New Opinion from the Third Circuit on Assertion of Derivative Claims Against Company Executives in Bankruptcy

A copy of the opinion is embedded below.

Full text:

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______
No. 14-1204
______
IN RE: SEMCRUDE L.P., et al.,
Debtors
Thomas L. Kivisto,
Appellant
______
On Appeal from United States Bankruptcy Court
for the District of Delaware
(08-bk-11525)
Honorable Brendan L. Shannon, U.S. Bankruptcy Judge
______
Argued December 9, 2014
Before: FUENTES, FISHER and KRAUSE, Circuit Judges.
______
JUDGMENT
______
This cause came on to be heard on the record from the United States Bankruptcy
Court for the District of Delaware and was argued on December 9, 2014.
On consideration whereof, it is now hereby ORDERED and ADJUDGED that the
order of the Bankruptcy Court entered January 24, 2014, be and the same is hereby
reversed. All of the above in accordance with the opinion of this Court.
Costs taxed against Appellees.
Attest:
s/Marcia M. Waldron
Clerk
Dated : September 8, 2015
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 6F il e dP a0g9e/0: 91/ 1 5 D Pataeg Fe il1e do:f 0298/08/2015
No. 14-1204
IN RE: SEMCRUDE L.P., et al.
page 2
Costs taxed in favor of Appellant In re Semcrude L.P. as follows:
Brief $114.31
Appendix $332.86
Reply Brief $94.31
Docketing Fee $450.00
Sales Tax $ 41.28
TOTAL $991.48

Case: 14-1204 Document: 003112066956 Page: 2 Date Filed: 09/08/2015
Certified as a true copy and issued in lieu
of a formal mandate on
Teste:
Clerk, U.S. Court of Appeals for the Third Circuit
Case 08-11525-BLS Doc 9721 Filed 09/09/15 Page 2 of 28
PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______
No. 14-1204
______
IN RE: SEMCRUDE L.P., et al.,
Debtors
Thomas L. Kivisto,
Appellant
______
On Appeal from United States Bankruptcy Court
for the District of Delaware
(08-bk-11525)
Honorable Brendan L. Shannon, U.S. Bankruptcy Judge
______
Argued December 9, 2014
Before: FUENTES, FISHER and KRAUSE, Circuit Judges.
(Filed: August 5, 2015 )
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 91/ 1 5 D Pataeg Fe il3e do:f 0298/08/2015
2
Paul R. Bessette, Esq. ARGUED
James P. Sullivan, Esq.
King & Spalding
401 Congress Avenue
Suite 3200
Austin, TX 78701
Counsel for Appellant
Andrew S. Hicks, Esq.
Adam P. Schiffer, Esq. ARGUED
Schiffer Odom Hicks & Johnson
700 Louisiana
Suite 2640
Houston, TX 77002
Gary F. Seitz, Esq.
Gellert Scali Busenkell & Brown
601 Walnut Street
The Curtis Center, Suite 280 South
Philadelphia, PA 19106
Counsel for Appellees
______
OPINION OF THE COURT
______
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 92/ 1 5 D Pataeg Fe il4e do:f 0298/08/2015
3
FISHER, Circuit Judge.
Thomas L. Kivisto, co-founder and former President
and CEO of SemCrude L.P., an Oklahoma-based oil and gas
company, allegedly drove SemCrude into bankruptcy through
his self-dealing and speculative trading strategies.
SemCrude’s Litigation Trust sued Kivisto, and the parties
reached a settlement agreement and granted a mutual release
of all claims. One month later, a group of SemCrude’s
former limited partners (collectively, “Oklahoma Plaintiffs”)
sued Kivisto in state court, alleging breach of fiduciary duty,
negligent misrepresentation, and fraud. Kivisto filed an
emergency motion to enjoin the state action on the theory that
the Oklahoma Plaintiffs’ claims derived from the Litigation
Trust’s claims, which the U.S. Bankruptcy Court for the
District of Delaware granted. On appeal, the U.S. District
Court for the District of Delaware reversed, concluding that
the claims were possibly direct and remanded. The
Bankruptcy Court thereafter adopted the District Court’s
order in its entirety and denied injunctive relief. Because we
conclude that the claims are derivative, we will reverse.
I.
A.
Kivisto co-founded SemCrude in Tulsa, Oklahoma, in
2000 and served as its President and CEO until 2008.
SemCrude provided transportation, storage, distribution, and
other oil-and-gas services to crude oil producers and refiners
across North America’s energy corridor. By 2006, SemCrude
became one of the largest privately-held companies in the
United States, with assets worth almost $14 billion.
In 2007 and 2008, however, SemCrude was driven into
bankruptcy, the cause of which is disputed by the parties.
Kivisto blames the company’s collapse on, among other
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 93/ 1 5 D Pataeg Fe il5e do:f 0298/08/2015
4
market factors, rising oil prices and tight credit markets that
were inhospitable to Kivisto’s previously successful trading
strategy. The Oklahoma Plaintiffs, on the other hand, blame
Kivisto for “engag[ing] in a pattern of egregious self-dealing
and related-party transactions, commingl[ing] personal and
corporate funds, and ma[king] wildly speculative trades for
his own benefit” that allegedly caused SemCrude billions of
dollars in losses. Appellees’ Br. at 2 n.1. In particular, they
allege that Kivisto used SemCrude’s funds to place bets on oil
for his personal benefit through a trading company that he
owned with his wife, Westback Purchasing Company, LLC
(“Westback”), causing SemCrude to incur a $290 million
receivable; and engaged in high-risk, double-or-nothing
trades on behalf of SemCrude, stripping SemCrude of its
ability to finance its operations and causing over $3 billion in
losses. App. 333-43.
The Oklahoma Plaintiffs further allege that Kivisto
concealed these decisions and actively misrepresented
SemCrude’s financial health and stability in order to induce
them to invest additional capital or retain their investments in
SemCrude. They specifically assert that Kivisto, among other
things, misrepresented that SemCrude’s “trading positions
were always ‘delta neutral’” and that it “‘closed its positions
in its trading books every day,’” and concealed the existence
of his personal trading scheme as well as SemCrude’s trade
exposure and attendant risks. App. 338. The Oklahoma
Plaintiffs claim that “Kivisto made these misrepresentations
to [the Oklahoma] Plaintiffs during shareholders’ meetings,
‘informative unitholder meetings,’ and other meetings—both
formal and informal” in 2000; 2001; April and September
2002; July 2003; December 2004; and later. App. 338. In
“reli[ance] upon Kivisto’s representations,” the Oklahoma
Plaintiffs allege that they “contributed millions of dollars to
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 94/ 1 5 D Pataeg Fe il6e do:f 0298/08/2015
5
Sem[Crude] through capital contributions made [i]n”
December 2000; November 2002; December 2003; January
2005; and May 2006. App. 338.
They also allege that “Kivisto was particularly
aggressive in his efforts to induce [the Oklahoma] Plaintiffs
to make their 2006 capital contributions.” App. 338. On or
about May 25, 2006, during a lunch meeting at Southern Hills
Country Club in Tulsa that occurred one day before a capital
contribution deadline, “Kivisto approached certain of the
[Oklahoma] Plaintiffs and made several statements clearly
intended to induce them to make these capital contributions.”
App. 338. He allegedly told some of the Oklahoma Plaintiffs
that “you’ve got 24 hours to get your money in,” and “you
don’t want to miss this one,” emphasizing that the value of
their shares would increase substantially in the future and that
failing to make the contributions would cause them financial
loss. App. 338-39 (internal quotation marks omitted). Those
Oklahoma Plaintiffs contributed several million dollars to
SemCrude shortly thereafter.
In essence, the Oklahoma Plaintiffs claim that, as a
result of their personal dealings with Kivisto, they “acted
and/or forewent certain actions in reliance upon Kivisto’s
misrepresentations and omissions. . . . [This is] illustrated, in
part, by the millions of dollars [the Oklahoma] Plaintiffs paid
to Sem[Crude] in the form of capital contributions.” App.
350. They distinguish themselves from other limited partners
because they allege that Kivisto’s misrepresentations were
made specifically to them. They also distinguish themselves
as “non-insider” limited partners, claiming that all other
limited partners held board or management positions or were
involved in “sweetheart side deals” with Kivisto, which
allowed these “insiders” to obtain information not available to
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 95/ 1 5 D Pataeg Fe il7e do:f 0298/08/2015
6
the Oklahoma Plaintiffs or dissuaded them from disclosing
Kivisto’s alleged misconduct. Appellees’ Br. at 2.
B.
On July 22, 2008, SemCrude, its parent company,
SemGroup L.P., and certain direct and indirect subsidiaries
(collectively, “SemCrude”) filed for Chapter 11 bankruptcy in
the U.S. Bankruptcy Court for the District of Delaware. The
Bankruptcy Court entered a confirmation order on October
28, 2009, confirming SemCrude’s plan of reorganization.
The reorganization plan established a Litigation Trust and
transferred to it the claims belonging to SemCrude’s
bankruptcy estate. The Litigation Trust was therefore entitled
to pursue SemCrude’s claims and distribute the money it
recovered to SemCrude’s creditors.
In 2009, the Litigation Trust1 asserted against Kivisto,
certain former SemCrude officers, and Westback thirty claims
related to breach of fiduciary duty, breach of contract,
fraudulent transfer, and unjust enrichment. See App. 61-150.
Following mediation, the parties reached a $30 million
settlement agreement (that was paid out of the directors’ and
officers’ liability insurance policies) and granted a mutual
release of all claims. The Litigation Trust also discharged
Kivisto and the other SemCrude officers from liability to any
party for contribution or indemnity relating to the released
claims. The Bankruptcy Court approved the settlement
agreement on November 19, 2010.
1 More precisely, the Litigation Trust was substituted
as the plaintiff in an adversary proceeding brought by an
unofficial committee of SemCrude’s unsecured creditors.
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 96/ 1 5 D Pataeg Fe il8e do:f 0298/08/2015
7
One month later, on December 22, 2010, the
Oklahoma Plaintiffs2 filed suit against Kivisto and
PriceWaterhouseCoopers LLP (“PwC”), SemCrude’s prebankruptcy
auditor, in the Tulsa County District Court in
Oklahoma. Asserting injuries allegedly separate and distinct
from the injuries sustained by SemCrude, the Oklahoma
Plaintiffs sought money damages from Kivisto for breach of
fiduciary duty, negligent misrepresentation, and fraud, and
from PwC for professional negligence and a violation of the
Oklahoma Accountancy Act. See App. 325-53. PwC
removed the case, but the U.S. District Court for the Northern
District of Oklahoma remanded the case back to state court.
Ultimately, although PwC is not a party to this appeal, the
Bankruptcy Court enjoined the action against PwC as
derivative on October 7, 2011,3 and the District Court
affirmed that order on November 15, 2012.
On May 4, 2011, Kivisto filed an emergency motion in
the Bankruptcy Court to enjoin the Oklahoma Plaintiffs’
lawsuit from proceeding in state court and, specifically, to
enforce the confirmation order, the terms of the
reorganization plan, and the settlement agreement. He
alleged that the Oklahoma Plaintiffs’ claims belonged to the
Litigation Trust and had been released. SemCrude and the
Litigation Trust joined the motion.
2 The Oklahoma Plaintiffs include Cottonwood
Partnership, L.L.P; Dunbar Family Partnership, L.P.; Rosene
Family L.L.C.; Warren F. Kruger; Katherine A. Kruger;
David S. Kruger; and Kathryn E. Shelley.
3 Prior to the Oklahoma Plaintiffs’ suit, the Litigation
Trust sued PwC in the Tulsa County District Court for
professional negligence, breach of fiduciary duty, and a
violation of the Oklahoma Accountancy Act.
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 97/ 1 5 D Pataeg Fe il9e do:f 0298/08/2015
8
The Bankruptcy Court granted the motion to enjoin all
three claims on October 7, 2011. It explained that the
Oklahoma Plaintiffs’ claims were derivative causes of action
for the following reasons: (1) “[T]he injury suffered by the
Oklahoma Plaintiffs is no different from the injury suffered
by SemCrude as a result of Kivisto’s wrongful conduct”; (2)
the Oklahoma Plaintiffs did not show that Kivisto owed them
any duties distinct from his fiduciary duties owed to
SemCrude and its other equity holders; and (3) any recovery
would be deemed equity in SemCrude’s estate and, therefore,
the Oklahoma Plaintiffs would not be entitled to recovery
outside the terms of the reorganization plan. App. 19. The
parties agreed to stay the lawsuit in state court pending final
resolution of these proceedings.
The Oklahoma Plaintiffs appealed to the District
Court, and, on November 15, 2012, the District Court
reversed and remanded the Bankruptcy Court’s order on all
three claims. The District Court explained that the
Bankruptcy Court did not properly consider the Oklahoma
Plaintiffs’ claims that they had been separately harmed and
found that there was a sufficient basis to conclude that they
had been. As to negligent misrepresentation and fraud, it
pointed to Kivisto’s misrepresentations to the Oklahoma
Plaintiffs “personally to induce them to make capital
contributions.” App. 36. As to breach of fiduciary duty, it
pointed to “the length and nature” of Kivisto’s relationship
with the Oklahoma Plaintiffs and the “trust and confidence
reasonably placed by [the Oklahoma] Plaintiffs in the
integrity and loyalty of Kivisto.” App. 37 (internal quotation
marks omitted). Therefore, since the Oklahoma Plaintiffs
sufficiently alleged distinct duties, they “may be able to
demonstrate entitlement to a recovery separate from
Case: 14C-a1s2e0 40 8 – 1 D1o5c2u5m-BeLnSt: 0 0D3o1c1 92702616 9 5 F7 il e d P 0a9g/e0:9 8/1 5 D Paateg eF 1ile0d o: f0 298/08/2015
9
Sem[Crude].” App. 37. The District Court thereafter denied
Kivisto’s motion for rehearing on March 12, 2013.
On remand, the Bankruptcy Court denied Kivisto’s
motion to enjoin the negligent misrepresentation and fraud
claims, but granted the motion with respect to the breach of
fiduciary duty claim. This order was entered on July 2, 2013,
and both Kivisto and the Oklahoma Plaintiffs appealed. On
October 30, 2013, the Bankruptcy Court amended its order
and “adopt[ed] and incorporate[d] by reference herein the
legal analysis, findings of fact and conclusions of law of the
District Court’s November 15, 2012 [] [o]rder, in its entirety.”
App. 6. It therefore denied Kivisto’s motion to enjoin with
respect to all three claims. Kivisto timely appealed from the
amended order.
II.
Because Kivisto’s motion to enjoin is related to the
Chapter 11 reorganization plan and requires a determination
that the Oklahoma Plaintiffs’ claims are property of the
Litigation Trust, the Bankruptcy Court had subject-matter
jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(A). This
Court exercises jurisdiction over Kivisto’s direct appeal
pursuant to certification by the Bankruptcy Court, the District
Court, and the parties acting jointly under 28 U.S.C. §
158(d)(2).4
4 The Bankruptcy Court certified Kivisto’s request for
direct appeal to the Third Circuit in its October 30, 2013,
amended order; the parties jointly certified the appeal on
November 22, 2013; and the District Court certified the
parties’ joint request on March 11, 2014, and Kivisto’s
request on March 31, 2014. This Court authorized the appeal
on January 21, 2014.
Case: 14C-a1s2e0 40 8 – 1 D1o5c2u5m-BeLnSt: 0 0D3o1c1 92702616 9 5 F7 il e d P 0a9g/e0:9 9/1 5 D Paateg eF 1ile1d o: f0 298/08/2015
10
This Court “review[s] the Bankruptcy Court’s factual
findings under a clearly erroneous standard and exercise[s]
plenary review over legal issues.” In re Emoral, Inc., 740
F.3d 875, 879 (3d Cir. 2014). Whether a claim is derivative
or direct is a question of (state) law, see Official Comm. of
Unsecured Creditors v. R.F. Lafferty & Co., Inc., 267 F.3d
340, 348 (3d Cir. 2001), so we exercise plenary review.
While we review a court’s denial of injunctive relief for abuse
of discretion, plenary review of the issue of derivative status
is appropriate here because “[a] district court by definition
abuses its discretion when it makes an error of law.” Koon v.
United States, 518 U.S. 81, 100 (1996).
III.
“The derivative injury rule holds that a shareholder . . .
may not sue for personal injuries that result directly from
injuries to the corporation.” In re Kaplan, 143 F.3d 807, 811-
12 (3d Cir. 1998) (applying Illinois law). The rule is
premised on the legal fiction of corporate existence, in which
“an injury to the corporate body is legally distinct from an
injury to another person.” Official Comm. of Unsecured
Creditors, 267 F.3d at 348. Under Oklahoma law, which the
parties concede controls here, the derivative injury rule does
not apply when a shareholder alleges that he or she “sustained
any loss in addition to the loss sustained by the corporation.”
Dobry v. Yukon Elec. Co., 290 P.2d 135, 138 (Okla. 1955)
(emphasis added). This standard extends to limited
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 91/01 5 DPatgee F 1il2e do:f 0298/08/2015
11
partnerships.5 Okla. Stat. Ann. tit. 54, § 500-1001A(b) (“A
partner commencing a direct action under this section is
required to plead and prove an actual or threatened injury that
is not solely the result of an injury suffered or threatened to
be suffered by the limited partnership.”).
We discuss the Oklahoma Plaintiffs’ claims for (A)
negligent misrepresentation and fraud6 and (B) breach of
fiduciary duty in turn. The Court ultimately concludes that
the Oklahoma Plaintiffs fail to show “any loss in addition to”
SemCrude’s loss and, therefore, that their claims derive from
the claims released by the Litigation Trust.
5 Under Oklahoma law, we may rely upon corporate as
well as partnership case law in analyzing the derivative/direct
nature of the Oklahoma Plaintiffs’ claims because the
determination is substantially the same in the corporate and
limited partnership contexts. See Lenz v. Associated Inns &
Rests. Co. of Am., 833 F. Supp. 362, 379 n.18 (S.D.N.Y.
1993) (applying Oklahoma law); see also Adco Oil Co. v.
Rovell, 357 F.3d 664, 666 (7th Cir. 2004) (construing
Oklahoma law and applying the derivative injury rule in a
limited partnership context).
6 The District Court and the parties treat negligent
misrepresentation and fraud together in light of their doctrinal
similarity under Oklahoma law. See App. 36 (citing
Roberson v. PaineWebber, Inc., 998 P.2d 193, 197 (Okla.
Civ. App. 1999) (stating the elements for fraud); Ragland v.
Shattuck Nat’l Bank, 36 F.3d 983, 991 (10th Cir. 1994)
(stating the elements for negligent misrepresentation)).
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 91/1 5 DPatgee F 1il3e do:f 0298/08/2015
12
A.
1.
Before analyzing whether the Oklahoma Plaintiffs’
claims state derivative or direct causes of action, we lay out
the analytical framework established by the Supreme Court of
Oklahoma in Dobry v. Yukon Electric Company, 290 P.2d at
138. The parties agree that Dobry creates the governing
standard for determining the derivative status of claims in
Oklahoma.
The Dobry Court considered whether the plaintiffstockholder
could bring a direct claim against the directors of
a corporation whose fraudulent conduct resulted in loss “by
depriving [the shareholder] of dividends which he might
otherwise have received or by depressing the value of his
stock.” Id. at 137. Adopting the universal principles
underlying the derivative injury rule, the Court explained that
there is no individual loss in such a situation:
In view of the legal concept of corporate entity
under which stockholders as such lose their
individualities in the individuality of the
corporation as a separate and distinct person,
and of the fact that stockholders by investing
their money in the corporation recognize it as
the person primarily entitled to control and
manage its use for the common benefit of all the
stockholders, it is a well-established general
rule that a stockholder of a corporation has no
personal or individual right of action against
third persons, including officers and directors of
the corporation, for a wrong or injury to the
corporation which results in the destruction or
depreciation of the value of his stock, since the
wrong thus suffered by the stockholder is
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 91/21 5 DPatgee F 1il4e do:f 0298/08/2015
13
merely incidental to the wrong suffered by the
corporation and affects all stockholders alike.
Id. (quoting H.A. Wood, Stockholder’s Right to Maintain
(Personal) Action Against Third Person as Affected by
Corporation’s Right of Action for the Same Wrong, 167
A.L.R. 280 (1947)) (emphasis added). In other words, the
Court underscored, where the alleged loss stems from
management’s wrong to the corporation that incidentally
affects the shareholder’s stock and affects all shareholders
alike, the rights are derivative. This is because “‘[i]t was not
as individuals that plaintiffs suffered detriment and damage,
but as stockholders in common with others similarly situated.
No fraud or deceit was practiced on plaintiffs, nor was any
illegal act performed to their detriment, which was not
common to all persons similarly situated in their legal
relations to defendants.’” Id. at 138 (quoting Stuart v.
Robertson, 248 P. 617, 619 (Okla. 1926)).
The Court reiterated the following rule: “‘If the
plaintiff has sustained no loss in addition to the loss to the
corporation, the action cannot be maintained as an individual
even though the wrongful acts were done with the specific
intent of injuring the plaintiff.’” Id. at 137 (quoting 12B
Fletcher Cyc. Corp. § 5914). It concluded that “[i]n the
instant case the plaintiff did not allege . . . that he sustained
any loss in addition to the loss sustained by the corporation.
His loss was only incidental to the corporation’s loss and
under the rules set forth herein, his rights were derivative.”
Id. at 138.
With this backdrop, we turn to whether the Oklahoma
Plaintiffs allege direct claims—that is, whether they allege
loss “in addition to” SemCrude’s loss.
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 91/31 5 DPatgee F 1il5e do:f 0298/08/2015
14
2.
Because whether a suit is derivative or direct is drawn
from the face of the complaint, see 12B Fletcher Cyc. Corp. §
5913, our analysis is drawn from the state-court petition filed
by the Oklahoma Plaintiffs against Kivisto.
The Oklahoma Plaintiffs’ first claim for distinct loss is
based on Kivisto’s alleged face-to-face misrepresentations
and omissions directed at the Oklahoma Plaintiffs during
formal and informal limited partner meetings, in particular the
2006 lunch meeting at the Southern Hills Country Club, and
based on their alleged status as “non-insider” limited partners.
They allege that they relied on Kivisto’s inducement by
(a) making additional capital contributions and (b) foregoing
opportunities to sell their limited partner units.
Kivisto counters that the Oklahoma Plaintiffs are
functionally indistinguishable from any other investor who
acted upon or forewent opportunities to sell their limited
partner units as a result of Kivisto’s misrepresentations and
omissions. He argues that all SemCrude limited partners
suffered the same loss of capital on a pro rata basis as a result
of his alleged misconduct and, therefore, the Oklahoma
Plaintiffs’ “[r]espective losses differ only in amount, not in
kind,” making their claims derivative. Appellant’s Br. at 30.
We agree. “It is well settled that an injury done to the
stock and capital of a corporation by the negligence or
misfeasance of its officers and directors is an injury done to
the whole body of stockholders in common, and not an injury
for which a single stockholder can sue.” Stuart, 248 P. at 619
(internal quotation marks omitted); see also 12B Fletcher
Cyc. Corp. § 5913 (“The reasoning behind this rule is said to
be that a diminution in the value of corporate stock resulting
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 91/41 5 DPatgee F 1il6e do:f 0298/08/2015
15
from some depreciation or injury to corporate assets is a
direct injury only to the corporation; it is merely an indirect or
incidental injury to an individual shareholder.”). Nor may
claims for corporate mismanagement be brought directly. See
Weston v. Acme Tool, Inc., 441 P.2d 959, 962 (Okla. 1968)
(“The remedial rights of minority stockholders with respect to
wrongs committed against the corporation by the officers and
directors in the management of corporate affairs are
derivative rights . . . .”). Accordingly, to the extent the
Oklahoma Plaintiffs’ claims are masked claims for a
diminution in value of their limited partner units as a result of
Kivisto’s mismanagement, their claims are derivative of the
claims released by the Litigation Trust. See Lipton v. News
Int’l, Plc, 514 A.2d 1075, 1078 (Del. 1986), disapproved of
on other grounds by Tooley v. Donaldson, Lufkin & Jenrette,
Inc., 845 A.2d 1031 (Del. 2004) (“[W]e must look to the
nature of the wrongs alleged in the body of the complaint, not
to the plaintiff’s designation or stated intention.”); Arent v.
Distribution Scis., Inc., 975 F.2d 1370, 1373 (8th Cir. 1992)
(“[T]he fact that plaintiffs framed the harm as a direct fraud
[does] not permit them to go forward on a claim that [i]s, at
its core, derivative.”).
Of course, the Oklahoma Plaintiffs oppose this
characterization and attribute their injury before SemCrude’s
bankruptcy in 2008 to the various times when the Oklahoma
Plaintiffs contributed additional capital or retained their
investments as a result of Kivisto’s inducement. They argue
that, at the times they were induced to contribute, the capital
they received was not worth what they paid. However, closer
scrutiny reveals that the gravamen of the Oklahoma
Plaintiffs’ injury is the demise of SemCrude as a result of
Kivisto’s alleged misconduct. That is, the course of conduct
underlying the Oklahoma Plaintiffs’ alleged loss—i.e.,
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 91/51 5 DPatgee F 1il7e do:f 0298/08/2015
16
Kivisto’s failure to disclose his risky trades or self-dealing or
actively misrepresenting SemCrude’s trading positions—is
the exact same conduct underlying the alleged cause of
SemCrude’s bankruptcy and, therefore, the Litigation Trust’s
released claims against Kivisto. See App. 326 (asserting in
their state court petition that Kivisto’s speculative trading
strategy and self-dealing caused the Oklahoma Plaintiffs to
“los[e] the full value of their limited partnership units when
Sem[Crude] declared bankruptcy in July 2008”). Thus, the
Bankruptcy Court got it right the first time it passed on the
issue: “[T]he injury suffered by the Oklahoma Plaintiffs is no
different from the injury suffered by SemCrude as a result of
Kivisto’s wrongful conduct. Indeed, the Oklahoma Plaintiffs’
alleged loss of capital went hand-in-hand with the titanic
losses that SemCrude suffered in the run-up to its bankruptcy
filing.” App. 19. The Oklahoma Plaintiffs’ alleged injury
therefore derives from SemCrude’s injury. See, e.g., Arent,
975 F.2d at 1374 (“[Plaintiffs’] claim also fails as a matter of
law because any injury to plaintiffs was not caused by [the
corporation’s] failure to disclose. Plaintiffs were not harmed
because they were unable to realize the true value of their
stock—they were harmed because the true value of their stock
was zero.”); Crocker v. FDIC, 826 F.2d 347, 350-51 (5th Cir.
1987) (holding that minority shareholders’ claims that they
“would have” sold their stock had they known that the
corporation was failing was, at its core, nothing more than a
derivative claim for diminution in the value of corporate
stock).
Accordingly, the Oklahoma Plaintiffs are unable to
show that they experienced any loss “in addition to” the other
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 91/61 5 DPatgee F 1il8e do:f 0298/08/2015
17
equity holders or, equally, the company,7 who were injured
by Kivisto’s alleged misconduct and experienced the same
pro rata loss by investing or failing to divest their units.
“Where all of a corporation’s stockholders are harmed and
would recover pro rata in proportion with their ownership of
the corporation’s stock solely because they are stockholders,
then the claim is derivative in nature.” Feldman v. Cutaia,
951 A.2d 727, 733 (Del. 2008); see also Empire Life Ins. Co.
of Am. v. Valdak Corp., 468 F.2d 330, 335 (5th Cir. 1972)
(explaining that claims are derivative where “each
shareholder suffers relatively in proportion to the number of
shares he owns”). Try as they may to distinguish themselves
from other limited partners, the Oklahoma Plaintiffs’ losses
differ only in amount, not in kind.
And even if the Court found arguendo that the
Oklahoma Plaintiffs were uniquely harmed, the Oklahoma
Plaintiffs still may not bring claims directly because they
have no right to recover the losses they assert. The Oklahoma
Plaintiffs’ asserted losses are the “millions of dollars [they]
paid to Sem[Crude] in the form of [additional] capital
contributions” at Kivisto’s specific request. App. 350;
Appellees’ Br. at 21. However, any such recovery would be
considered equity in SemCrude’s estate, which belongs to the
Litigation Trust. “[D]estruction or depreciation of the value
of [a shareholder’s] stock . . . is merely incidental to the
wrong suffered by the corporation and affects all stockholders
alike.” Dobry, 290 P.2d at 137 (internal quotations marks
omitted). Accordingly, the Oklahoma Plaintiffs cannot show
7 See Jarvis v. Great Bend Oil Co., 168 P. 450, 454
(Okla. 1917) (“Where the injury is to the stockholders
collectively it is said to be an injury to the corporation.”)
(internal quotation marks omitted).
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 91/71 5 DPatgee F 1il9e do:f 0298/08/2015
18
that they are entitled to receive the benefit of recovery
without showing an injury to SemCrude. See Tooley, 845
A.2d at 1039 (“The stockholder must demonstrate that . . . he
or she can prevail without showing an injury to the
corporation.”).8
The Oklahoma Supreme Court’s decision in Jarvis v.
Great Bend Oil Co., 168 P. 450 (Okla. 1917), and Johnson v.
Render, 270 P. 17 (Okla. 1928), which the parties heavily
dispute, drives this principle home. In Jarvis, a corporation’s
promoters induced investors to pay an inflated price for the
corporation’s stock by fraudulently misrepresenting the price
8 Kivisto asserts for the first time on appeal that Tooley
should not be used to decide the derivative status of claims in
Oklahoma. However, it appears that he specifically makes
this argument with regard to Tooley’s disavowal of the
“special injury” test used to identify direct claims. See
Appellant’s Br. at 22 n.5; see also Tooley, 845 A.2d at 1033,
1035, 1037-39 (disapproving of the “special injury” concept
and establishing that the analysis must turn solely on “(1)
who suffered the alleged harm” and “(2) who would receive
the benefit of any recovery or other remedy”); cf. id. at 1036
(explaining that the second inquiry “is helpful in analyzing
the first prong of the analysis: what person or entity has
suffered the alleged harm? The second prong of the analysis
should logically follow.”). While we may generally look to
Delaware law in construing Oklahoma corporate law, see
Beard v. Love, 173 P.3d 796, 802 (Okla. Civ. App. 2007)
(“[I]n the absence of Oklahoma authority we may consult
decisions from the courts of Delaware and other jurisdictions
concerning derivative actions.”), we do not rely on the special
injury test here and therefore do not reach whether Tooley is
inconsistent with Dobry on this basis.
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 91/81 5 DPatgee F 2il0e do:f 0298/08/2015
19
of an oil-and-gas lease, which the corporation thereafter
purchased. 168 P. at 450-53. The corporation sued the
promoters, and the promoters argued that the corporation did
not have standing because the fraud occurred “prior to the
organization of the [] corporation.” Id. at 453. On appeal, the
Jarvis Court held that the right of action was properly vested
in the corporation because the promoters purchased the lease
using corporate funds previously paid in by the investors
collectively. In other words, the investors could not bring
direct claims; the wrong complained of was fraud against the
newly-formed corporate entity, which received a lease worth
less than the amount of corporate funds used to buy it. As a
result, all shareholders were affected equally (in proportion to
their contributions), and “each [shareholder] will be made
whole if the corporation obtains compensation or restitution
from the wrongdoer.” Empire Life Ins. Co., 468 F.2d at 335.
On the other side of the spectrum is Johnson. In
Johnson, the promoters of a corporation induced the plaintiff,
S.P. Render, to pay an additional “bonus” for the company’s
stock by misrepresenting the corporation’s value and then
pocketing the bonus for their own benefit. 270 P. at 17-18.
The Court rejected appellees’ allegation that the right to sue
was vested in the corporation. It explained that, unlike in
Jarvis, “[i]n the instant case neither the corporation nor the
stockholders collectively were defrauded of any sum
whatsoever, [because] the corporation received value, dollar
for dollar, for its stock,” and because “no breach of duty was
violated as against the corporation or the stockholders
collectively.” Id. at 20. Rather,
The fraud complained of was against the
plaintiff, Render, individually, was a breach of
duty under the original agreement between him
and the defendants . . . . The fraud arose from a
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 91/91 5 DPatgee F 2il1e do:f 0298/08/2015
20
misrepresentation as to the payment of a bonus
whereby plaintiff was induced to pay a sum of
money not in accord with and in violation of
their original agreement.
Id. Accordingly, the Court was “unable to see where the
corporation in the instant case would have the right to
maintain any action against the defendants for the recovery
and return of the sum sought to be recovered by the plaintiff,
Render.” Id. 9
9 The parties also dispute an unpublished, federal
district court opinion, Stoner v. Ford, No. 74-311, 1974 WL
476 (N.D. Okla. Dec. 24, 1974) (applying Oklahoma law),
which has the least force but which we discuss here for the
sake of completeness. In Stoner, the plaintiff brought a suit
against the promoters and directors of a corporation alleging,
among other things, that the defendants fraudulently induced
him to purchase stock in their company by failing to disclose
that they watered the stock and made a secret profit. Id. at *4.
The Stoner Court considered both Jarvis and Dobry and held
that the fraudulent inducement claim was a direct claim, i.e., a
“wrong[] affecting Plaintiff as an individual, distinct from any
harm to the entire body of shareholders.” Id. at *5. To the
extent Stoner bears any force, it speaks to the broader
principle that inducing a particular individual to purchase
stock may be a direct injury if the fraud injures neither the
shareholders collectively nor the corporation. Like in
Johnson, in Stoner “the fraud complained of had its inception
before the corporation was organized. It was a personal
transaction between individuals.” Johnson, 270 P. at 20-21
(internal quotation marks omitted). Compared to the case at
bar, where Kivisto’s alleged misconduct induced
contributions beyond the Oklahoma Plaintiffs’ pre-existing
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 92/01 5 DPatgee F 2il2e do:f 0298/08/2015
21
Here, the Oklahoma Plaintiffs’ claims fall along the
lines of Jarvis, not Johnson. SemCrude, not the Oklahoma
Plaintiffs, had the right to pursue an action to recover from
Kivisto’s fraudulent conduct towards SemCrude and its
equity holders collectively. SemCrude, not the Oklahoma
Plaintiffs in their individual capacities, was defrauded by
Kivisto’s misrepresentations and omissions and injured by his
alleged misconduct. Because “the injury or wrong
complained of was a fraud against the corporation or its
subscribers collectively,” “the right of action or recovery [i]s
in the corporation.” Id. “Stated differently, the misconduct
alleged by [the Oklahoma Plaintiffs] did not injure [them] or
any other [unit]holders directly, but instead only injured them
indirectly as a result of their ownership of [SemCrude’s
units].” See Smith v. Waste Mgmt., Inc., 407 F.3d 381, 385
(5th Cir. 2005). Accordingly, the Oklahoma Plaintiffs’
claims for negligent misrepresentation and fraud are
derivative of the claims belonging to—and, importantly,
released by—the Litigation Trust.
B.
The Oklahoma Plaintiffs’ second basis for asserting
direct injuries is that Kivisto breached fiduciary duties owed
equity interests, “[t]he misrepresentations that allegedly
caused [their] losses injured not just [the Oklahoma Plaintiffs]
but the corporation as a whole.” See Smith v. Waste Mgmt.,
Inc., 407 F.3d 381, 384-85 (5th Cir. 2005); see also Big Lots
Stores, Inc. v. Bain Capital Fund VII, LLC, 922 A.2d 1169,
1177 (Del. Ch. 2006) (“[T]he main dividing line between
direct and derivative claims styled as ‘fraudulent
inducement,’ [is] whether the plaintiff has alleged some
injury other than that to the corporation.”). Thus, Stoner is
inapposite.
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 92/1 5 DPatgee F 2il3e do:f 0298/08/2015
22
to them as individuals. It is not disputed that Kivisto, as the
President and CEO of SemCrude, owed fiduciary duties to
SemCrude, the Oklahoma Plaintiffs, and all other equity
holders in that role. See, e.g., Wilson v. Harlow, 860 P.2d
793, 798 (Okla. 1993). The question is whether Kivisto owed
separate and distinct fiduciary duties to the Oklahoma
Plaintiffs, and whether the Oklahoma Plaintiffs were
individually injured on the basis of the breach of those duties
such that they are entitled to recover separately from
SemCrude.
Oklahoma Plaintiffs argue that a separate fiduciary
duty was formed based on the parties’ longstanding
relationship of trust that led the Oklahoma Plaintiffs to rely
on Kivisto’s superior influence and expertise. They point to
Oklahoma law that recognizes the existence of de facto
fiduciary relationships, in various contexts outside derivative
suits, where (1) “there is confidence reposed on one side [of a
relationship] and resulting domination and influence on the
other,” Lowrance v. Patton, 710 P.2d 108, 111 (Okla. 1985);
and (2) even when there is no duty to speak, someone
“volunteers to speak and to convey information which may
influence the conduct of the other party,” and, as a result, “he
or she is bound to disclose the whole truth,” Croslin v.
Enerlex, Inc., 308 P.3d 1041, 1047 (Okla. 2013). They also
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 92/21 5 DPatgee F 2il4e do:f 0298/08/2015
23
rely on an Oklahoma pattern jury charge10 and other authority
to argue that “whether a separate fiduciary [relationship]
exist[s] is a question of fact for the jury.” Appellees’ Br. at
35-41.
To be sure, these cases point to a broad interpretation
of when a fiduciary duty exists under Oklahoma law. See
Lowrance, 710 P.2d at 111 (“[C]ourts of equity will not set
any bounds to the facts and circumstances out of which a
fiduciary relationship may spring.”). However, as Kivisto
emphasizes, Oklahoma courts have never identified a
violation of a supposed “special duty” to a shareholder in this
context as loss “in addition to” the loss sustained by the
corporation under Dobry. Nor has any other court to our
knowledge found a direct injury in the context of a derivative
or direct suit on the basis of a general relationship that forms
from a power imbalance or out of an obligation to speak the
truth. If we found direct claims here, there is no reason why
the other limited partner unitholders, or any other shareholder
for that matter, could not bring direct claims. Indeed, it
would be difficult to cognizably administer this much broader
rule the Oklahoma Plaintiffs ask us to endorse. A reviewing
court would be forced to determine which communications to
which equity holders and in what contexts would be
10 The Oklahoma Uniform Jury Instructions state that a
jury can find a fiduciary relationship “based upon the . . .
[parties’] relationship and the other circumstances in th[e]
case. A fiduciary relationship exists whenever trust and
confidence are reasonably placed by one person in the
integrity and loyalty of another, and the other person
knowingly accepts that trust and confidence and then
undertakes to act on behalf of the person.” Okla. Unif. Jury
Instr. 26.2.
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 92/31 5 DPatgee F 2il5e do:f 0298/08/2015
24
actionable for breach of duty, which appears to undermine the
principles behind the derivative injury rule. See Dobry, 290
P.2d at 137 (explaining “the legal concept of corporate entity
under which stockholders as such lose their individualities in
the individuality of the corporation as a separate and distinct
person”) (internal quotation marks omitted). Thus, the
Bankruptcy Court was not wrong in the first instance to
conclude that the Oklahoma Plaintiffs’ allegations for breach
of fiduciary duty were insufficient.
Still, even assuming arguendo that Kivisto owed the
Oklahoma Plaintiffs unique, individual fiduciary duties in
addition to the duties owed to them in their legal capacity as
unitholders, the Oklahoma Plaintiffs can show neither that
they were injured separately from the company or all other
unitholders on the basis of that misconduct, nor that they were
entitled to recovery of the units they allegedly would not have
contributed or would have sold but for Kivisto’s misconduct.
Thus, for the same reasons we provided above, the Oklahoma
Plaintiffs’ breach of fiduciary duty claim is derivative.
IV.
For the reasons set forth above, we conclude that the
Oklahoma Plaintiffs’ claims are derivative of the claims
rightfully belonging to, and released by, SemCrude’s
Litigation Trust. As such, we reverse the Bankruptcy Court’s
order denying Kivisto’s motion to enjoin and direct it to enter
a permanent injunction forbidding the Oklahoma Plaintiffs’
claims from proceeding in state court.
Case: 14C-1a2s0e4 0 8 – 1D1o5c2u5m-BenLtS: 0 0 D31o1c 290762619 5 7F il e dP a0g9e/0: 92/41 5 DPatgee F 2il6e do:f 0298/08/2015
MARCIA M. WALDRON
CLERK
OFFICE OF THE CLERK
UNITED STATES COURT OF APPEALS
21400 UNITED STATES COURTHOUSE
601 MARKET STREET
PHILADELPHIA, PA 19106-1790
Website: www.ca3.uscourts.gov
September 8, 2015
TELEPHONE
215-597-2995
Mr. David D Bird, Clerk
United States Bankruptcy Court for the District of Delaware
824 North Market Street
Marine Midland Building
5th Floor
Wilmington, DE 19801
RE: In re: Semcrude L.P.
Case Number: 14-1204
District Case Number: 08-bk-11525
Dear Mr. Bird:
Enclosed herewith is the certified judgment together with copy of the opinion or certified copy of
the order in the above-captioned case(s). The certified judgment or order is issued in lieu of a
formal mandate and is to be treated in all respects as a mandate.
Counsel are advised of the issuance of the mandate by copy of this letter. The certified judgment
or order is also enclosed showing costs taxed, if any.
Very truly yours,
Marcia M. Waldron,
Clerk
By: Maria
Case Manager
267-299-4937
cc:
Paul R. Bessette, Esq.
Andrew S. Hicks, Esq.
Case: 14C-a1s2e0 40 8 – 1 D1o5c2u5m-BeLnSt: 0 0D3o1c1 92702616 9 5 F8 il e d P 0a9g/e0:9 1/1 5 D Paateg eF 2ile7d o: f0 298/08/2015
Adam P. Schiffer, Esq.
Gary F. Seitz, Esq.
James P. Sullivan, Esq.
Case: 14C-a1s2e0 40 8 – 1 D1o5c2u5m-BeLnSt: 0 0D3o1c1 92702616 9 5 F8 il e d P 0a9g/e0:9 2/1 5 D Paateg eF 2ile8d o: f0 298/08/2015

One Reply to “New Opinion from the Third Circuit on Assertion of Derivative Claims Against Company Executives in Bankruptcy”

Leave a Reply