Plumbers Local No. 137 Pension Fund et al v. Davis et al

Filing 68

OPINION AND ORDER: Upon review, I agree with Judge Acostas recommendation and I ADOPT the F&R 61 as my own opinion. The motion to dismiss 20 is GRANTED, without prejudice, and I GRANT plaintiffs leave to amend their complaint within 30 days of this opinion. If no amended complaint is filed, a judgment of dismissal will enter. Signed on 2/23/12 by Judge Michael W. Mosman. (dls)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON
PORTLAND DIVISION

PLUMBERS LOCAL NO. 137
PENSION FUND, et al.,
Civ. No. 3:11-cv-00633-AC
Plaintiffs,
OPINION AND ORDER
v.
RAYMOND P. DAVIS, et al.,
Defendants,
and
UMPQUA HOLDINGS CORPORATION,
Nominal Party.

MOSMAN, J.,
On January 11, 2012, Magistrate Judge Acosta issued his Findings and Recommendation
(“F&R”) [61] in the above-captioned case, recommending that I grant the Motion to Dismiss
[20] filed by Allyn Ford, Peggy Fowler, Stephen Gambee, Jose Hermocillo, William Lansing,
Luis Machuca, Diane Miller, Hilliard Terry III, Bryan Timm, Frank Whittaker, Raymond Davis,
Bradley Copeland, Ronald Farnsworth, and Mark Wardlow (collectively, the “Individual
Defendants”). The plaintiffs in this case, Plumbers Local No. 137 Pension Fund and Laborers’
Local #231 Pension Fund, filed objections [63] and the Individual Defendants responded [65].

1 – OPINION AND ORDER

STANDARD OF REVIEW
The magistrate judge makes only recommendations to the court, to which any party may
file written objections. The court is not bound by the recommendations of the magistrate judge,
but retains responsibility for making the final determination. The court is generally required to
make a de novo determination regarding those portions of the report or specified findings or
recommendation as to which an objection is made. 28 U.S.C. § 636(b)(1)(C). However, the
court is not required to review, de novo or under any other standard, the factual or legal
conclusions of the magistrate judge as to those portions of the F&R to which no objections are
addressed. See Thomas v. Arn, 474 U.S. 140, 149 (1985); United States v. Reyna-Tapia, 328
F.3d 1114, 1121 (9th Cir. 2003). While the level of scrutiny under which I am required to
review the F&R depends on whether or not objections have been filed, in either case, I am free to
accept, reject, or modify any part of the F&R. 28 U.S.C. § 636(b)(1)(C).
DISCUSSION
This is a derivative action on behalf of Umpqua Holdings Corporation (“Umpqua”).
Judge Acosta recommended dismissal because plaintiffs made no pre-suit demand on the
Umpqua board of directors—who are named defendants in this suit—and failed to sufficiently
plead that any demand would have been futile. See Fed. R. Civ. P. 23.1. Judge Acosta applied
the two-prong futility test articulated in Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984), and
adopted by the Oregon Court of Appeals, which requires a plaintiff to allege “particularized facts
showing that there is a reasonable doubt either that (1) the directors are disinterested and
independent for purposes of responding to the demand or (2) the challenged transaction was
otherwise the product of a valid exercise of business judgment.” Crandon Capital Partners v.
Shelk, 181 P.3d 773, 782 (Or. Ct. App. 2008) (citing Brehm v. Eisner, 746 A.2d 244, 256 (Del.
2000)). Plaintiffs raise two objections, which I will address in turn.
2 – OPINION AND ORDER

First, plaintiffs argue Judge Acosta applied the wrong futility standard. According to
plaintiffs, under Wills v. Nehalem Coal Co., 96 P. 528 (Or. 1908), a pre-suit demand is futile
anytime the suit alleges wrongdoing by a majority of corporate directors. (Pl.’s Obj. [63] 1, 6).1
I reject this invitation to needlessly find such a broad exception to the demand requirement. As
plaintiffs point out, the Wills decision did quote a treatise for the proposition that futility
generally exists when “the defendants charged with the wrongdoing, or some of them, constitute
a majority of the directors.” 96 P. at 534. However, the court went on to hold only that futility
was established due to specific factual allegations that two directors had conflicting interests in
the allegedly wrongful transaction at issue, and that those two directors “exercised complete
control” over the rest of the board. Id. at 535. That holding thus aligns with more recent case
law because Wills simply falls within the first prong of the Oregon (and Delaware) futility
analysis. It is a case where there were “particularized facts” alleged that raised a reasonable
doubt that a majority of directors were “disinterested and independent.” Crandon Capital
Partners, 181 P.3d at 782; see also, Beam v. Stewart, 845 A.2d 1040, 1050 (Del. 2004) (“In
order to show lack of independence, the complaint of a stockholder-plaintiff must create a
reasonable doubt that a director is not so beholden to an interested director . . . that his or her
discretion would be sterilized.”) (quotation omitted).
Thus, Wills does not mean that suing an entire board negates the demand requirement or
the necessity to make particular allegations as to why specific directors are not sufficiently
disinterested or independent. It only means a plaintiff may establish futility via specific factual
allegations that some interested directors controlled an entire board. Here, as Judge Acosta
concluded, there are no specific allegations of that nature. (F&R [61] 11).

1

While plaintiffs did not cite Wills to Judge Acosta, I find they fairly raised this general argument and therefore
reject the Individual Defendants’ suggestion that I not consider this objection.

3 – OPINION AND ORDER

Plaintiffs’ second objection is that, even if Judge Acosta applied the right standard, he did
not properly apply it to the facts. This objection is adequately addressed by the F&R itself. The
only exception is a specific point plaintiffs apparently never raised to Judge Acosta. Plaintiffs
argue that, under the second futility prong, they have overcome the presumption that the
Individual Defendants’ decisions were made in the exercise of valid business judgment because
the Individual Defendants lowered Umpqua’s annual operating earnings per share (“OEPS”)
goals in order to justify performance-based pay increases, and did not disclose this fact to
shareholders. (Pls.’ Obj. [63] 13). However, the fact that Umpqua may have lowered
performance goals after repeated failures to accomplish its prior goals during an economic
downturn is not sufficient to rebut the presumption in the Individual Defendants’ favor. And,
while plaintiffs argue the reductions in the OEPS goals were secret, they cite Umpqua’s proxy
statement to show that these reductions occurred. I therefore reject this argument.
CONCLUSION
Upon review, I agree with Judge Acosta’s recommendation and I ADOPT the F&R [61]
as my own opinion. The motion to dismiss [20] is GRANTED, without prejudice, and I GRANT
plaintiffs leave to amend their complaint within 30 days of this opinion. If no amended
complaint is filed, a judgment of dismissal will enter.
IT IS SO ORDERED.
DATED this 23

day of February, 2012.

/s/Michael W. Mosman
MICHAEL W. MOSMAN
United States District Court

4 – OPINION AND ORDER

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