, the Seventh Circuit noted that the long list of factors created a risk of
inconsistent results but that the Supreme Court “has effectively told courts how those factors
should be weighed” by emphasizing the obligation to exercise jurisdiction. AXA, 347 F.3d at
278. The Seventh Circuit, thus, has reaffirmed the Supreme Court’s admonition “not to stay or

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dismiss actions without strong justification to do so” and has “recognized a general presumption
against abstention.” AXA, 347 F.3d at 278 & 279. In addition, where a plaintiff has alleged a
claim within the exclusive jurisdiction of the federal courts, it is not appropriate for the federal
court to abstain. Adkins v. VIM Recycling, Inc., 644 F.3d 483, 500 (7th Cir. 2011) (“Our
precedent holds that ‘where a plaintiff’s nonfrivolous claim invokes the exclusive jurisdiction of
federal courts, the Colorado River stay is not appropriate.’”) (quoting Medema v. Medema
Builders, Inc., 854 F.2d 210, 215 (7th Cir. 1988)).
The Court first considers whether the two suits are parallel and concludes that they are
not. Unquestionably, the two cases are similar. Although the plaintiffs are different, the parties
are essentially the same, because the two plaintiffs are proceeding derivatively as shareholders.
In addition, in both cases, the plaintiffs make nearly identical claims with respect to the stock
options awards in excess of 150,000 shares. The federal case, however, also includes two
additional claims, one of which (Count IV) is within the exclusive jurisdiction of federal courts.
Thus, as the Seventh Circuit explained in Adkins, the suits are not fully parallel and Colorado
River abstention is inappropriate.
Even if the cases were parallel, however, the Court still would not abstain from hearing
this case, because abstention is supposed to be the exception, not the rule. None of the relevant
factors cuts strongly in favor of abstention. First, the cases do not involve property. If they did,
that fact would cut in favor of abstention, because disposition of property is better handled in a
single proceeding. That the cases do not involve property cuts against abstention. Next, it is just
as convenient to litigate in this building as it is to litigate in DuPage County, a few dozen miles
down the road. It is desirable, in every case, to avoid piecemeal litigation, so this factor does not

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suggest this case is exceptional. Finally, although this case was filed second, that will be true
perhaps 50% of the time when a federal and a state court are exercising contemporaneous
jurisdiction. Something that happens 50% of the time is not extraordinary. In short, nothing
about this case overcomes the virtually unflagging obligation to exercise jurisdiction.
Defendants’ motion to stay is denied.
B.

Defendants’ motion to dismiss

In their motion to dismiss, defendants argue that Counts I, III and V should be dismissed
for lack of subject matter jurisdiction, because the claims are moot. Defendants argue that
Counts II and IV should be dismissed for failure to state a claim.
1.

Mootness

Defendants move pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure to
dismiss three of plaintiff’s claims on the grounds that they are moot. This Court lacks subject
matter jurisdiction over moot claims and, therefore, must dismiss such claims. St. John’s United
Church of Christ v. City of Chi., 502 F.3d 616, 625 (7th Cir. 2007).
In Counts I, III and V, plaintiff alleges that DeVry violated the 2005 Plan by awarding
Hamburger stock options for more than 150,000 shares for the years 2010, 2011 and 2012.
Defendants argue that these claims are moot, because DeVry has corrected the awards, such that
it granted Hamburger stock options for only 150,000 shares under the 2005 Plan for each of the
years 2010, 2011 and 2012.
Plaintiff agrees that part of those claims are moot. Specifically, plaintiff agrees that
DeVry has corrected the awards for 2010 and 2011 and that, therefore, her claims are moot with
respect to the years 2010 and 2011.

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Plaintiff does not, however, agree with defendants that her claims with respect to the year
2012 are moot. Plaintiff points out that Hamburger was awarded stock options for 237,910
shares for the year 2012, but defendants have put forth evidence that some of those options were
awarded under a different plan. Specifically, defendants have put forth evidence that stock
options for only 150,000 shares were awarded under the 2005 Plan for the year 2012 and that the
stock options for the remaining 87,910 shares were awarded under a separate plan (the 2003
Incentive Plan) that plaintiff does not challenge. Plaintiff argues that the Court cannot consider
defendants’ evidence at this stage of the case and that, instead, the Court must accept as true
plaintiff’s complaint allegation that all stock option awards to Hamburger for the year 2012 were
made under the 2005 Plan. Plaintiff is mistaken about the evidence the Court may consider.
When considering whether it has subject matter jurisdiction, a “district court may consider
whatever evidence has been submitted on this issue to determine whether in fact subject matter
jurisdiction exists.” St. John’s United Church of Christ, 502 F.3d at 625. Thus, the Court may
consider the evidence defendants submitted.
Based on the evidence submitted to this Court, the Court agrees with defendants that
plaintiff’s Counts I, III and V are moot. Defendants have put forth evidence that DeVry has
corrected the stock option awards to Hamburger such that Hamburger has been granted stock
options for 150,000 shares under the 2005 Plan for each of the years 2010, 2011 and 2012. That
is exactly what plaintiff requested in Counts I, III and V. Accordingly, those claims are moot
and are hereby dismissed for lack of jurisdiction. The Court notes that this conclusion is
consistent with the decision recently reached by the judge in the related state-court case.

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2.

Motion to dismiss

That leaves two claims, both of which are brought derivatively and assert that the
defendants made misstatements in the 2012 Proxy. In Count IV, Donnawell asserts that the
individual defendants violated Section 14(a) of the Securities Exchange Act by including false or
misleading statements in the 2012 Proxy. Specifically, Donnawell alleges that “the 2012 Proxy
was false and misleading because it falsely implied that that [sic] gains on the stock options
awarded to defendant Hamburger will be entitled to tax deductibility under section 162(m), when
in fact the violation of the 150,000 share limit put at risk the tax deductibility of such awards and
the gains thereon.” (Donnawell Complt. ¶ 41). In Count II, Donnawell alleges that defendants
breached their fiduciary duty “by disseminating the 2012 Proxy, which they knew contained
material omissions . . .” (Donnawell Complt. ¶ 59).
Defendants argue that these claims should be dismissed, because plaintiff failed to make
a pre-suit demand and failed to allege sufficiently that pre-suit demand would have been futile.
Rule 23.1(b) of the Federal Rules of Civil Procedure states that a derivative complaint must:
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state with particularity:
(A)

any effort by the plaintiff to obtain the desired action from the
directors or comparable authority and, if necessary, from the
shareholders or members; and

(b)

the reasons for not obtaining the action or not making the effort.

Fed.R.Civ.P. 23.1(b)(3). The law of the state of incorporation determines whether demand may
be excused as futile. In re Abbott Depakote Shareholder Deriv. Lit’n, Case No. 11 C 8114, 2013
WL 2451152 at *4 (N.D. Ill. June 5, 2013). The parties agree that state is Delaware.

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The parties also agree that, under Delaware law, to determine whether a demand would
have been futile, a judge must consider “whether, under the particularized facts alleged, a
reasonable doubt is created that: (1) the directors are disinterested and independent; and (2) the
challenged transaction was otherwise the product of a valid exercise of business judgment.”
Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984). To show a reasonable doubt as to the first
prong of the Aronson test, plaintiff “must undertake a ‘director-by-director analysis’ showing
that the majority of the Board was incapable, due either to a material personal interest or
domination and control, of objectively evaluating a demand, if made.” Raul v. Rynd, __ F.
Supp.2d __, 2013 WL 1010290 at *10 (D. Del. March 14, 2013). Plaintiff has not done so here.
She has included no allegations as to what each director had to gain by making misstatements
about the tax deductibility of Hamburger’s stock options. Nor has she included any allegations
suggesting that the directors were under Hamburger’s control.
With respect to the second prong, plaintiff argues that demand is excused because she has
alleged that the directors improperly approved stock options for excessive amounts of shares
despite the 2005 Plan’s prohibition. This is irrelevant, because the three claims (Counts I, III
and V) that challenge the excessive stock-option awards have been dismissed as moot. The
claims with respect to which plaintiff needs to allege demand futility are the misstatement claims
(Counts II and IV). Plaintiff does not so much as argue that she has alleged demand futility with
respect to the misstatement claims. The Court can find no facts in the complaint that create a
reasonable doubt that the 2012 Proxy was a result of a valid exercise of business judgment.
Accordingly, plaintiff has failed to allege demand futility with particularity, and Counts
II and IV must be dismissed. Because it is conceivable that plaintiff could correct the defect

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with an amendment, the Court will grant plaintiff 28 days to file an amended complaint, should
she so choose.
III.

Conclusion
For the reasons set forth above, the Court denies defendants’ motion to stay. The Court

grants defendants’ motion to dismiss. Counts I, III and V are moot and are dismissed for lack of
jurisdiction. Counts II and IV are dismissed without prejudice. Plaintiff is granted 28 days in
which to amend Counts II and IV, should she so choose.

ENTER:

George M. Marovich
United States District Judge
DATED: June 25, 2013

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