CORPORATIONS:  When Traditional Standing Rules Do Not Apply to Shareholder Derivative Actions

Charlene J. Hicks—Senior Attorney

        Standing, or the right to pursue a judicial action, is often viewed in black-and-white terms, that is, either a plaintiff does or does not have standing. In some situations, however, the plaintiff’s status cannot be so easily quantified. One notable grey area is found in shareholder derivative litigation.

       Generally speaking, in order to maintain a shareholder derivative suit, an individual plaintiff must own stock in the corporation at the time the controlling shareholders or directors committed the wrongful act against the corporation that is the subject of the action, and the plaintiff must retain ownership of that stock for the entire duration of the lawsuit. If these stock ownership requirements are not satisfied throughout the entire course of litigation, the plaintiff lacks standing to maintain the derivative action on behalf of the corporation. This general rule is premised on the rationale that a former shareholder would not personally benefit from a recovery by the corporation; therefore, he/she “might be willing to accept an improper or inadequate settlement” to the detriment of the remaining shareholders. Noakes v. Schoenborn, 116 Or. App. 464, 470, 841 P.2d 682, 685 (1992).

Lawletter Vol  48 No. 3

ChatGPT, LLMs, and Legal Research

Brett R. Turner—Senior Attorney

What Is ChatGPT? What Are LLMs?

     ChatGPT is one particular brand of a large language model, or LLM. LLMs are a recent technological advance in how computers and humans communicate with one another. In one direction, LLMs parse plain-language instructions and convert them into language which a computer can understand. In the opposite direction, LLMs allow computers to translate their output into ordinary language for humans, including not only sentences but also entire written products, such as memos or briefs.

     More specifically, LLMs work by starting with certain words (the prompt) and finding other words which are associated with those words in certain training material. An algorithm is then used to convert the chosen words into a product using ordinary human language.

    ChatGPT has been analogized to the automatic chat bots found on many support websites. The software begins with a prompt, scans through a specific list of documents, and produces the content of those materials in ordinary human language.

Charlene Hicks, Senior Attorney, National Legal Research Group

        Bankruptcy preference litigation involves situations in which the plaintiff (normally the trustee) tries to claw back substantial monetary payments debtors make to creditors within 90 days of filing for bankruptcy. Preference cases are deceptively simple in form. However, complications often arise, particularly in cases involving creditors that regularly do business with the debtor. Such creditors may invoke diverse sections of the Bankruptcy Code in an attempt to negate the trustee’s reimbursement claim against them.

            In Auriga Polymers Inc. v. PMCM2, LLC, 40 F.4th 1273, 1277 (11th Cir. 2022), the Eleventh Circuit Court of Appeals recently analyzed the interplay between two such sections of the Bankruptcy Code. One of the eight preference defenses a creditor may raise is known as the subsequent new value defense and is set forth in 11 U.S.C. § 547(c)(4). Section 503(b)(9), in turn, contains an administrator expense claim that a creditor may obtain for payment in full for the value of goods sold to the debtor in the ordinary course of business within 20 days before the debtor files for bankruptcy. 11 U.S.C. § 503(b)(9). In an issue of first impression in the Eleventh Circuit and one which is unsettled in other circuits, the Auriga Polymers court addressed “whether post-petition transfers made under a 11 U.S.C. § 503(b)(9) request will reduce the creditor’s new value defense” under 11 U.S.C. § 547(c)(4). The trustee claimed that Auriga would effectively receive a “double payment” if it were allowed to obtain payment for its administrator expense claim and also to avoid repayment to the trustee under the preference defense of subsequent new value. Auriga Polymers, 40 F.4th at 1288.

Nadine Roddy, Senior Attorney, National Legal Research Group

      In a most unusual case recently before the federal district court sitting in Nevada, Barnes v. Kijakazi, No. 3:18-cv-00199-MMD-WGC, 2023 WL 3007904 (D. Nev. Apr. 19, 2023), a pro se plaintiff asserted a claim of disparate-impact discrimination against the Social Security Administration (SSA) under the Age Discrimination in Employment Act (ADEA). It has been less than 20 years since the Supreme Court held in Smith v. City of Jackson, 544 U.S. 228 (2005), that disparate-impact claims are cognizable under the ADEA. The scope of disparate-impact liability is narrower under the ADEA than under Title VII, and the general requirement of statistical evidence to prove the elements of a disparate-impact case still applies. Thus, it is unusual for a pro se plaintiff to bring such a suit under the ADEA—even an attorney plaintiff.

      The plaintiff in Barnes was a lawyer who had applied unsuccessfully for the position of attorney advisor in a soon-to-be-opened SSA hearing office in Reno, Nevada. She sued the agency through its Acting Commissioner and the hiring official who handled her application. She alleged that the official had recruited and hired five attorneys for the new office in a manner that had a disparate impact on older applicants such as herself. As part of his recruitment process, the official advertised the positions externally with an online job board maintained by the University of Nevada’s law school. He also recruited from the alumni branch of the Peace Corps.

Anne Hemenway, Senior Attorney, National Legal Research Group, Inc.

             It is not uncommon for a debtor who filed a Chapter 11 or 13 bankruptcy case to die or become incapacitated during the life of the bankruptcy proceeding. Under Fed. R. Bankr. P. 1016:

If a reorganization, family farmer's debt adjustment, or individual's debt adjustment case is pending under chapter 11, chapter 12, or chapter 13, the case may be dismissed; or if further administration is possible and in the best interest of the parties, the case may proceed and be concluded in the same manner, so far as possible, as though the death or incompetency had not occurred.

           Interestingly, the rule is different where the debtor filed under Chapter 7. The death or incompetency of the debtor "shall not abate a liquidation case under chapter 7 of the Code." This is because the death of the debtor has no practical effect on the administration of a Chapter 7 which is in the hands of the Chapter 7 Trustee. See Hawkins v. Eads, 135 B.R. 380 (Bankr. E.D. Cal. 1991).    

     To avoid having a reorganization case dismissed up

Lee Dunham—Senior Attorney, National Legal Research Group

      It can be frustrating for creditors when a debtor files for bankruptcy, especially when the creditor has put time and expense into successfully litigating a claim in court and obtaining a judgment. Nonetheless, with limited exceptions, even judgment debts are dischargeable in bankruptcy. Among these exceptions to discharge are exceptions that apply to certain fraudulently incurred debts. To claim the benefit of these exceptions, the creditor must bring a timely filed “adversary proceeding” (a suit filed in the Bankruptcy Court, under a separate case number but under the umbrella of the larger bankruptcy case) and plead and prove that a particular debt is nondischargeable under 11 U.S.C. § 523(a)(2)(A) or (B).

      In nondischargeability actions brought pursuant to § 523(a)(2)(A), the plaintiff bears the burden of proving the elements of the claim by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991); In re Ricker, 475 B.R. 445, 455 (Bankr. E.D. Pa. 2012); In re Witmer, 541 B.R. 769, 777 (Bankr. M.D. Pa. 2015).

      A claim is nondischargeable under § 523(a)(2)(A) where the creditor proves each of the following: (1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or was made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor justifiably relied on the false representation; and (4) its reliance was the proximate cause of loss. In re Rembert, 141 F.3d 277, 280-81 (6th Cir. 1998). Section 523(a)(2)(A) applies only to statements other than statements “respecting the debtor’s or an insider’s financial condition,” which fall under the narrower exception defined under § 523(a)(2)(B).

Fred Shackelford—Senior Attorney, National Legal Research Group

            In a case of apparent first impression, the Ninth Circuit Court of Appeals has decided when a cause of action in admiralty for wrongful death accrues. In Deem v. William Powell Co., 33 F.4th 554 (9th Cir. 2022), a shipyard machinist contracted mesothelioma while employed in repairing naval vessels. His illness was diagnosed on February 20, 2015, and he died on July 3, 2015. His wife filed suit within three years of his death but more than three years after the illness was diagnosed. The federal district court ruled that the claim was time-barred because the three-year statute of limitations began to run at the time of the diagnosis.

            The issue on appeal was succinctly stated: "When does a wrongful death claim accrue in a maritime case?" Id. at 559. To decide the question, the appellate court recognized that there is a fundamental distinction between survival actions and wrongful death actions under admiralty law. A survival action is for the benefit of the directly injured victim, while a wrongful death action benefits the decedent’s family members who are deprived of his presence when he dies.

Charlene Hicks—Senior Attorney, National Legal Research Group

            It is common enough for an overworked attorney drafting a contract to regard a choice-of-law clause as boilerplate and therefore not in need of thoughtful consideration. However, the specific wording of such a clause may well alter the outcome of a future dispute between the contracting parties. Perhaps the most important consideration in this regard is whether the clause is worded broadly enough to encompass all potential causes of action that may arise in both contract and tort. In addition, specific language may be included to ensure that the chosen forum’s statute of limitations will also apply.

            One recent illustrative case is ARKRAY America, Inc. v. Navigator Business Solutions, Inc., No. N20C-12-012 MMJ (2021) (CCLD), 2021 Del. Super. LEXIS 463 (June 9, 2021). There, the parties entered into two separate contracts, one for software and consulting services and one for a license. Both contracts contained nearly identical choice-of-law clauses except that one provided for Utah law to apply and the other for Delaware law. Both choice-of-law clauses utilized traditional language stating that the agreement shall be governed by and in accordance with the named state’s laws without reference to the state’s conflicts-of-law principles.

Paul Ferrer—Senior Attorney, National Legal Research Group

            As part of the check collection process governed by Article 4 of the Uniform Commercial Code (“UCC”), the “midnight deadline” rule of § 4-302 requires that a payor bank pay or return an item, or send notice of its dishonor, before midnight of the next banking day following the banking day on which the bank receives the item. The rule imposes strict liability on a payor bank that fails to meet the midnight deadline requirement. But what if something happens to the payee while the check is being dishonored as part of the collection process? Who has standing to sue the payor bank to enforce the midnight deadline rule?

            That was the unusual question decided by the Virginia Supreme Court in Stahl v. Stitt, ___ Va. ___, 869 S.E.2d 55 (2022). In that case, Ivory Markus had checking accounts at Branch Banking and Trust Company (“BB&T”) and MCNB Bank and Trust Company (“MCNB”). Markus’s niece, Sheree Stahl, was designated as the payable-on-death (“POD”) beneficiary on the BB&T account. On March 15, 2016, Stahl made an electronic request for a check transferring the $245,271.25 balance of the MCNB account to the BB&T account. On March 18, MCNB’s online banking system issued a check in that amount for mail-in deposit into the BB&T account. A BB&T branch received the check on March 21, and BB&T provisionally credited Markus’s account on that day. On March 22, the check was electronically presented to MCNB for payment. MCNB decided to dishonor the check and return it to BB&T but failed to do so until March 25, after MCNB’s midnight deadline. Markus died intestate on March 26.

Charlene Hicks—Senior Attorney, National Legal Research Group

            Prior to bringing a shareholder derivative action, the complaining shareholders must normally make a detailed presuit demand on the corporation’s board of directors or show the court that such a demand would be futile. In United Food & Commercial Workers Union v. Zuckerberg, No. 404, 2020, 2021 WL 4344361 (Del. Sept. 23, 2021), the Delaware Supreme Court announced a new “universal test” for determining whether a shareholder demand should be excused as futile. This new test imposes more stringent pleading requirements on the derivative plaintiffs to show futility.

            In United Food, the complaining shareholders alleged that the members of Facebook, Inc.’s (now “Meta Platforms Inc.”) board of directors violated their fiduciary duties when they voted in favor of a stock reclassification that would have allowed Mark Zuckerberg, Facebook’s CEO, to sell most of his Facebook stock while still maintaining voting control. The Board’s vote eventually led to the company spending approximately $90 million to defend against a class action lawsuit. The complaining shareholders filed the derivative action in an attempt to recoup those litigation expenses.