Schartz v. Parrish et al

Filing 18

MEMORANDUM Opinion: Signed by the Honorable Samuel Der-Yeghiayan on 12/14/2016. Mailed notice (mmy, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
BRIAN C. SCHARTZ,

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Plaintiff,
v.
O.B. PARISH, et al.
Defendants.

No. 16 C 10736

MEMORANDUM OPINION
SAMUEL DER-YEGHIAYAN, District Judge
This matter comes before the court on Plaintiff Brian Schartz’s (Schartz)
motion to remand and motion for sanctions. For the following reasons stated below,
Schartz’s motion to remand is granted and motion for sanctions is denied.

BACKGROUND
Schartz alleges that on November 4, 2016, he filed a stockholder class action
and derivative complaint in State court against Defendants O.B. Parrish, William R.
Gargiulo, Jr., Donna Felch, David R. Bethune, Andrew S. Love, Mary Margaret
Frank, Sharon Meckes, Elgar Peerschke, Mitchell S. Steiner (Steiner), Harry Fisch
(Fisch), Georges Makhoul, Mario Eisenberger, and Lucy Lu (collectively referred to
as the “Board”) and Defendant Female Health Company, a Wisconsin corporation

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that is headquartered in Chicago, Illinois (Female Health). Schartz alleges that the
Board and Female Health violated Wisconsin Business and Corporation Law
(WBCL), §§ 180.1101 et seq, by merging Aspen Park Pharmaceuticals, Inc., a
Delaware corporation, (Aspen Park) into Female Health without the affirmative vote
of at least two thirds of the shareholders. Schartz filed this case in State court and
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 Steiner and Fisch. On November 7, 2016, Schartz filed a motion for
preliminary injunction and a hearing was scheduled in State court for November 22,
2016. On November 18, 2016, Defendants filed their notice of removal to this court
pursuant to the Class Action Fairness Act (CAFA), 28 U.S.C. § 1332(d). Schartz
now moves to remand the matter to State Court and for sanctions against Defendants.

LEGAL STANDARD
Pursuant to 28 U.S.C. § 1441(a), “[e]xcept as otherwise expressly provided by
Act of Congress, any civil action brought in a State court of which the district courts
of the United States have original jurisdiction, may be removed by the defendant or
the defendants, to the district court of the United States for the district and division
embracing the place where such action is pending.” Id. Pursuant to 28 U.S.C. §
1447(c), “[i]f at any time before final judgment it appears that the district court lacks
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subject matter jurisdiction, the case shall be remanded.” Id. When an action is
removed to federal court and a defendant invokes federal subject matter jurisdiction,
the defendant bears the burden of showing that the federal court has subject matter
jurisdiction. See Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609, 617 (7th
Cir. 2012)(stating that “[t]he party invoking federal jurisdiction bears the burden of
demonstrating its existence”).

I. Class Action Fairness Act

A. Federal Jurisdiction Under CAFA
Defendants removed this matter to federal court arguing that the court has
jurisdiction under the CAFA. CAFA gives district courts jurisdiction over state-law
class actions where the putative class action consists of at least 100 proposed class
members, “the matter in controversy exceeds the sum or value of $5,000,000. . .and
any member of a class of plaintiffs is a citizen of a State different from any
defendant. . . .” 28 U.S.C. § 1332(d). CAFA was enacted to “grant[ ] broad federal
jurisdiction over class actions and establishes narrow exceptions to such
jurisdiction.” Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609, 618 (7th
Cir. 2012). The party seeking “removal bears the burden of establishing the general
requirements of CAFA jurisdiction.” Id.
Defendants argue that they properly established the requirements for CAFA
jurisdiction in federal court. Defendants contend that they have met the threshold
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elements for removal under CAFA, showing the following: that the class consists of
at least 100 class members, no defendant is a State, State official or government
entity, the citizenship of at least one class member is different from that of any
defendant, and the aggregate amount in controversy exceeds $5 million. Defendants
discuss the allegations in Schartz’s complaint as support for meeting this threshold.
Defendants contend that Schartz brought the lawsuit on behalf of himself and all
others similarly situated and derivatively on behalf of Female Health, which exceeds
100 class members. Defendants have shown that minimal diversity is met because
Female Health shareholders and several Individual Defendants reside in various
other States. Defendants also have shown that the amount in controversy exceeds
$5,000,000 because Schartz alleges that he and other class members have suffered
significant damages as a result of the merger. Defendants have shown that Female
Health has 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
on October 31, 2016. Defendants contend any damages based on these estimates
exceeds the sum of $5,000,000. The court finds that Defendants have satisfied their
burden of establishing the general requirements of CAFA for federal jurisdiction.

B. Internal Affairs CAFA Exception Applies
Schartz argues that the case should be remanded to State court because
Schartz’s claims are expressly excluded from CAFA jurisdiction. The party opposing
removal and “seeking remand has the burden to establish any exception to CAFA
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jurisdiction.” Appert v. Morgan Stanley Dean Witter, 673 F.3d 609, 618-19
(7th Cir. 2012); see also Breuer v. Jim's Concrete of Brevard, Inc., 538 U.S. 691,
697–98 (2003)(holding that when a defendant removes a case under 28 U.S.C. §
1441(a), the burden is on a plaintiff to find an express exception to removal). Section
1453(b) allows removal of any class action brought within federal jurisdiction by §
1332(d), and § 1453(d) adds: “Exception.—This section shall not apply to any class
action that solely involves—(2) a claim that relates to the internal affairs or
governance of a corporation or other form of business enterprise and arises under or
by virtue of the laws of the State in which such corporation or business enterprise is
incorporated or organized . . . .” Katz v. Gerardi, 552 F.3d 558, 562 (7th Cir.
2009)(quoting 28 U.S.C. § 1453(d)(2)). The “internal affairs” doctrine is “a conflict
of laws principle which recognizes 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.” Edgar v. MITE Corp., 457 U.S. 624, 645 (1982).
Schartz argues that he solely asserts claims relating to the internal affairs of
Female Health because the violations arose under Wisconsin law, which is where
Female Health is incorporated. The background on this transaction provides the
necessary context in determining whether Schartz’s claims solely relate to the
internal affairs of Female Health. Schartz alleges that on April 5, 2016, Female
Health announced a proposed merger with Aspen Park. Defendants contend that
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under WBCL, three aspects of the proposed April 5, 2016 merger required the
approval of at least two-thirds of Female Health’s shareholders. Schartz alleges that
on September 20, 2016, Female Health did not obtain sufficient shareholder votes
and postponed the meeting to September 22, 2016. On September 22, 2016, Female
Health postponed the meeting to October 14, 2016. On October 14, Female Health
announced only 65% shareholder approval, which did not satisfy WBCL. On
October 31, 2016, Female Health disclosed the amended merger agreement.
Defendants contend that the “amended merger agreement is clear that the merger was
only between two Delaware corporations.” However, the amended merger
agreement states that “The Female Health Company, a Wisconsin corporation
(‘FHC’), completed a merger transaction (the ‘Transaction’) with Aspen Park
Pharmaceuticals, Inc., a Delaware corporation (‘APP’), pursuant to an Amended and
Restated Agreement and Plan of Merger. . .among FHC, APP, and FHC’s wholly
owned subsidiary Blue Hen Acquisition, Inc. (‘APP Merger Sub’).” (Def. Ex. H).
Schartz alleges that under “the amended merger agreement, [Female Health] issued
two million shares of common stock and 546,756 shares of [Female Health] Class A
Preferred Stock - Series 4 to [Aspen Park] shareholders.” (Comp. Par. 59). Schartz
alleges that each of those preferred stock shares “will automatically convert into 40
common shares at a future date.” Id. Allegedly, as a result of the merger, “[Aspen
Park] shareholders will own approximately 23,870,000 [Female Health] common
shares, constituting approximately 45% of the outstanding common shares as of the
closing date.” Id. Schartz brings this claim on behalf of himself, as a shareholder of
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Female Health, and derivatively on behalf of Female Health. Schartz’s claims are
relevant in determining that they fall within the CAFA exception. Schartz alleges a
breach of fiduciary duty against Female Health board members, aiding and abetting a
breach of fiduciary duty against Female Health’s post-merger Board members, and
unjust enrichment claims against Steiner and Fisch.

1. Breach of fiduciary duty claims
Female Health argues that Schartz’s fiduciary duty claim does not solely relate
to the internal affairs of Female Health and does not solely involve Wisconsin law.
Where “plaintiffs' claims rest on state law, the choice-of-law rules come from the
state in which the federal court sits.” In re Bridgestone / Firestone, Inc., 288 F.3d
1012, 1015 (7th Cir. 2002). Thus, Illinois choice of law principles apply. Illinois
employs the internal affairs doctrine. See Resolution Trust Corp. v. Chapman, 29
F.3d 1120, 1122 (7th Cir.1994) (noting that internal affairs doctrine is “recognized
throughout the states”). 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.” Edgar, 457 U.S. at 645. It is “well established that
only the law of the State of incorporation governs and determines issues relating to a
corporation’s internal affairs.” CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 86,
89-93 (1981). Pursuant to “the internal affairs doctrine, a suit for breach of fiduciary
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duty is governed by the law of the state of incorporation.” CDX Liquidating Trust v.
Venrock Associates, 640 F.3d 209, 212 (7th Cir. 2011).
Defendants argue that Schartz’s claim is essentially that the merger between
Blue Hen and Aspen Park was illegal because Female Health’s directors failed to get
the necessary approval from Female Health’s shareholders. Defendants contend that
this allegation requires the court to interpret Delaware law due to the nature of the
merger. Defendants cite to Delaware case law in support of this contention. Schartz
alleges a breach of fiduciary duty claim against Defendants O.B. Parrish, William R.
Gargiulo, Jr., Donna Felch, David R. Bethune, Andrew S. Love, Mary Margaret
Frank, and Sharon Meckes. Schartz alleges that these Defendants were Female
Health’s officers and/or directors at all relevant times up to and including the
October 31, 2016 transaction. Schartz alleges that Defendants breached their
fiduciary duties by consummating the transaction in violation of the WBCL because
they failed to obtain the affirmative vote of at least two-thirds as statutorily required.
Thus, Schartz’s 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. Schartz’s breach of fiduciary duty claim does
not allege a violation of Delaware law nor would it require the court to interpret
Delaware law. Thus, the breach of fiduciary duty claim is governed solely by
Female Health’s state of incorporation, Wisconsin and the exception applies to these
claims.

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2. Aiding and abetting breach of fiduciary duty
Defendants argue that Schartz’s aiding and abetting a breach of fiduciary duty
claims and unjust enrichment claims do not solely relate to the internal affairs of
Female Health and do not solely involve Wisconsin law. As noted above, “[a] single
rule for each corporation's internal affairs reduces uncertainty and the prospect of
inconsistent obligations; it also enables the corporate venturers to adjust the many
variables of the corporate life, confident that they can predict the legal effect of these
choices” Nagy v. Riblet Products Corp., 79 F.3d 572, 576 (7th Cir. 1996). The
internal-affairs doctrine “recognizes 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.” Edgar, 457 U.S. at 645. Defendants argue that Illinois applies the “most
significant relationship” test for tort claims. As noted above, the internal affairs
doctrine is recognized throughout the States and in Illinois. Schartz argues that the
claims derive solely from the internal affairs of Female Health and actions by its
officers and/or directors under the laws of Wisconsin. The court notes that the aiding
and abetting claim cannot exist without the underlying allegation of breach of
fiduciary duty, which is governed by Wisconsin law. Thus, the aiding and abetting
breach of fiduciary duty claim falls within the internal affairs doctrine and is
governed solely by Wisconsin law and the exception applies to these claims.

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3. Unjust enrichment
Defendants argue that Schartz’s unjust enrichment claims do not solely relate
to the internal affairs of Female Health and do not solely involve Wisconsin law.
Schartz contends that because Female Health is incorporated in Wisconsin, and
because Schartz brings this action under his role as a shareholder, Wisconsin law
governs the claims. Under the choice of law provisions, the internal affairs doctrine
applies to the unjust enrichment claims as well. See Haith v. Bronfman, 928 F. Supp.
2d 964, 968 (N.D. Ill. 2013)(stating that because “Accretive Health is a Delaware
corporation, the internal affairs doctrine provides that Delaware law governs
Plaintiffs' claims,” which include “three counts of breach of fiduciary duty, one count
of unjust enrichment, one count of abuse of control, one count of gross
mismanagement, and one count of waste of corporate assets”). Similarly, the court
finds that Schartz’s allegations fall within the scope of the internal affairs doctrine
and arises under the laws of Wisconsin and the exception applies. Based on the
above, the motion to remand is granted.

II. Sanctions
Schartz also moves for sanctions against Defendants contending that they
intended to interfere with Schartz’s ability to obtain a preliminary injunction in a
timely fashion by filing this frivolous removal. The Seventh Circuit has explained
that parties and/or attorneys may be subject to Federal Rule of Civil Procedure 11
(Rule 11) sanctions “when parties or their attorneys bring legal action for any
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improper purpose, such as to harass or needlessly increase the cost of litigation.”
National Wrecking Co. v. International Broth. of Teamsters, Local 731, 990 F.2d
957, 963 (7th Cir. 1993). A court can impose Rule 11 sanctions “if a lawsuit is not
well grounded in fact and is not warranted by existing law or a good faith argument
for the extension, modification, or reversal of existing law.” Cuna Mut. Ins. Soc. v.
Office and Professional Employees Intern. Union, Local 39, 443 F.3d 556, 560–61
(7th Cir. 2006). In making its Rule 11 inquiry, the court “must undertake an
objective inquiry into whether the party or his counsel should have known that his
position is groundless.” Id. The Seventh Circuit has recognized that “[w]hile the
Rule 11 sanction serves an important purpose, it is a tool that must be used with
utmost care and caution.” Federal Deposit Ins. Corp. v. Tekfen Const. and
Installation Co., Inc., 847 F.2d 440, 444 (7th Cir. 1988).
In the instant action, Schartz has not provided sufficient evidence to show that
Defendants engaged in any intentional delay, harassment, or frivolous argument by
exercising their right to remove this matter to federal court. The mere fact that
Female Health did not prevail does not mean that they, or their counsel, engaged in
sanctionable conduct. The court notes that Defendants exercised their right to
remove this matter under CAFA and Schartz had the burden of proving an exception
to CAFA. The court finds that no objective evidence of bad faith was exercised by
Defendants in this matter. See Cuna Mut. Ins. Soc. v. Office and Professional
Employees Intern. Union, Local, 39, 443 F.3d 556, 560–61 (7th Cir. 2006)(stating
that “[t]he court must ‘undertake an objective inquiry into whether the party or his
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counsel should have known that his position is groundless”). The Defendants
exercised their right to remove this matter and will not be penalized for it. Schartz
has not shown that Female Health or Female Health’s counsel should have concluded
that the removal was groundless. Thus, the motion for sanctions is denied.

CONCLUSION
For the foregoing reasons, the motion to remand is granted and the motion for
sanctions is denied.

___________________________________
Samuel Der-Yeghiayan
United States District Court Judge
Dated: December 14, 2016

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