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Kona Enterprises, Inc. ex rel Handford's, Inc. v. Estate of Bishop ex rel. Peters
Citations: 179 F.3d 767; 99 Cal. Daily Op. Serv. 4280; 44 Fed. R. Serv. 3d 225; 99 Daily Journal DAR 5463; 1999 U.S. App. LEXIS 11345; 1999 WL 356093Docket: No. 98-16197
Court: Court of Appeals for the Ninth Circuit; June 4, 1999; Federal Appellate Court
Kona Enterprises was established for investors, including the Defendants, to control two companies: Hanford’s, Inc. and Nationwide. The Bishop Estate intervened by providing letters of credit to prevent foreclosure but later purchased the companies’ loans and foreclosed due to non-payment, seizing their assets under a stock pledge agreement. Subsequently, Kona and its shareholders filed suit against the Defendants for breaches of fiduciary duty, good faith, and fair dealing, as well as interference with corporate opportunity. The district court ruled that Kona did not have direct claims and lacked standing for derivative claims. On appeal, Kona argues: 1) the court incorrectly stated it had not asserted a direct claim for damages, and 2) it has standing for derivative claims despite not meeting the continuous share ownership requirement of Rule 23.1, suggesting state law applies and that an equitable exception exists for those who lost shares involuntarily due to wrongful conduct. The court reviews whether Kona can assert a direct claim or has derivative standing de novo, concluding that Kona has not made a direct claim as it seeks damages for the Companies' decline in value rather than a return of shares. The issue of Rule 23.1’s applicability in diversity cases remains unresolved in the Circuit, although it has been touched upon in previous decisions. Rule 23.1’s continuous share ownership requirement is procedural and applicable in diversity actions, with federal courts enforcing it despite varying state laws. Kona's lack of contemporaneous stock ownership in the Companies at the time of filing deprives it of standing to pursue derivative claims. Even if Rule 23.1 were inapplicable, state law would lead to the same conclusion, as most jurisdictions require ownership at the time of the transaction and when the suit is filed. States like North Carolina and Pennsylvania have less stringent requirements but still necessitate ownership during these critical times. Kona argues for equitable standing based on two precedents: Eastwood v. National Bank of Commerce, where a plaintiff had a vested interest in challenging a foreclosure linked to a derivative claim, and the "merger" cases, where plaintiffs lost stock due to wrongful conduct during a merger. However, Kona does not fit these exceptions as it has not sought recovery of its shares or challenged the stock pledge agreement. Additionally, no merger has occurred, and the Companies still exist, meaning the standing to pursue claims under Rule 23.1 lies with the current shareholders or the Companies themselves. The court affirmed the dismissal of Kona's claims, noting its previous litigation history in North Carolina and Utah, with the North Carolina suit voluntarily dismissed and the Utah case dismissed for improper venue.