Ryan v. Morgan Asset Management, Inc. et al

Filing 61

ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS 38 42 45 . Signed by Judge Samuel H. Mays, Jr., on March 10, 2010. (Mays, Samuel)

IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TENNESSEE WESTERN DIVISION IN RE: REGIONS MORGAN KEEGAN SECURITIES, DERIVATIVE, AND ERISA LITIGATION REBECCA RYAN, Plaintiff, v. MORGAN ASSET MANAGEMENT, INC., REGIONS MORGAN KEEGAN MULTISECTOR FUND, et al., Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

Case Nos. MDL 2009 08-2162

ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS

Before the Court are the Motions to Dismiss filed by all Defendants on July 30 and August 19, 2009. 42, 45.) (See Dkt. Nos. 38,

Defendants generally argue that Plaintiff Rebecca Ryan

has failed to show that the Court should excuse her failure to make demand on the board of Nominal Defendant Regions Morgan Keegan Multi-Sector Fund1 (the "Fund") before filing this

derivative suit. Dismiss
1

(E.g., Memorandum in Support of Motion to R. Blair, et al., at 6-8) ("Indiv. Defs.'

by

Jack

The proper name for the Fund during the applicable time period was the Regions Morgan Keegan Multi-Sector High Income Fund. Following a change in control on July 29, 2008, the Fund changed its name to the Helios MultiSector High Income Fund.

Memo");

see

also

Fed.

R.

Civ.

P.

23.1.

Ryan

responded

in

Opposition on September 18, 2009. Plaintiff's response on October

Defendants later replied to 19, 2009 (Dkt. Nos. 53-55),

which generated a sur-reply from Plaintiff on October 26, 2009. (Dkt. No. 56.) by The Court an rejected entire Plaintiff's from attempt a to

incorporate

reference

complaint

related

case, Landers v. Morgan Asset Mgmt., Inc., No. 08-2260 (W.D. Tenn.), via her sur-reply. (See Order Granting in Part

Plaintiff's Motion for Leave to File a Sur-Reply, Dkt. No. 58, at 2-3.) The parties' arguments concluded with Defendants' sur(See Dkt. No. 60.)

sur reply, filed on December 15, 2009.

Because Ryan has failed to plead facts sufficient to excuse the stringent demand requirement of Maryland law, the Court GRANTS Defendants' Motion to Dismiss. A.2d 123, 143-44 (Md. 2001). I. BACKGROUND See Werbowsky v. Collomb, 766

Ryan filed her derivative Complaint on behalf of the Fund on March 13, 2008. (Compl. at 1.) She is a resident of the (Id. ¶ 3.) Morgan which Asset is a

state of Arkansas and a shareholder of the Fund. Named as Defendants Inc., the are the Fund itself and

Management,

Fund's

investment

manager,

wholly-owned subsidiary of MK Holding, Inc.2
2

Ryan has also named

MK Holding is itself a wholly-owned subsidiary of Regions Financial Corporation, the holding company that also owns Regions Bank and the investment firm Morgan Keegan & Company. (Compl. ¶¶ 4-5.)

2

each of the Fund's eight directors (the "Individual Defendants" or "Directors") as Defendants: J. Kenneth Alderman, Jack R.

Blair, Albert C. Johnson, James Stillman R. McFadden, Allen B. Morgan, Jr., W. Randall Pittman, Mary S. Stone, and Archie W. Willis. (Id. ¶¶ 5-13.)

The Fund made its initial public offering to investors on January 23, 2006. As a closed-end fund, the value of its

investments combined with any premium placed on its shares by the market determines its share price. (Id. ¶ 26.) (Id.) The Fund's

initial offering price was $15.00 a share.

The Fund is a

"High Yield" fund, designed to invest in a wide range of debt securities asset-backed distressed securities including "corporate bonds, mortgage-backed securities, These and and

securities, securities."

convertible (Id. ¶

debt

27.) as

distressed and are

are

more

commonly

known

"junk

bonds"

issued by companies with below-investment-grade credit ratings. To attract investors to purchase these more risky investments, the bonds pay a much higher yield to compensate for their higher likelihood of default. of (Id.); see (2d Glenn ed.), Yago, The Concise at

Encyclopedia

Economics

available (last

http://www.econlib.org/library/Enc/JunkBonds.html Mar. 4, 2010).

visited

A significant portion of the Fund's investment portfolio consisted of collateralized debt obligations ("CDOs"). 3 CDOs are

asset-backed, structured credit products that are constructed from a portfolio of fixed-income assets. In the case of the (Compl. ¶ 28.) tranches

Fund, these fixed-income assets were mortgages. Investment professionals divide CDOs into

different

before their sale based on their exposure to risk. least senior, the ratings are AAA, AA to BB,

From most to and unrated

tranches known as equity tranches.

(Id.)

When the value of the

assets backing the CDOs declines because of default, the losses are distributed to the junior tranches first. CDOs do not trade

in open-market exchanges, making it difficult to value them on a frequent basis. (Id. ¶¶ 28-29)

Ryan alleges that a large portion of the CDOs held by the Fund were highly volatile because the assets backing them were subprime mortgages, i.e., those mortgages issued to homebuyers with substandard credit. (Id. ¶ 28.) She also alleges that,

when the subprime mortgage crisis began in the summer of 2007, the Fund continued to hide its exposure to this slumping area of the market to inflate its share price artificially. The Fund began for a to acknowledge first time its exposure it was assets in (Id. ¶ 30.) July 2007,

admitting

the

that for

having

difficulty as the

establishing

"fair

value"

its

because,

subprime market began to plummet, fewer people were willing to purchase CDOs backed by riskier mortgages. (Id. ¶ 31.) On

November 7, 2007, James Kelsoe, the Fund's portfolio manager, 4

wrote a letter to investors revealing the full extent of the Fund's exposure to subprime-mortgage-backed assets. The letter

explained that the Fund had invested 11.4% of its portfolio in those assets. (Id. ¶ 32.) On November 8, 2007, the day after

Kelso released his letter, the Fund's share price closed at $5.41, reflecting a 63% decline from its price on July 13, 2007. (Id. ¶ 33.) The Complaint alleges that the dramatic decline in the

Fund's share price demonstrates that the Fund lacked adequate investment controls and had invested too much of its portfolio in illiquid assets. prospectus misstated (Id. ¶ 34.) the extent Ryan asserts that the Fund's of the Fund's exposure to

mortgage-backed assets, the proper value of those assets, and the extent to which the Fund had to value its assets by fair value, i.e., appraisal, methods. (Id. ¶ 35.) According to

Ryan, the Directors were aware of these misstatements, but did nothing to correct them, violating Generally Accepted Accounting Principles ("Principles"). (Id. ¶¶ 23-24, 35-36.)

Specifically, Ryan alleges that the Defendants' actions caused the Fund to violate the Principles of materiality, completeness, conservatism in valuation, and disclosure of all contingencies when it is possible that a loss may have occurred. i.) These failures further caused the Fund (Id. ¶¶ 42ato violate

5

provisions of Section 13 of the 1934 Securities and Exchange Act and Section 302 of the Sarbanes-Oxley Act. Ryan's derivative Complaint alleges (Id. ¶ 44-45.) that the Individual

Defendants breached their fiduciary duties, grossly mismanaged the Fund, abused assets, their and right unjustly to control the Fund, wasted at the

corporate

enriched

themselves

shareholders' expense.

(Id. ¶¶ 64-69, 78-91.)

It also asserts

that all Defendants violated Section 13 of the 1934 Securities and Exchange Act. (Id. ¶¶ 70-77.) Ryan seeks declaratory

relief; an order requiring the Individual Defendants to disgorge all profits, benefits, and compensation obtained while serving on the Fund's board; reimbursement for damage to the Fund; and reasonable attorneys' and experts' fees. (Id. at 27.)

Defendants filed the present Motions to test the adequacy of Plaintiff's Complaint. II. JURISDICTION AND STANDARD OF REVIEW brings this action under the diversity

Plaintiff

jurisdiction conferred by 28 U.S.C. § 1332(a)(1). a citizen of the state of Arkansas.

Plaintiff is Nominal

(Compl. ¶ 3.)

Defendant Fund is a Maryland corporation whose principal place of business is in Memphis, Tennessee.3 (Id. ¶ 4.) Defendant

Morgan Asset Management, Inc. is an Alabama corporation whose

3

Because the Fund is a Maryland corporation, Maryland law governs the issue of demand. See Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 101 (1991)

6

principal place of business is in Memphis, Tennessee. 5.)

(Id. ¶

None of the eight Individual Defendants is an Arkansas (Id. ¶¶

citizen, and the amount in controversy exceeds $75,000. 1, 5-13.)

In addressing a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), the Court must construe the complaint in the light most favorable to the plaintiff and accept all well-pled factual allegations as true. League of United Latin Am. Citizens v. Bredesen, 500 F.3d 523, 527 (6th Cir. 2007). A plaintiff can support a claim "by

showing any set of facts consistent with the allegations in the complaint." (2007). Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 563

This standard requires more than bare assertions of Bovee v. Coopers & Lybrand C.P.A., 272 F.3d "[A] formulaic recitation of the Twombly, 550 U.S.

legal conclusions.

356, 361 (6th Cir. 2001).

elements of a cause of action will not do." at 555.

Any claim for relief must contain "a short and plain

statement of the claim showing that the pleader is entitled to relief." curiam). Erickson v. Pardus, 551 U.S. 89, 93 (2007) (per

"Specific facts are not necessary; the statement need

only `give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.'" U.S. at 555.) Id. (citing Twombly, 550

7

Nonetheless, a complaint must contain sufficient facts "to `state a claim to relief that is plausible on its face'" to survive a motion to dismiss. Ashcroft v. Iqbal, 129 S. Ct. "This

1937, 1949 (2009) (quoting Twombly, 550 U.S. at 570). plausibility standard is not akin to a

`probability

requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." U.S. at 556). of action, Id. (citing Twombly, 550

"Threadbare recitals of the elements of a cause by mere conclusory statements, do not

supported

suffice." facts and

Id. at 1949 (citation omitted). "armed with nothing more than

A plaintiff with no conclusions" cannot

"unlock the doors of discovery."

Id. at 1950.

When a plaintiff brings a derivative suit, Federal Rule of Civil Procedure 23.1 heightens these notice-pleading

requirements. 2001). The

See McCall v. Scott, 239 F.3d 808, 815 (6th Cir. complaint must "state with particularity" all

efforts undertaken by the plaintiff to make demand on the board of directors or the reasons the plaintiff failed to make demand. Fed. R. Civ. P. 23.1(b)(1)(3). not suffice" under Rule 23.1. "Merely alleging futility will Auletta v. Ortino (In re Ferro

Corp. Derivative Litig.), 511 F.3d 611, 618 (6th Cir. 2008). Rather "the plaintiff must point to facts which show that the presumed ability of the directors to make unbiased, independent business judgments about whether 8 it would be in the

corporation's best interests to file the action does not exist in this case." Id. (quoting Davis v. DCB Fin. Corp., 259 F.

Supp. 2d 664, 670 (S.D. Ohio 2003) (emphasis in original)). Where the complaint does not meet this heightened pleading

standard, a court will dismiss it. III. ANALYSIS

See id. at 623.

A. Plaintiff is not Required to Make Demand on the New Board Before proceeding to the issue of whether the Court can excuse Plaintiff's failure to make demand on the Fund's board at the time she filed suit, the Court must address the argument of the Fund's current board that Plaintiff must make demand on it. The Nominal Defendant notes that, as of July 29, 2008, when control of the Fund changed, the shareholders elected an

entirely new board. Defendant's Motion

(Memorandum of Law in Support of Nominal to Dismiss at 1.) ("Nom. Defs.' Memo")

Because none of the new board members was in office when the events in question allegedly occurred, the Fund asserts that the Court should stay the present action so that it may conduct an appropriate investigation or dismiss the suit. (Id. at 1-2.)

The Fund's fellow Defendants join in this argument and point the Court to Delaware law because Maryland's courts have yet to give guidance on whether a plaintiff must make demand on a board elected after she filed suit. (Independent Directors' Reply

9

Brief in Support of Their Motion to Dismiss at 1-2.) ("Indiv. Defs.' Reply") Defendants are correct that Maryland courts have not

established if and when a plaintiff must make demand on a new board, elected after she commenced her suit. The Court,

therefore, will examine the law of Delaware, a lodestar for corporate law, for guidance on this issue. Delaware law

generally tests whether demand was appropriate at the time the plaintiff filed her original complaint. See Braddock v.

Zimmerman, 906 A.2d 776, 785 (Del. 2006) ("[D]emand is excused only where particularized factual allegations create a

reasonable doubt that, as of the time the complaint was filed, the board of directors could have properly exercised its

independent and disinterested business judgment in responding to a demand." (emphasis added)). In Braddock, the Delaware Supreme

Court held that a plaintiff does not have to make demand on a new board unless the plaintiff files an amended complaint after the new board has taken office and adds new claims unrelated to those already "validly in litigation." Id. at 786. In all

other situations, a court examines whether demand was proper in the context of the board in office when the original complaint was filed. See id.

In the present suit, it is undisputed that Ryan has not amended her Complaint. Therefore, 10 Plaintiff need not make

demand

on

the

Fund's

new

board.

See

id.

at

778-89.

Acknowledging this likely result under Delaware law, Defendants argue that, were it to address the issue, Maryland's highest court would impose a higher standard on derivative plaintiffs and require that they make demand on any new, independent board. (Indiv. Defs.' Reply at 2.) A federal court must predict how a state's highest court would interpret its law where no relevant case law exits. v. Jeff Miller Stables, 573 F.3d 289, 298 (6th Cir. 2009). FDIC The

Court is reluctant to find that the Maryland Court of Appeals would significantly diverge from the general rule that a court looks to the time plaintiff filed her complaint to determine whether demand was proper. Maryland's highest court has not

been reluctant to announce its disagreement with corporate law trends, particularly those that originate in Delaware. See

Werbowsky, 766 A.2d at 144, 146 (establishing higher standard than Delaware for finding demand futile). when reforming Maryland's demand law, the Notably, however, Maryland Court of

Appeals made no mention of any requirement that a plaintiff make demand on a new board that takes office after she files suit. See id. at 135, 146. as an invitation to The Court does not interpret this silence rewrite Maryland's demand requirement

further.

Were the Maryland Court of Appeals faced with the

issue, the Court finds that it would follow the lead of Delaware 11

and

most

other does

states not

and

hold

that

a

change a

in

board in a

composition

automatically

require

plaintiff

pending suit to make demand on the new board. A.2d at 786.

Braddock, 906

The Court, therefore, DECLINES to dismiss Ryan's

suit based on her failure to make demand on the Fund's new board, which took office on July 29, 2008. B. Plaintiff Has Failed to Establish That Demand Was Futile Defendants adequate facts next to argue that Ryan has to failed to plead on the

excuse

her

failure

make

demand

Fund's board at the time she filed suit. Memo at 6-8.)

(E.g., Indiv. Defs.'

Defendants further argue that Maryland statutory

law provides that all directors who meet the requirements for disinterested directors under the Investment Company Act of 1940 are "deemed to be independent and disinterested when making any determination or taking any action as a director." Md. Code

Ann., Corps. & Ass'ns § 2-405.3; (see also Indiv. Defs.' Memo at 8-9.) a Ryan responds that she has pled facts adequate to survive to dismiss to and that the cited Maryland statute is

motion

inapplicable

derivative

actions.

(Plaintiff's

Sur-Reply

Brief in Opposition at 3-5.) 1. The Maryland standard A derivative suit, like the one Ryan brings, is a "suit to enforce a corporate cause of action against officers, directors,

12

and third parties."

Ross v. Bernhard, 396 U.S. 531, 534 (1970) Its purpose is to allow individual

(emphasis in original).

shareholders "to protect the interests of the corporation from the misfeasance and malfeasance of faithless directors and

managers." citation wrongs:

Kamen, 500 U.S. at 95 (internal quotation marks and Derivative suits redress "`two distinct

omitted).

(1) [t]he act whereby the corporation was caused to

suffer damage, and (2) the act of the corporation itself in refusing Mgmt., to redress 380 the said act.'" n.7 Scalisi (2d Cir. v. Fund Asset

L.P.,

F.3d

133,

138

2004)

(quoting

Druckerman v. Harbord, 22 N.Y.S.2d 595, 597 (N.Y. Sup. Ct. 1940) (alteration in original)). Courts have fashioned the

requirement that plaintiffs seeking to bring derivative actions first make demand on the corporation's board to protect the right of the board to manage the company and prevent abuse of the remedy by litigious shareholders. Kamen, 500 U.S. at 95-96.

Thus, the demand requirement provides corporate directors with "an opportunity to exercise their reasonable business judgment and waive a legal right vested in the corporation in the belief that [the corporation's] best interests will be promoted by not insisting on such right." citations omitted). Many states recognize an important check on the power of a corporation to control all litigation: 13 the demand futility Id. (internal quotation marks and

exception.

Id.

at

101.

In

most

jurisdictions,

where

a

corporation's board is deemed unable to exercise its independent business judgment because of a conflict, the law will waive the demand requirement and allow a derivative suit to proceed

without the board's consent.

Id. at 102.

When the "directors'

minds are closed to argument," the futility exception eliminates the board's normal power to veto lawsuits filed on the

corporation's behalf.

In re Ferro Corp. Derivative Litig., 511

F.3d at 618 (internal quotation marks and citation omitted); see also Kamen, 500 U.S. at 101. ("To the extent that a

jurisdiction recognizes the futility exception to demand, the jurisdiction places a limit upon the directors' usual power to control the initiation of corporate litigation." (emphasis in original)). State law determines the contours of both the demand

requirement and the futility exception.

Kamen, 500 U.S. at 101.

Because the Fund is a Maryland corporation, Maryland law will determine the substantive burden Ryan faces in proving that her failure to make demand on the board is excusable because any demand would have been futile. Id. Rule 23.1 governs the

specificity with which Ryan must plead facts sufficient to meet Maryland's substantive standard. See Fed. R. Civ. P.

23.1(b)(1)(3); In re Ferro Corp. Derivative Litig., 511 F.3d at 618. 14

In Werbowsky, the Maryland Court of Appeals reviewed the history of the demand requirement in corporate law in general and Maryland common law in particular. 766 A.2d at 135-142.

The court observed that the demand requirement and the futility exception had a long history in Maryland case law, but that the modern trend "has been to enforce more strictly the requirement of pre-suit demand and at least to circumscribe, if not

effectively eliminate, the futility exception."

Id. at 137.

After taking note of this trend and Delaware's more forgiving futility exception, the Maryland Court of Appeals determined

that both went too far. at 785 (explaining there is a that

Id. at 143. Delaware

Compare Braddock, 906 A.2d law usually that the excuses demand are

where

reasonable

doubt

directors

disinterested or that the challenged transaction was the product of a valid business judgment), with Cuker v. Mikalauskas, 692 A.2d 1042, 1048-49 (Pa. 1997) which (adopting require the American Law

Institute's

Principles,

universal

demand).

Maryland retained "for the time being" the futility exception, but only as a "very limited exception" to a robust demand

requirement.

Werbowsky, 766 A.2d at 144.

Under Maryland law, a court is to excuse demand only: when the allegations or evidence clearly demonstrate, in a very particular manner, either that (1) a demand, or a delay in awaiting a response to a demand, would cause irreparable harm to the corporation, or (2) a majority of the directors are so personally and 15

directly conflicted or committed to the decision in dispute that they cannot reasonably be expected to respond to a demand in good faith and within the ambit of the business judgment rule. Id. A reviewing court must focus its "attention on the real,

limited issue ­ the futility of a pre-suit demand" rather than "preliminary proceeding issues that go more to the merits of the complaint [such as] whether there was, in fact, self-dealing, corporate waste, or a lack of business judgment with respect to the decision . . . under attack." Id. Simply put, "demand . .

. is important," and Maryland law will not easily excuse it. Id. (emphasis in original); see also Washtenaw County Employees' Ret. Sys. v. Wells Real Estate Inv. Trust, Inc., No. 1:07-CV862-CAP, 2008 U.S. Dist. LEXIS 53652, at *42-44 (N.D. Ga. Mar. 31, 2008) (collecting cases and observing that only one highlycriticized case applying the Werbowsky standard has ever found that demand was futile). But see Felker v. Anderson, No. 04-

0372-CV-W-ODS, 2005 U.S. Dist. LEXIS 4236, at *7 (W.D. Mo. Feb. 11, 2005) (summarily concluding that plaintiff met Werbowsky

standard and demonstrated demand futility). 2. Plaintiff fails to meet the Werbowsky test Ryan's Complaint alleges that demand was futile because a majority of the directors were conflicted. also Werbowsky, 766 A.2d at 144 (second (Compl. ¶ 50.); see prong of futility

exemption).

To support her contention she alleges that 1) each

16

of

the

directors of 2)

participated false because they they

in,

ratified, misleading

or

approved

the to the and

dissemination shareholders; alleged persons

and the would

statements in

directors have "to

participated sue

wrongdoing, with whom

themselves and

have

extensive

business

personal

entanglements"; 3) each member of the board receives extensive remuneration for his or her services as well as "other

emoluments" that he or she would lose; 4) the Directors are beholden therefore to the Fund be and the to Fund's the parent companies 5) if and the

would

hostile

action;

and

Directors had to sue fellow directors, their liability insurance policies would not cover any resulting judgment. 62.) (Compl. ¶¶ 51-

Defendants argue that Ryan's allegations fail to meet (E.g., Indiv. Defs.'

Maryland's high standard to waive demand. Memo at 8.)

Werbowsky flatly rejected the notion that a plaintiff may excuse demand based on an allegation that directors "are well paid for their services." 766 A.2d at 143; cf. Scalisi, 380

F.3d at 136, 142 (applying Maryland law and finding that demand was not waived where each of a fund's nine directors sat on forty-nine annually). [directors] boards and made between $160,000 and $260,000

Nor are "generalized or speculative allegations that are conflicted or controlled by other conflicted Werbowsky,

persons" adequate to waive the demand requirement. 17

766 A.2d at 143.

In a case applying Maryland law, the Supreme

Court has recognized as unremarkable the fact that investment companies, such as the Fund, typically have the same entity underwrite and organize them. Kamen, 500 U.S. at 93. If a

plaintiff could simply waive demand through an allegation that a fund's organizer also appointed the Board, the demand

requirement would evaporate ­ a result directly opposed to the Maryland Court of Appeals' holding that futility is to be "a very limited exception." For similar in, Werbowsky, 766 A.2d at 144. the or allegation approved that the Directors alleged

reasons, ratified,

participated

some

of

the

wrongful conduct cannot excuse demand. the demand requirement a chimera.

This, too, would make

The Maryland Court of Appeals

has explained that the demand requirement often "may be [the directors'] first knowledge that a decision or transaction they made or approved is being questioned." Id. Demand allows

directors the opportunity "to consider, or reconsider, the issue in dispute." Id. On learning of an aggrieved shareholder's

complaint, the board can investigate the allegations itself or appoint a special litigation committee. Id. Because "the

futility exception [would] eliminate[] any chance at meaningful pre-litigation alternative dispute resolution," courts should

not allow mere allegations of director wrongdoing to waive the demand requirement. See id.; accord In re Franklin Mut. Funds 18

Fee

Litig.,

388

F.

Supp.

2d

451,

470

(D.N.J.

2005)

("Mere

approval of the challenged transactions . . . is not enough to excuse the failure to make a demand." (citing Werbowsky, 766 A.2d at 143-44)). Finally, the allegation that Directors may have to sue

themselves or their fellow board members and thereby void their liability insurance coverage is not enough to waive demand under Maryland law. Although the Maryland Court of Appeals has yet to

address this issue directly, other courts applying Maryland law have found that lack of insurance coverage is not enough to waive demand under Werbowsky. See, e.g., In re InfoSonics Corp.

Derivative Litig., No. 06cv1336 BTM(WMc), 2007 U.S. Dist. LEXIS 66043, at *20 n.1 (S.D. Cal. Sept. 4, 2007) (declining to find Werbowsky would waive demand because directors' insurance would not cover potential judgment); Sekuk Global Enters. Profit

Sharing Plan v. Kevenides, Nos. 24-C-03-007496, 24-C-03-007876, 24-C-03-008010, 2004 Md. Cir. Ct. LEXIS 20, at *24 (Md. Cir. Ct. May 25, 2004) (predicting that the Maryland Court of Appeals would decline to adopt an "insured-versus-insured" argument for waiving demand). Courts routinely find that allegations that

the directors might have to sue themselves or other directors do not waive demand. LEXIS 66043, at See In re InfoSonics Corp., 2007 U.S. Dist. *22 (noting that such a holding would

"eviscerate the demand requirement" anytime a plaintiff alleged 19

that a director had committed wrongdoing); id. at *20 ("[A]ll well-pled complaints would be able to establish demand futility" under such a standard); cf. Werbowsky, 766 A.2d at 144 (noting that the demand requirement allows directors to reconsider their prior decisions). futility Indeed, when interpreting the less stringent of Ohio law, the Sixth Circuit has

requirements

declined to hold that the possibility of directors' having to sue themselves and lose their insurance coverage waives demand. In re Ferro Corp., 511 F.3d at 622; see also In re Ferro Corp., 511 F.3d at 622 (noting that the result would be the same under Delaware law (citing Orloff v. Schulman, No. 852-N, 2005 Del. Ch. LEXIS 184, at *50-51 (Del. Ch. Nov. 23, 2005))). None of

the Complaint's allegations excuses Plaintiff's failure to make demand on the Fund's board.4 IV. CONCLUSION

Maryland law requires that Ryan make demand on the Fund's board before Ryan filing failed suit. to See Werbowsky, demand, 766 the A.2d Court at 144.

Because

make

any

GRANTS

It is unnecessary to decide the effect, if any, Maryland Code Annotated, Corporations and Associations § 2-405.3 might have on directors' independence. There is a split of authority on the issue. Compare In re Mut. Funds Inv. Litig., 384 F. Supp. 2d 873, 879 (D. Md. 2005) (finding that there is "no question" that the statutory presumption applies in the context of demand futility), with Scalisi, 380 F.3d at 139 n.11 (finding that the statute does not apply because it "is not directed specifically to derivative actions," which in Maryland are solely creatures of common, rather than statutory, law), and Werbowsky, 766 A.2d at 145-146 (resolving demand issue without mentioning § 2-405.3). Even absent a presumption of independence, Plaintiff's Complaint fails to plead facts sufficient to waive demand on the board.

4

20

Defendants' PREJUDICE to

Motions the

and

DISMISSES right to

Plaintiff's seek

suit

WITHOUT for any

Fund's

remuneration

perceived wrongs on the completion of its board's investigation. So ordered this 10th day of March, 2010.

s/ Samuel H. Mays, Jr. SAMUEL H. MAYS, JR. UNITED STATES DISTRICT JUDGE

21