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Jerue v. Millett (3/28/2003) sp-5676
Jerue v. Millett (3/28/2003) sp-5676
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
CARL J. JERUE, JR. and ERNIE )
DEMOSKI, SR., as individual ) Supreme Court No. S-9076
shareholders and on behalf of )
INGALIK, INCORPORATED, and ) Superior Court No. 4FA-98-
170 CI
INGALIK, INCORPORATED, )
) O P I N I
O N*
Appellants, )
) [No. 5676 - March 28, 2003]
v. )
)
GLORIA MILLETT, THEODORE )
KRUGER, JR., KENNETH )
W. CHASE, SHANNON F. CHASE, )
CARL JERUE, SR., TERRENCE )
WHARTON, JR., and JOHN )
DOES 1-5, )
)
Appellees. )
________________________________)
Appeal from the Superior Court of the State
of Alaska, Fourth Judicial District,
Fairbanks, Charles R. Pengilly, Judge.
Appearances: Peter J. Aschenbrenner and
Sheila Doody Bishop, Aschenbrenner Law
Offices, Inc., Fairbanks, for Appellants.
Robert K. Reiman, Law Offices of Robert K.
Reiman, Anchorage, for Appellees.
Before: Matthews, Chief Justice, Eastaugh,
Fabe, Bryner, and Carpeneti, Justices.
EASTAUGH, Justice.
CARPENETI, Justice, dissenting.
I. INTRODUCTION
This appeal concerns attorneys fees and indemnification
disputes arising after the superior court dismissed a derivative
suit brought by shareholders of an Alaska Native Claims
Settlement Act (ANCSA) village corporation. The plaintiffs sued
without first making the pre-suit demand Alaska law requires.
After the superior court dismissed the complaint for mootness,
both sides sought attorneys fees and costs. Concluding that the
shareholders did not prove that a pre-suit demand was excused,
the superior court held that they were not prevailing parties and
denied their attorneys fees motion. Finding that the defendant
directors were prevailing parties, the court awarded them Alaska
Civil Rule 82 attorneys fees against the plaintiff shareholders,
and ordered the corporation to indemnify them under AS
10.06.490(c). Because the superior court did not err in holding
that the shareholders did not prove that a demand was excused, we
affirm the denial of the plaintiffs fees request. But because
the directors did not establish that they were Rule 82 prevailing
parties, we vacate their attorneys fees award. And because they
did not establish that they were successful litigants, we hold
that they were not entitled to indemnification under AS
10.06.490(c).
II. FACTS AND PROCEEDINGS
Carl J. Jerue, Jr. and Ernie Demoski, Sr. (plaintiff
shareholders) are shareholders of Ingalik, Incorporated, the
ANCSA village corporation for the Native village of Anvik.
Gloria Millett, Kenneth Chase, Shannon Chase, and Ted Kruger, Jr.
(defendant directors) were members of Ingaliks board of directors
as of January 1998. On January 12, 1998 the Alaska Department of
Commerce and Economic Development issued the corporation a
Certificate of Involuntary Dissolution, citing the corporations
failure to file a biennial report or pay taxes.
On January 22, 1998 the plaintiff shareholders filed a
derivative complaint against the defendant directors, alleging
financial mismanagement and other wrongdoing. The complaint asked
the court to compel the defendant directors to hold an annual
shareholders meeting to elect a new board of directors; to
appoint Jerue as an interim director with authority to take
whatever action was necessary to reinstate the corporation; and
to issue a temporary restraining order prohibiting the defendant
directors from winding up the corporations affairs and
distributing any corporate assets. Summonses were issued for the
individual defendants on January 22, 1998.
In January Ingalik made reinstatement efforts; it
returned to good standing with the state and was reinstated on
February 6, 1998.
On April 6 the directors moved to dismiss. They argued
that the plaintiff shareholders had not demonstrated that their
failure to make a demand on the board was excused. They also
argued that the complaint was moot because the corporation had
been reinstated, it had scheduled an annual meeting, and its
reinstatement meant its assets would not be distributed.
Ingalik held an annual shareholders meeting on April
25. The shareholders reorganized the board by electing new
directors, including both plaintiff shareholders; only one
incumbent, defendant Kruger, was reelected. The new board met
the next day and passed resolutions authorizing the corporation
to join the lawsuit as a party plaintiff and denying
indemnification to the defendant directors.
The plaintiff shareholders then asked the superior
court to join Ingalik as a party plaintiff; the court did so on
June 8. But on the same day, it also entered an order dismissing
the derivative suit with prejudice. It retained jurisdiction for
the purpose of determining prevailing party status and awarding
costs and attorneys fees.
The defendant directors moved for a Civil Rule 82 fees
award against the plaintiff shareholders individually; they also
sought an order requiring Ingalik to indemnify their litigation
costs under AS 10.06.490(c). The plaintiff shareholders and
Ingalik (the plaintiffs) opposed these requests and, claiming
that they were the prevailing parties because the requested
relief was achieved, cross-moved for an award of fees against the
defendant directors under Civil Rules 23.1(j) and 82(a). Both
sides relied on numerous documents in addition to their
pleadings.
Following oral argument, the superior court ruled for
the defendant directors on the fees and costs motions. It
reasoned that the plaintiff shareholders had the burden of
proving that they were excused from making the formal pre-suit
demand Civil Rule 23.1(c) requires; it also reasoned that the
directors alleged practices gave rise to any number of
conflicting inferences and by no means demonstrated that a
majority of the directors were implicated in an injury to the
corporation. It therefore concluded that a demand was not
excused, that the defendant directors were entitled to dismissal
under Civil Rule 23.1(d), and that the defendant directors were
the prevailing parties under Civil Rule 82. It also concluded
that the defendant directors prevailing party status entitled
them to full indemnification from the corporation under AS
10.06.490(c).
The judgment awarded the defendant directors $26,656.96
against Ingalik under AS 10.06.490(c) to indemnify their
attorneys fees and costs, and $3,804.16 against Jerue and Demoski
individually as costs and Rule 82 attorneys fees. The award
against Ingalik included the amount awarded against the
individual plaintiff shareholders, and the judgment prevented the
directors from recovering more than the total amount awarded
against Ingalik.
Ingalik and the plaintiff shareholders argue on appeal
that the superior court erred by (1) failing to award them costs
and fees under Civil Rules 82 and 23.1(j) and AS 10.06.435(j);
(2) granting costs and Civil Rule 82 attorneys fees to the
defendant directors against the plaintiff shareholders; and (3)
requiring the corporation to indemnify the defendant directors
under AS 10.06.490(c).
III. DISCUSSION
A. Standard of Review
We apply our independent judgment to questions of
statutory interpretation1 and must adopt the rule of law that is
most persuasive in light of precedent, reason, and policy.2
For reasons we discuss in Part III.B.2, we review for
abuse of discretion the superior courts fact-based determination
that the plaintiff shareholders did not prove that a pre-suit
demand was excused.3 The legal effect of that finding on the
plaintiffs motion for an award of litigation expenses presents a
question of law which we review by applying our independent
judgment.
Because it presents questions of law, we apply our
independent judgment in reviewing the ruling that, because the
plaintiff shareholders failed to prove that a demand was excused,
the defendant directors were the prevailing parties under Rule
82(a).4 A determination of prevailing party status under Rule
82(a) will not be overturned unless it is manifestly
unreasonable.5 We apply our independent judgment in reviewing
the ruling that the defendant directors prevailing party status
entitled them to AS 10.06.490(c) indemnification, because this
ruling presents a question of law.
B. Denial of Costs and Attorneys Fees to the Plaintiffs
Jerue, Demoski, and Ingalik first argue that it was
error not to award them costs and attorneys fees against the
defendant directors.6 They reason that they secured the relief
their complaint sought, rendering the derivative suit successful;
this made them, not the directors, the prevailing parties,
entitling them to recover costs and fees from the defendant
directors under Civil Rules 82(a) and 23.1(j) and AS
10.06.435(j).7
Alaska Statute 10.06.435(j) and Alaska Civil Rule
23.1(j) permit awards of expenses, including attorneys fees, to
derivative suit plaintiffs. The statute and the rule are
identical. They provide in pertinent part that [i]f the
derivative action is successful, in whole or in part, or if
anything is received as a result of the judgment, compromise, or
settlement of that action, the court may award to the plaintiff
or plaintiffs reasonable expenses, including reasonable attorney
fees.8
Civil Rule 23.1(j) is a fee-sharing rule. It requires
the corporation benefitted by a derivative suit to share the
expense incurred by the plaintiff shareholders in achieving the
benefit for the corporation.9 It reaches this result by
requiring the corporation to reimburse the plaintiff
shareholders. Because it is a fee-sharing rule, Rule 23.1(j)
does not give the corporation itself a claim for fees or provide
for an award against individual defendants.10 Moreover, here
Ingaliks successor board adopted a resolution authorizing Ingalik
to reimburse all legal fees and costs incurred in behalf of Jerue
and Demoski. Because the corporation has voluntarily agreed to
share any litigation expense incurred by or for Jerue and Demoski
individually, Rule 23.1(j) has no further direct application to
this case: Its fee-sharing purpose was achieved without court
order.
To illustrate the true nature of Ingaliks fees claim,
we assume that a Rule 23.1(j) fees award could indirectly give
rise to a corporate claim against derivative suit defendants.
Thus, perhaps a corporation ordered under Rule 23.1(j) to
reimburse successful derivative-suit plaintiffs could seek
indemnification, possibly on a subrogation theory, from the
defendant officers or directors whose acts were the basis for the
derivative suit and the Rule 23.1(j) award. But the court did
not order Ingalik to pay those expenses; the corporation
voluntarily agreed to pay them by resolution of April 26, 1998.
And a subrogated claim would give the corporation no greater
rights than the plaintiff shareholders had. In short, no
plaintiff in this case has a claim against these defendants under
Rule 23.1(j).
Unlike Rule 23.1(j), Rule 82(a) is a fee-shifting
rule.11 Rule 82(a) provides for an award of attorneys fees to
the prevailing party. It is the proper framework for considering
whether the defendant directors should reimburse attorneys fees
directly incurred by Ingalik and attorneys fees incurred by or
for Jerue and Demoski and potentially recoverable by Ingalik
under an assignment or subrogation theory.
Because this is a shareholder derivative action, the
question whether the plaintiffs were prevailing parties under
Rule 82(a) ultimately depends at least in part on the principles
that determine whether a shareholder derivative suit has been
successful. As we will see, this question turns on whether the
superior court erred in concluding that the shareholders did not
establish that their failure to make a demand on the board before
suing was excused. This is so because, even though the plaintiff
shareholders litigation goals were achieved, there was a dispute
about why they were achieved.
The shareholders filed suit in late January 1998
seeking reinstatement of the corporation and a shareholders
meeting at which new directors could be elected. The state
reinstated the corporation in early February 1998. This
prevented dissolution and distribution of corporate assets. The
corporation held a shareholders meeting to elect directors in
April 1998. The relief the complaint sought was thus achieved,
and in June the superior court dismissed the complaint with
prejudice, apparently because the complaint was mooted by the
corporations reinstatement and the annual meeting.12
We assume that derivative suit plaintiffs may not
necessarily be ineligible to recover litigation expenses under
Rule 23.1(j) even though a court dismisses their lawsuit after
the boards remedial actions moot their derivative suit claims.13
Filing suit may force a recalcitrant board to act, securing a
valuable benefit to the corporation. This may also be sufficient
to make plaintiff shareholders (and a plaintiff corporation for
whom they acted) prevailing parties for Rule 82(a) purposes.
We think that whether plaintiff shareholders are
prevailing parties in a shareholder derivative action should turn
on whether their lawsuit is successful in whole or in part.14 If
a corporate benefit is achieved, the focus is on the causal
relationship between the lawsuit and the benefit.15
We assume here that the individual plaintiffs and
Ingalik were benefitted by actions reinstating the corporation
and holding the annual meeting taken after the plaintiff
shareholders sued. But were these actions the result of the
suit? Or would they have been taken if the shareholders had made
a formal demand before suing? Or, indeed, would they have been
taken even absent either a pre-suit demand or any suit at all?
As we will see, the superior courts rejection of Jerue
and Demoskis assertion that a demand was excused resolves these
questions for purposes of the plaintiffs motion for costs and
attorneys fees.
1. The requirement of a pre-suit formal demand
Before filing a shareholder derivative suit, a
plaintiff is required by AS 10.06.435(c) and Civil Rule 23.1(c)
to make a formal demand on the board to secure the action the
plaintiff desires, unless that demand is excused.16 The statute
and the rule excuse the demand requirement if a majority of the
directors is implicated in or under the direct or indirect
control of a person who is implicated in the injury to the
corporation.17
The statute and the rule require a shareholder who
fails to make a formal demand to plead with particularity the
facts establishing excuse.18 The statute and the rule also
impose on a shareholder opposing a motion to dismiss the burden
of establishing excuse: In a motion to dismiss for failure to
make demand on the board the shareholder shall have the burden to
establish excuse.19
Jerue and Demoski argue that they satisfied these
requirements, despite their failure to make any pre-suit demand
on the board; they assert that a demand would have been futile.
The demand requirement is an important aspect of
corporate democracy. Among other things, it gives the
corporation a fair opportunity to decide whether to take action
directly and to receive the proceeds of any recovery.20 And it
gives the corporation an opportunity to remedy problems
internally, without exposing it to avoidable litigation
expense.21 The Fletcher Cyclopedia discusses the demand
requirement:
The particularized pleading requirements
are designed to strike a balance between a
shareholders claim of right to assert a
derivative claim and a board of director[s]
duty to decide whether to invest resources of
the corporation in pursuit of the
shareholders claim of corporate wrong. But
the requirements of demand futility and
refusal of demand are predicated upon and
inextricably bound to issues of business
judgment and standards of that doctrines
applicability. The demand requirement in
derivative proceedings serves as a form of
notice to the corporation. It is designed to
assure that the shareholder affords the
corporation the opportunity to address the
alleged wrong without litigation and to
control any litigation which does occur. It
also provides a safeguard against abuse that
could undermine the basic principle of
corporate governance that the decisions of a
corporation, including the decision to
initiate litigation, should be made by the
board of directors. A determination on a
motion to dismiss, whether based on demand
refused or demand excused, involves
essentially a discretionary ruling on a
predominantly factual issue.
The demand should provide the directors
with sufficient information regarding the
standing of the plaintiff, the relief sought,
and the grounds for relief. In some states,
the demand must be in written form. The
directors have a reasonable time within which
to investigate the claim and to make a
decision, although some state statutes set
forth a final time period. The demand
inquiry and authority to respond may be
delegated to a special litigation
committee.[22]
2. Applicable standard of review
We have never before addressed the demand requirement
of AS 10.06.435(c) and Civil Rule 23.1(c), and have consequently
never adopted a standard for reviewing a conclusion that
shareholders did not meet their burden of establishing excuse.
Most appellate courts review for an abuse of discretion
a trial courts determination that the demand requirement was not
excused.23 They typically apply that standard because
determining the necessity of a demand is a fact-based inquiry.
For example, in Lewis v. Graves, the United States Court of
Appeals for the Second Circuit, applying the federal analog to
Alaska Civil Rule 23.1,24 held that the decision as to whether a
plaintiffs allegations of futility are sufficient to excuse
demand depends on the particular facts of each case and lies
within the discretion of the district court.25
Until recently, the mother court of corporate law,26
the Delaware Supreme Court, followed the same approach.27 But in
Brehm v. Eisner, that court, applying the Delaware counterpart to
Alaska Civil Rule 23.1, held that this issue is subject to de
novo review.28 The court stated that [i]n a Rule 23.1
determination of pleading sufficiency . . . this Court[] is
merely reading the English language of a pleading and applying to
that pleading statutes, case law and Rule 23.1 requirements. To
that extent, our scope of review is analogous to that accorded a
ruling under Rule 12(b)(6).29
In comparison, the United States Court of Appeals for
the Third Circuit applies a mixed standard of review. In Garber
v. Lego it stated:
To the extent that we are reviewing the
district courts determination of demand
futility based upon the facts of this case,
the scope of our review is for abuse of
discretion. Our review of the legal precepts
employed by the district court and of its
interpretation of those legal precepts is
plenary.[30]
We choose to follow the Third Circuit, and therefore
adopt a mixed standard of review. We agree with the Delaware
Supreme Court that it is a question of law whether pleadings
satisfy a legal standard, such as the demand requirement. But
the question of demand excuse potentially also involves fact-
based analysis which is better reviewed under the abuse of
discretion standard. This case demonstrates the factual nature
of these disputes. A mixed standard of review recognizes that
the superior court made both legal and factual determinations
when it ruled, after considering materials beyond the pleadings,
that the shareholders did not prove that demand was excused.
3. Excusing the failure to make a pre-suit demand
The pre-suit demand required by AS 10.06.435(c) and
Alaska Civil Rule 23.1(c) is excused if a majority of the
directors is implicated in or under the direct or indirect
control of a person who is implicated in the injury to the
corporation.31
Delaware and the federal courts frame the exception to
the demand requirement in terms of futility.32 In those courts,
making a demand is considered futile and thus excused where
corporate officers and directors are under an influence rendering
them incapable of making decisions for the corporation.33 Courts
following the futility-of-demand principle apply procedural rules
that differ from Alaska Civil Rule 23.1. Federal Civil Rule 23.1
and Delaware Chancery Court Rule 23.1 are very similar to each
other34 and with regard to the demand requirement are nearly
identical. Their pleading requirements implicitly address
futility, but do not specify criteria for deciding when futility
excuses a failure to make a demand:
The complaint shall also allege with
particularity the efforts, if any, made by
the plaintiff to obtain the action the
plaintiff desires from the directors or
comparable authority . . . and the reasons
for the plaintiffs failure to obtain the
action or for not making the effort.[35]
It is not necessary in this case to decide whether
excuse in Alaska is the same as excuse elsewhere. Alaska Statute
10.06.435(c) and Alaska Civil Rule 23.1(c) were not modeled after
a specific state provision or model code.36 Although our
standard is similar to that applied in some other jurisdictions
to discern when demand would be futile,37 the plain text of our
rule provides a specific test for excuse: establishing that a
majority of the directors are implicated in the injury to the
corporation.38 The Alaska Code Revision Commissions study of
Alaskas proposed revised Corporations Code before it was enacted
in 1988 supports this interpretation:
Section .435c requires that a qualified
shareholder make a demand upon the board to
secure such action as the plaintiff desires,
unless the shareholder can show that such
demand would be futile. Under Section
.435(d), the burden to establish excuse is
upon the plaintiff-shareholder. If a demand
on the board is not excused, Section .435(e)
provides that a decision by the board,
consonant with its duties of care and
loyalty, that in its business judgment such
litigation would not be in the best interest
of the corporation, terminates the right
created by Section .435(a). A shareholder is
thereafter precluded from offering evidence
that any or all of the directors who have
decided that the litigation not go forward
are implicated in the wrong complained
of.[39]
4. Demand in this case
Because the superior court did not base its denial of
the shareholders fees motion on the sufficiency of their
complaint, it is unnecessary to decide whether their complaint
satisfied the requirement that it state with particularity the
facts establishing excuse . . . .40 The court instead ruled
after it reviewed the documents the parties submitted or
discussed when they briefed the excuse issue in their competing
motions for attorneys fees. The superior court held that the
practices complained of give rise to any number of conflicting
inferences but by no means demonstrate that a majority of the
directors [were] . . . implicated in [an] injury to the
corporation.
Moreover, because there was no injury to the
corporation, the superior court did not abuse its discretion by
so holding. The plaintiff shareholders submitted numerous
documents to support their request for attorneys fees and to
oppose the defendant directors requests for attorneys fees and
indemnification. But these materials and the remainder of the
undisputed record did not establish that the board would have
rejected a demand to reinstate the corporation and hold the
annual meeting. Nor did they establish that the lawsuit achieved
these benefits. Instead, the record contains evidence that would
have permitted a finding that the board would have reinstated the
corporation and held the meeting whether or not there was a
demand or a lawsuit. This included evidence (attached to the
plaintiffs complaint or found in affidavits they submitted to the
superior court) that the defendant directors had attempted to
hold the annual meeting as recently as the prior fall; that they
had met only thirty-six days before the plaintiffs filed suit;
that even before the plaintiffs sued, the defendant directors had
written the corporations shareholders to encourage them to fill
vacancies on the board until the next annual meeting and
election; that they had already scheduled a shareholders meeting
for June; and that when the corporation had failed to pay its
taxes in the past, on each occasion it was reinstated and its
assets were not liquidated. Moreover, plaintiffs exhibits listed
corporate checking account transactions; one is for a January 7,
1998 check payable to the State of Alaska for biennal [sic]
filing fee, suggesting that the directors had taken steps to
reinstate the corporation weeks before plaintiffs filed suit.41
5. How the unexcused failure to make demand affects
plaintiffs attorneys fees motion.
The plaintiff shareholders cannot recover litigation
expenses because their case was dismissed for mootness before
they either made a demand or proved that demand was excused.
Failure to prove that demand was excused necessarily means that
they did not show that the corporation would not have been
reinstated and that the annual meeting would not have been held
if they had not sued. Because the court dismissed their action
for mootness, the plaintiffs could not recover litigation
expenses unless they showed that their suit was successful, i.e.,
that it conferred some measurable benefit on the corporation even
though the court dismissed their complaint. But by failing to
prove that a demand was excused, they necessarily failed to
establish that the board would not have reinstated the
corporation and held the annual meeting but for the lawsuit.
In the narrow context of derivative suits, failure to
make a demand or prove that demand was excused is fatal to an
award of attorneys fees and costs because a pre-suit demand might
have prompted remedial action without need for litigation. The
policy rationale of the demand requirement dictates this result.
Demand is required to give a corporation the opportunity to
rectify an alleged wrong without litigation and to control any
litigation which does arise.42 Awarding litigation expenses
without a demand or proof of demand excuse would undermine the
demand requirement and these policy objectives. Moreover, the
modern reality of large corporations requires this result. At
any given moment a large corporation may be the subject of a
number of derivative suits filed by shareholders. In this
context, almost any action taken by a corporate board could
arguably satisfy some plaintiffs lawsuit. Awarding fees without
requiring demand or proof of demand excuse would open
corporations to unwarranted fees claims predicated on unrelated
corporate actions.
In this case, without proof of demand excuse, and
particularly given Ingaliks past course of corporate events, the
trial court permissibly might have found that this corporation
would have been reinstated and the meeting held even without a
demand or a lawsuit. Therefore, the shareholders failure to
prove that demand was excused meant that they did not prove that
the derivative suit was successful.43 This meant that Jerue and
Demoski were not entitled to an award of attorneys fees and
costs.
An inverse hypothetical helps demonstrate the
significance of failing to make a demand or prove demand excuse.
Consider a dissenting shareholder whose attorney makes a timely
demand upon directors before filing a derivative suit. If the
directors promptly take curative action that satisfies the
shareholders concerns, there would be no suit and clearly no
attorneys fees awarded to the shareholder. This illustrates the
importance of the demand requirement and explains why we must
affirm the denial of fees to Jerue and Demoski. The reasoning is
twofold: First, if the hypothetical shareholder who satisfies
the demand procedure is not entitled to attorneys fees, it is
inequitable to award fees to shareholders who failed to make a
demand or prove that it was excused. Second, awarding fees to
Jerue and Demoski would undermine successful operation of the
demand requirement as illustrated above, and encourage wasteful
litigation that could have been avoided if demand were properly
made.
Ingalik has not clearly explained on what theory it
should be awarded fees. It must demonstrate its prevailing party
status to recover fees under Rule 82(a). But if the plaintiff
shareholders who asserted claims in the corporations behalf are
not prevailing parties, we do not see how the corporation can be
a prevailing party as to those claims, either. Any attorneys
fees claim Ingalik could pursue under subrogation or assignment
theories to recover its voluntary payment of Jerue and Demoskis
fees would be subject to the considerations that bar Jerue and
Demoskis fees motion. Ingalik apparently also seeks an award for
the post-joinder fees it incurred directly. But because Ingalik
did not become a party plaintiff until after the events occurred
that mooted the derivative suit, it is not a prevailing party for
purposes of recovering those fees, either.
We therefore conclude that the superior court did not
err in denying the plaintiffs attorneys fees motion.
C. The Defendant Directors Rule 82 Attorneys Fees Award
A. The superior court awarded the defendant directors Rule 82
prevailing party attorneys fees against Jerue and Demoski. In
arguing that this was error, Jerue and Demoski contend in part
that they, not the directors, were the prevailing parties because
their complaint was dismissed for mootness and because they
accomplished what they had hoped to with this litigation. They
assert that the burden was on the former management to argue and
show that the annual meeting . . . would have happened without
the suit.
A litigant seeking Rule 82 attorneys fees must show
that it is the prevailing party.
We first reject the directors assertion that, because
the superior court granted their motion to dismiss with
prejudice, they were the prevailing parties.44 Because the court
dismissed the complaint for mootness, it is no more likely that
the directors achieved their litigation goals than the
plaintiffs.
The court apparently based its finding that the
directors were the prevailing parties on its October conclusion
that the shareholders had not proved that demand was excused.
This conclusion did not alter the reason for the June dismissal
or turn the dismissal order into a ruling on the merits.
Dismissing for mootness did not explicitly or implicitly resolve
the issue of who prevailed, and indeed, the court stated it was
retaining jurisdiction to decide prevailing party status. That
question turned on an issue whether demand was excused the
court had not resolved in June.
We assume for discussions sake that if a shareholder
derivative lawsuit were the only reason directors took remedial
actions benefitting a corporation and mooting the complaint, the
directors would not be the prevailing parties.45 And as we noted
in Part III.B, under some circumstances plaintiffs may be able to
recover attorneys fees in at least some types of cases dismissed
for mootness.46 But the ruling that these plaintiffs did not
bear their burden of proving excuse did not amount to a finding
that the board would have heeded a pre-suit demand or that its
remedial actions were unrelated to the lawsuit.
In general, we are reluctant to encourage parties in a
lawsuit dismissed for mootness to litigate the merits only to
establish for Rule 82 purposes who would have been the
hypothetical prevailing party. Rule 82 is only intended to
partially compensate prevailing parties, not to provide an
incentive for merits litigation that would not otherwise take
place.47
Evidence, discussed in Part III.B.4, would have
permitted a finding that the directors would have cured the
corporate deficiencies absent the lawsuit. But the memorandum
opinion awarding fees did not refer to this evidence. And it did
not find that the directors would have remedied the deficiencies
either spontaneously or in response to a pre-suit demand. Nor
did it find that the actions that mooted the complaint and
benefitted the corporation were not attributable to the lawsuit.
The evidence would not have compelled such findings. The
directors provided no direct evidence why they acted, and no
director offered an affidavit explaining why the old board acted.
The superior court recognized when it denied the shareholders
Rule 23.1(j) attorneys fees motion that there were conflicting
inferences about whether a majority of the directors were
implicated in an injury to the corporation. These conflicting
inferences were also relevant to the reasons the board acted.
In summary, the plaintiffs failure to meet their burden
of proving that a formal demand was excused did not necessarily
mean that the directors were the prevailing parties. Because the
complaint was dismissed as moot shortly after its filing as a
result of the defendants apparently responsive actions, it would
be unrealistic to treat the directors as prevailing parties
unless they demonstrated why the suit became moot, i.e., why the
corporation was reinstated and the annual meeting was
accelerated. Notwithstanding other evidence permitting
conflicting factual inferences, the directors offered no direct
evidence why things were done that gave the plaintiffs the relief
they requested. Because we conclude as a matter of law that the
directors did not meet their burden of proof on the issue of
prevailing party status, we vacate their Rule 82 attorneys fees
award and remand for entry of a corrected judgment.48
D. The Directors Statutory Indemnification Award
The superior court ruled that the directors prevailing
party status also entitled them under AS 10.06.490(c) to full
indemnification from Ingalik.49 The plaintiff shareholders and
Ingalik argue that because the court did not find the election
and all subsequent board action to be invalid, the business
judgment rule required the court to enforce the new boards
resolution that denied indemnification to the defendant
directors.50 The defendant directors respond that because
indemnification under AS 10.06.490(c) was mandatory, the board
had no authority to adopt a resolution denying them
indemnification.51
This issue turns on whether the defendant directors
satisfied their burden of demonstrating that they were entitled
to indemnification under AS 10.06.490(c). We conclude that they
did not. We therefore vacate the indemnification award and
remand for entry of a corrected judgment.
It appears that indemnification is mandatory if the
conditions of AS 10.06.490(c) are met, because that subsection
provides that a corporate director who has been successful on the
merits or otherwise in defense of certain lawsuits including
derivative suits shall be indemnified.52 We assume that if
this subsection applies, mandating indemnification, the board has
no discretion to adopt a resolution denying indemnification.
But to be eligible for mandatory indemnification under
AS 10.06.490(c), these defendant directors had to have been
successful on the merits or otherwise in defense of an action . .
. .53 The defendant directors did not demonstrate that they
successfully defended the litigation on its merits or otherwise;
they simply obtained dismissal of the complaint, apparently by
providing the relief the complaint sought. As discussed in Part
III.C, above, the defendant directors did not establish why the
remedial actions were taken. The conflicting inferences about
how the lawsuit came to be mooted also pertain to the issue
whether the directors successfully defended the litigation.
Because the defendant directors did not establish why action was
taken that mooted the complaint, they did not meet their burden
of establishing a right to mandatory indemnification under AS
10.06.490(c). The plaintiffs failure to prove that a demand was
excused does not mean that the defendant directors must have been
successful in defending the suit. The complaint was dismissed
for mootness, not on a theory demand was unexcused.
Few cases discuss equivalent situations. Courts
requiring mandatory indemnification under substantially identical
statutes do so when the defendant achieves success on the merits
or otherwise, including termination of claims by agreement
without any payment or assumption of liability.54 Courts are
reluctant to ask why the result was achieved.55 But in those
cases, it appears that the defendants did nothing to achieve the
dismissal; they certainly paid no consideration, and they took no
corrective action that mooted the lawsuits.
Because the superior court did not apply the statutory
standard for determining whether the defendant directors were
entitled to indemnification under AS 10.06.490(c), we must vacate
the indemnification award. And because the directors simply
asserted below that the dismissal with prejudice entitled them to
indemnification, they failed to establish that the dismissal was
not attributable at least in part to a desire to resolve the
lawsuit. We therefore remand for entry of a corrected judgment
that deletes the indemnification award.
IV. CONCLUSION
The plaintiff shareholders are not prevailing parties
because the court found that their failure to make a demand was
not excused. In the absence of a demand, it is uncertain whether
the defendant directors would have responded to a demand as they
responded to the lawsuit, affording the plaintiffs the relief
they sought. Although the suit might factually have brought
about the relief, this is not enough. Plaintiffs must show that
a demand would not have resulted in the same relief. Because
this is difficult to show and the difficulty is a product of
their failure to make a demand, they can not be regarded as
prevailing parties.
The defendant directors are not prevailing parties
because they did not prove that the lawsuit was not a cause of
the remedial action they took, or that if a demand had been made
they would have taken the remedial action.
For these reasons, we (1) AFFIRM the superior courts
holding that the plaintiff shareholders were not prevailing
parties and were consequently not entitled to attorneys fees
under Civil Rules 23.1 and 82; (2) VACATE the award of costs and
Civil Rule 82 attorneys fees to the defendant directors against
the plaintiff shareholders; (3) VACATE the defendant directors
award of indemnification under AS 10.06.490(c); and (4) REMAND
for entry of a corrected judgment reflecting that all parties are
to bear their own costs and attorneys fees.56
CARPENETI, Justice, dissenting.
I agree with the courts conclusion that the plaintiffs
were not excused from the requirement that they make a demand on
the corporation before filing suit, and that their failure to
make a demand precludes their recovery of attorneys fees. But
because a review of the record shows that the superior court
dismissed the complaint precisely because the plaintiffs failed
to carry their burden of showing that their failure to make a
demand was excused, I dissent from Parts III.C. and III.D of
todays ruling.
In vacating the superior courts award of attorneys fees
to the defendant directors, todays opinion assumes that the
superior court dismissed the complaint for mootness: [I]n June
the superior court dismissed the complaint with prejudice,
apparently because the complaint was mooted by the corporations
reinstatement and the annual meeting.1 It concludes that a
dismissal for mootness did not establish that the defendant
directors were the prevailing parties. The courts assumption
that the complaint was dismissed for mootness is incorrect.
A review of the record shows that, at the time the case
was dismissed, the superior court did not specify a reason for
its action. Under our well-established case law, when a trial
court does not specify a reason for its decision, we may review
the record and affirm if any basis for the courts action is
supported by the record.2 Moreover, by the time of its final
ruling,3 the superior court unmistakably based its decision on
the plaintiffs unexcused failure to make a demand on the
corporation.
Although unspoken, the courts opinion today suggests
that, once a superior court announces a rationale for its
decision, it may not change it. But this is not the law. We
have consistently upheld the proposition that one superior court
judge who inherits a case from another superior court judge is
free to reexamine and reverse an earlier decision in that case if
convinced that it is erroneous: [I]t [is] entirely reasonable for
a judge whose responsibility it is to try a case to reconsider
and reverse an earlier ruling if convinced that that ruling was
erroneous.4
If one judge may reconsider and reverse a predecessor
judges ruling in a case, then a fortiori a single judge may
reconsider and modify the basis for his or her own earlier ruling
in a case. That is what happened in this case, as a review of
the record shows.
The record establishes: (1) that the defendants
proposed three reasons to dismiss the case; (2) that the superior
court dismissed the case without specifying the reason for the
dismissal; (3) that at the same time the court declined to award
attorneys fees to either side but set the matter on for a
hearing; (4) that at the beginning of the hearing the court
suggested one basis for the dismissal, mootness; but (5) during
the hearing the court suggested a different basis for the
dismissal; and (6) that by the time of its written order shortly
thereafter the superior court unambiguously held that it
dismissed the case because demand was not excused. I examine
each of these events in turn.
Defendant directors offered three reasons for
dismissing the case. The first, and most extensively argued, was
that the plaintiffs had not shown that their failure to make a
demand on the corporation was excused. Accordingly, we can
uphold the dismissal on this ground. Indeed, the court today
rests its affirmance of the superior courts denial of attorneys
fees to plaintiffs on this very ground.5
It is true that, at the time the superior court granted
the motion for dismissal, it did not state a reason for its
decision; it even modified the defendants proposed order by
striking language awarding fees to the defendants. Rather, in
what can only be described as a cautious approach to a difficult
issue, the court retain[ed] jurisdiction to determine prevailing
party status and to award costs and fees as may be appropriate.
At the commencement of the hearing to address the
question of attorneys fees, it is also true that the superior
court suggested that mootness might be the grounds for its
action.6 But during the course of the hearing the superior
court, through its probing of counsel for both sides, made quite
clear that it considered the plaintiffs failure to make a demand,
and the lack of excuse for that failure, to be critical to its
earlier decision to dismiss. For example, the court stated, Rule
23.1 says [the plaintiffs] bear the burden of proving that the
demand was excused. Later, the court noted that [t]he demand is
the part of this case thats giving me the biggest problem right
now. What have you done to bear the burden of proving that the
demand was excused in this case? Finally, the court observed, if
the plaintiffs were alleging inaction on the part of the
directors, isnt it just commonsensical that you would first ask
them to take the action you want?
All of these statements call into question this courts
conclusion that the superior court dismissed the case on mootness
grounds. And, by the end of the hearing and the filing six days
later of the superior courts written decision, it is quite clear
that the court had dismissed the case on the basis of the
plaintiffs failure to show that their lack of demand was excused:
Under Alaska R. Civ. P. 23.1(d), a
shareholder who files suit without having
made the formal demand contemplated by Rule
23.1(c) bears the burden of proving that
demand was excused. . . . Demand was not
excused and defendants were thus entitled to
dismissal pursuant to Alaska R. Civ. P.
23.1(d). Consequently, they must be
recognized as the prevailing party entitled
to recover attorneys fees.
Thus, while the superior courts original order of
dismissal did not specify the grounds for dismissal, the court
plainly stated in its final order after the hearing to determine
the prevailing party that the plaintiffs failure to make a demand
was not excused and defendants were thus entitled to dismissal
pursuant to Alaska R. Civ. P. 23.1(d).
In sum, the whole record establishes that the superior
court dismissed the case due to the plaintiffs failure to make a
formal demand. Because the superior courts ruling on the merits
was that the plaintiffs failed to show that the demand
requirement was excused, the director defendants were successful
on the merits and were the prevailing party. Also, because the
director defendants were successful on the merits, they are
entitled to mandatory indemnification. I would, therefore,
affirm the judgment of the superior court in its entirety. At
the very least, given our demonstrated uncertainty concerning the
basis for the superior courts decision, we ought, in fairness to
the superior court, to remand the case and allow the superior
court to make clear the basis upon which it dismissed the case.
_______________________________
* This opinion replaces Opinion No. 5650 issued December
13, 2002. In response to appellees petition for rehearing, the
court adds footnote 56.
1 Brandon v. State, Dept of Corr., 938 P.2d 1029, 1031
(Alaska 1997) (citation omitted).
2 Guin v. Ha, 591 P.2d 1281, 1284 n.6 (Alaska 1979).
3 Garber v. Lego, 11 F.3d 1197, 1200 (3d Cir. 1993).
4 Mathis v. Sauser, 942 P.2d 1117, 1120 (Alaska 1997)
(citation omitted).
5 Ashley v. Baker, 867 P.2d 792, 796 (Alaska 1994)
(citation omitted).
6 We initially reject defendant directors argument that
because plaintiffs are appealing the October 1998 prevailing-
party ruling and not the merits of the June 1998 order dismissing
their complaint, they have waived their right to challenge the
ruling that they did not prove that demand was excused. The June
8, 1998 dismissal order retained jurisdiction to determine
prevailing party status and to award costs and fees. Plaintiffs
correctly argue that they could wait and appeal the superior
courts final judgment, which was first entered on October 7,
1998. Plaintiffs did not appeal (and had no reason to appeal) the
underlying dismissal because the goals of their lawsuit had been
achieved.
7 The minutes of the April 26, 1998 board meeting
indicate that the Anvik Tribal Council, a non-party, initially
paid some or all of plaintiff shareholders attorneys fees.
Defendant directors have not argued that this circumstance
precludes plaintiff shareholders Rule 82 claim.
But circumstances bearing on how legal fees and costs
were to be paid may be relevant for other reasons we discuss
below. Plaintiffs counsel submitted affidavits and attachments
demonstrating that legal fees totaling $26,073 had been incurred
by the plaintiffs as of June 30, 1998. Of that, the Anvik Tribal
Council had paid fees totaling $15,000, plaintiffs counsels law
firm had advanced an additional $7,670.70 in services, and
Ingalik had agreed to pay for services, worth $4,341, the law
firm provided after Ingalik sought to became a party plaintiff.
The fees incurred by or for Jerue and Demoski individually thus
totaled $22,670.70. By resolution, Ingaliks new board agreed to
reimburse the Anvik Tribal Council and the law firm for the legal
services provided to Jerue and Demoski.
8 Alaska Civil Rule 23.1(j) provides:
If the derivative action is successful, in
whole or in part, or if anything is received
as a result of the judgment, compromise, or
settlement of that action, the court may
award to the plaintiff or plaintiffs
reasonable expenses, including reasonable
attorney fees, and shall direct an accounting
to the corporation for the remainder of the
proceeds. This subsection does not apply to
a judgment rendered only for the benefit of
injured shareholders and limited to a
recovery of the loss or damage sustained by
them.
The text of AS 10.06.435(j) is identical.
9 It appears that Alaska Civil Rule 23.1(j) is modeled
after New York Business Corporation Law 626(e), which provides:
If the action on behalf of the corporation
was successful, in whole or in part, or if
anything was received by the plaintiff or
plaintiffs or a claimant or claimants as the
result of a judgment, compromise or
settlement of an action or claim, the court
may award the plaintiff or plaintiffs,
claimant or claimants, reasonable expenses,
including reasonable attorneys fees, and
shall direct him or them to account to the
corporation for the remainder of the proceeds
so received by him or them. This paragraph
shall not apply to any judgment rendered for
the benefit of injured shareholders only and
limited to a recovery of the loss or damage
sustained by them.
The New York courts have interpreted this provision to
provide for fee-sharing, but not fee-shifting. See, e.g., Glenn
v. Hoteltron Sys., Inc., 547 N.E.2d 71, 75 (N.Y. 1989) (holding
that New York provision with language nearly identical to Civil
Rule 23.1(j) was what we would call fee-sharing, not fee-shifting
provision i.e., that litigation expenses awarded under provision
are to be borne by corporation, not losing party). Citing Glenn,
the Fletcher Cyclopedia states, The obligation to reimburse
expenses to a shareholder who brings a successful derivative
action should be the obligation of the corporation, and not the
obligation of the defendants. 13 Timothy P. Bjur & James
Solheim, Fletcher Cyclopedia of the Law of Private Corporations
6044, at 357 (1995 rev.) While the semantic distinction between
fee sharing and fee shifting does not seem to be similarly
observed by the Delaware Supreme Court, it is worth noting that
under Delaware corporate law, what we call fee sharing (but which
the Delaware Supreme Court considers fee shifting even in cases
where the litigation creates, and the fees are collected from, a
common fund) can, provided that a three-part test is met, remain
available to plaintiffs even in the event a derivative suit is
dismissed as moot. See Waterside Partners v. C. Brewer & Co.,
739 A.2d 768, 769-70 (Del. 1999) (holding first, that fee
shifting [what this court would call fee sharing] was not
appropriate where common benefit was conferred on corporation
through successful proxy contest parallel to but outside context
of derivative litigation, and second, that policy embracing fee
shifting in cases in which benefit to corporation was created
outside litigation context would have no limiting principle).
Despite the semantic complications between fee sharing and fee
shifting, and Delawares willingness to consider what we would
call fee sharing in cases where derivative suits are dismissed as
moot, Delaware appears to have no rule like Alaska Civil Rule
23.1(j) or statute like AS 10.06.435(j) or N.Y. Bus. Corp. L.
626(e). Given the apparent derivation of the Alaska statute and
rule, we read Rule 23.1(j) to provide only for fee-sharing. Our
existing fee-shifting rule, Rule 82(a), adequately deals with
attempts to recover litigation expenses from defendants in
derivative suits.
10 See, e.g., Glenn, 547 N.E.2d at 71.
11 See Municipality of Anchorage v. Gallion, 944 P.2d 436,
445-48 (Alaska 1997) (differentiating between fee-sharing and fee-
shifting rules); Edwards v. Alaska Pulp Corp., 920 P.2d 751, 755
(Alaska 1996).
12 The June dismissal order did not specify the ground for
dismissal. But during the October oral argument on the attorneys
fees motions, the superior court announced:
We should certainly proceed on the assumption
that the dismissal was on mootness grounds,
and the reason I say that is because it would
have made no sense at all to reserve decision
on prevailing party status had the case been
otherwise, would it? . . . For todays
purposes, lets . . . assume mootness is the
basis for the dismissal.
Those words and the other relevant record passages
demonstrate that the superior court dismissed the complaint for
mootness, not on a theory the plaintiff shareholders did not make
a formal demand. See Dissent at 34-35. The superior court
thought at the October hearing that the demand excuse issue was
critical to the competing fees motions, and it proceeded to
consider the parties arguments on that issue. It told the
plaintiffs lawyer, demand is the part of this case thats giving
me the biggest problem right now, and asked him directly, What
have you done to bear the burden of proving that demand was
excused in this case? These comments are inconsistent with
concluding that the court had already resolved the issue when it
dismissed the complaint. If the court had decided that issue in
June, there would have been no reason to consider it again in
October. The court was clearly attempting to decide whether the
plaintiffs had satisfied their burden of proving that demand was
excused, and was thus necessarily resolving an issue it had not
previously decided.
Dismissal in June for failure to prove that demand was
excused is also contextually improbable. There was no real
dispute in June that the relief the complaint sought had been
achieved, i.e., that the complaint was moot. In comparison, the
demand excuse issue was in substantial dispute. It is unlikely
that the dismissal would have been with prejudice if the court
had thought the complaint was deficient. It is also unlikely
that the parties submissions as of June would have allowed the
court to resolve the demand excuse issue on its merits. (But if
that had been the basis for the dismissal, it is probable the
dismissal order would have said so.) Before the court decided
the demand excuse issue in October, the parties submitted
extensive filings not before the court when it dismissed the
complaint in June.
In context, we read the order deciding the fees motions
to mean that the directors would have been entitled to dismissal
(were thus entitled to dismissal) on the demand excuse issue had
that issue been fully litigated or decided in June. We do not
read it to mean that the court actually dismissed the complaint
for failure to prove demand excuse, rather than for mootness.
13 Compare Buckhannon Bd. & Care Home, Inc. v. West
Virginia Dept of Health & Human Res., 532 U.S. 598, 605-10 (2001)
(discussing and rejecting catalyst rule for determining
prevailing party status) with DeSalvo v. Bryant, 42 P.3d 525, 530
(Alaska 2002) (discussing catalyst theory); State, Dept of
Natural Res. v. Tongass Conservation Socy, 931 P.2d 1016, 1031
(Alaska 1997) (discussing catalyst theory and possible
differences between purposive federal fee-shifting statutes and
Alaska Civil Rule 82).
We do not need to decide here whether policies
potentially justifying a catalyst approach to encourage certain
types of claims would apply to shareholder derivative actions.
See Matthew D. Slater, Civil Rights Attorneys Fees Awards in Moot
Cases, 49 U. Chi. L. Rev. 819 (1982).
14 AS 10.06.435(j); Civil Rule 23.1(j); see also 13
Timothy P. Bjur & James Solheim, Fletcher Cyclopedia of the Law
of Private Corporations 6045.01, at 366 (1995 rev.) (footnotes
omitted).
15 E.g., In re Oracle Sec. Litig., 852 F. Supp. 1437, 1447
(N.D. Cal. 1994) (citing Chrysler Corp. v. Dann, 223 A.2d 384,
389 (Del. 1966), as holding that lack of causal connection
between alleged corporate benefit and the derivative suit
justified denial of fee award).
16 AS 10.06.435(c) provides:
Unless excused on grounds that a majority of
the directors is implicated in or under the
direct or indirect control of a person who is
implicated in the injury to the corporation,
before an action in the right of a domestic
or foreign corporation is instituted a
plaintiff who has standing under (b) of this
section shall make a formal demand upon the
board to secure the action the plaintiff
desires.
Alaska Civil Rule 23.1(c) is identical.
17 AS 10.06.435(c); Alaska R. Civ. P. 23.1(c).
18 AS 10.06.435(d); Alaska R. Civ. P. 23.1(d).
19 AS 10.06.435(d); Alaska R. Civ. P. 23.1(d). AS
10.06.435(d) provides:
If a shareholder fails to make a formal
demand under (c) of this section the
complaint shall state with particularity the
facts establishing excuse under (c) of this
section. In a motion to dismiss for failure
to make demand on the board the shareholder
shall have the burden to establish excuse.
Alaska Civil Rule 23.1(d) is identical.
20 E.g., Aronson v. Lewis, 473 A.2d 805, 809 (Del. 1984)
(acknowledging that demand requirement is a rule of substantive
right designed to give a corporation the opportunity to rectify
the alleged wrong without litigation, and to control any
litigation which does arise) (citation omitted), overruled on
other grounds by Brehm v. Eisner, 746 A.2d 244, 255 (Del. 2000);
Werbowsky v. Collomb, 766 A.2d 123, 144 (Md. 2001) (discussing
futility exception, and noting that demand requirement gives the
directors even interested, non-independent directors an
opportunity to consider, or reconsider, the issue in dispute . .
. [which] may be their first knowledge that a decision or
transaction they made or approved is being questioned).
21 E.g., Gaubert v. Fed. Home Loan Bank Bd., 863 F.2d 59,
65 (D.C. Cir. 1988) (The demand requirement also serves the goal
of judicial economy, by giving the corporation a full opportunity
to put its house in order before it is prematurely hauled into a
court to account for its actions.) (citation omitted); Brehm, 746
A.2d at 255 ([B]y requiring exhaustion of intracorporate
remedies, the demand requirement invokes a species of alternative
dispute resolution procedure which might avoid litigation
altogether.); see generally BJUR & SOLHEIM, supra note 9, 5963,
at 127 ([D]emand requirement in derivative proceedings serves as
a form of notice to the corporation. It is designed to assure
that the shareholder affords the corporation the opportunity to
address the alleged wrong without litigation and to control any
litigation which does occur.) (footnote omitted).
22 BJUR & SOLHEIM, supra note 9, 5963, at 127 (footnotes
omitted).
23 E.g., Lewis v. Graves, 701 F.2d 245, 248 (2d Cir.
1983); Greenspun v. Del E. Webb Corp., 634 F.2d 1204, 1208 (9th
Cir. 1980); Shelton v. Thompson, 544 So. 2d 845, 850 (Ala. 1989).
24 Fed. R. Civ. P. 23.1.
25 Graves, 701 F.2d at 248 (citation omitted).
26 Kamen v. Kemper Fin. Servs., Inc., 908 F.2d 1338, 1343
(7th Cir. 1990) (acknowledging Delaware Supreme Court as mother
court of corporate law), overruled on other grounds, 500 U.S. 90
(1991).
27 Brehm v. Eisner, 746 A.2d 244, 253 (Del. 2000).
28 Id. at 253 (applying Del. Ch. Ct. R. 23.1).
29 Id. at 254.
30 11 F.3d 1197, 1200 (3d Cir. 1993) (citations omitted).
31 AS 10.06.435(c); Alaska R. Civ. P. 23.1(c).
32 Lewis v. Curtis, 671 F.2d 779, 784-85 (3d Cir. 1982),
superseded on other grounds by Garber v. Lego, 11 F.3d 1197, 1206-
07 (3d Cir. 1993); Coyer v. Hemmer, 901 F. Supp. 872, 886 (D.N.J.
1995); Brehm, 746 A.2d at 253.
33 Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984),
overruled on other grounds by Brehm, 746 A.2d 244.
34 Aronson, 473 A.2d at 808 n.1.
35 Fed. R. Civ. P. 23.1; Del. Ch. Ct. R. 23.1.
36 Civil Rule 23.1 was adopted in 1988 as part of the
legislatures comprehensive revision of the Alaska Corporations
Code. Ch. 166, 1, 17, SLA 1988; see generally The Alaska Code
Revision Commission, A Comparative Study of the Proposed Alaska
Corporations Code (ACC) with the Final 1984 Draft of the Revised
Model Business Corporation Act (RMBCA) (Apr. 1985) (Code Revision
Report). That report indicates that Rule 23.1(c)s demand
requirement, as enacted in AS 10.06.435(c), was original work by
the code revision commission. Id. at 42.
37 Greenspan v. Del E. Webb Corp., 634 F.2d 1204, 1209-10
(9th Cir. 1980) (noting that demand requirement is excused when
either majority of board is interested in underlying transaction
or underlying transaction was completely unrelated to corporate
purpose); In re Kauffman Mut. Fund Actions, 479 F.2d 257, 264-65
(1st Cir. 1973) (same); Kaufman v. Kansas Gas & Elec. Co., 634 F.
Supp. 1573, 1580-81 (D. Kan. 1986) (holding that complaint must
allege self-dealing or bias on part of majority of board of
directors to establish excuse); Aronson, 473 A.2d at 814 (holding
that futility is established when plaintiff raises reasonable
doubt that (1) majority of directors are disinterested and
independent, and (2) the challenged transaction was otherwise
product of a valid exercise of business judgment); Marx v. Akers,
666 N.E.2d 1034, 1040-41 (N.Y. 1996) (holding that demand
requirement is excused when (1) majority of board is interested
in challenged transaction, (2) board members did not inform
themselves about transaction, and (3) challenged transaction is
so egregious on its face that it could not have been the product
of sound business judgment).
38 AS 10.06.435(c); Alaska R. Civ. P. 23.1(c).
39 Code Revision Report, supra note 36.
40 Alaska R. Civ. P. 23.1(d).
41 Although there was a factual dispute regarding the
question of demand excuse (whether a majority of the directors
were implicated in the alleged injury), the parties were
apparently content to litigate the fees and demand issues based
on the extensive memoranda, affidavits, and exhibits they filed.
No party sought to introduce live testimony on this point or
requested an evidentiary hearing. The shareholders do not claim
on appeal that the superior court erred by resolving these issues
without an evidentiary hearing.
42 See infra pp. 13-15 and notes 20-21.
43 AS 10.06.435(j); Alaska R. Civ. P. 23.1(j).
44 They also argue that the court dismissed the suit on
the grounds that no formal demand had been made as required by
Civil Rule 23.1(c). This argument is without merit: the court
dismissed for mootness, not because demand was unexcused.
45 City of Yakutat v. Roman, 654 P.2d 785, 793 (Alaska
1982) (holding that defendant city was not Rule 82 prevailing
party where trial court found that complaint was at least partly
responsible for citys corrective actions resulting in dismissal
of complaint for mootness).
46 See supra note 13.
47 See Alaska R. Civ. P. 82(b)(2).
48 Likewise, the judgment should not include a prevailing-
party costs award.
49 AS 10.06.490(c) provides:
To the extent that a director, officer,
employee, or agent of a corporation has been
successful on the merits or otherwise in
defense of an action or proceeding referred
to in (a) or (b) of this section, or in
defense of a claim, issue, or matter in the
action or proceeding, the director, officer,
employee, or agent shall be indemnified
against expenses and attorney fees actually
and reasonably incurred in connection with
the defense.
(Emphasis added.)
50 The resolution provided:
THEREFORE BE IT RESOLVED, that the Board of
Directors of Ingalik, Incorporated acting
pursuant to AS 10.06.490(a), hereby denies
any indemnification of defense costs,
including court costs, litigation expenses,
and legal fees to said defendant officers and
directors, specifically, Kenneth Chase,
Shannon Chase, Gloria Millett[,] and Theodore
Kruger, Jr. for their defense of the action
brought by shareholders Carl Jerue, Jr. and
Ernie Demoski, Sr.
Soon after adopting this resolution, the new board agreed to
indemnify Theodore Kruger, Jr., the only incumbent reelected to
the board.
51 Defendant directors also argue that they were entitled
to discretionary indemnification and that the boards resolution
was contrary to Ingaliks bylaws, which require indemnity to the
full extent permitted by law. These alternative arguments are
resolved by our analysis of AS 10.06.490(c).
52 In comparison, the other subsections of AS 10.06.490
appear to make indemnification permissive or discretionary,
regardless of the success of the litigation. Thus, AS
10.06.490(a), (b), and (d) provide in pertinent part:
(a) A corporation may indemnify a
person who was, is, or is threatened to be
made a party to a completed, pending, or
threatened action or proceeding, whether
civil, criminal, administrative, or
investigative, other than an action by or in
the right of the corporation, by reason of
the fact that the person is or was a
director, officer, employee, or agent of the
corporation, or is or was serving at the
request of the corporation as a director,
officer, employee, or agent of another
corporation, partnership, joint venture,
trust, or other enterprise. . . .
(b) A corporation may indemnify a
person who was, is, or is threatened to be
made a party to a completed, pending, or
threatened action by or in the right of the
corporation to procure a judgment in its
favor by reason of the fact that the person
is or was a director, officer, employee, or
agent of the corporation, or is or was
serving at the request of the corporation as
a director, officer, employee, or agent of
another corporation, partnership, joint
venture, trust, or other enterprise. . . .
. . . .
(d) Unless otherwise ordered by a
court, indemnification under (a) or (b) of
this section may only be made by a
corporation upon a determination that
indemnification of the director, officer,
employee, or agent is proper in the
circumstances because the director, officer,
employee, or agent has met the applicable
standard of conduct set out in (a) and (b) of
this section. . . .
(Emphasis added.)
53 AS 10.06.490(c).
54 Waltuch v. Conticommodity Serv. Inc., 88 F.3d 87, 96-97
(2d Cir. 1996) (holding that Waltuch was entitled to mandatory
indemnification because he walked away without liability and
without making a payment); Wisener v. Air Express Intl Corp., 583
F.2d 579 (2d Cir. 1978) (construing similar Illinois statute to
same effect); B & B Inv. Club v. Kleinerts, Inc., 472 F. Supp.
787 (E.D. Pa. 1979) (requiring mandatory indemnification for
officer who made no monetary payment, but who was dismissed from
case with prejudice because second officer paid to settle claim).
55 Waltuch, 88 F.3d at 96.
56 Reversal of the mandatory indemnification award entered
under AS 10.06.490(c) does not prevent Ingalik from indemnifying
director Kruger as an exercise of board discretion under AS
10.06.490(a) or (b). The boards resolution of April 26, 1998
seems to have exercised that discretion in favor of indemnifying
director Krugers litigation expenses.
1 Slip Op. at 10 (emphasis added). In a footnote, the
court quotes the superior courts direction to counsel at the
outset of oral argument on the attorneys fees motions to assume
mootness is the basis for the dismissal. Slip Op. at 11 n.12.
As shown below, however, by the end of the hearing and in the
order that followed, the superior court made clear that the
dismissal was based on the plaintiffs failure to show that their
lack of demand was excused. See infra at 35-36.
2 See, e.g., Municipality of Anchorage v. Higgins, 754
P.2d 745, 748 (Alaska 1988) (appellate court may uphold lower
courts ruling on any ground that is apparent from the record and
that supports the decision as a matter of law).
3 The courts opinion creates a straw man when it observes
that the superior courts comments at the October hearing are
inconsistent with concluding that the court had already resolved
the issue when it dismissed the complaint. (Opinion at 11, n.12)
This dissent does not contend that the superior court had already
resolved the issue when it dismissed the complaint. It does
contend that a trial court has the right to change its mind and
to revisit a decision before it is final. See infra text at note
4 and note 4.
4 Stepanov v. Gavrilovich, 594 P.2d 30, 36 (Alaska 1979).
See also West v. Buchanan, 981 P.2d 1065, 1067 (Alaska 1999)
(second trial judge within her discretion to reconsider
predecessor trial judges ruling).
5 Slip Op. at 20-22.
6 This suggestion, set out in the courts opinion at 10
n.12, did not amount to a finding or ruling by the superior
court. At most, it showed that the court was considering
mootness as the rationale for its decision to dismiss the case.
But even if it had formally ruled on that basis, there is no
reason why the court could not change its ruling. See supra text
at note 4.
