Nelson Gomes v. American Century Companies

Citations: 710 F.3d 811; 2013 WL 1235238; 2013 U.S. App. LEXIS 6184Docket: 12-1639

Court: Court of Appeals for the Eighth Circuit; March 28, 2013; Federal Appellate Court

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Nelson Gomes, an investor in the American Century International Discovery Fund, initiated a lawsuit against the Fund's fiduciaries, alleging violations of Maryland common law and federal racketeering laws under 18 U.S.C. § 1962(c) and (d). The complaint included derivative claims for breach of fiduciary duty, negligence, waste, and racketeering, asserting that the fiduciaries knowingly invested in two illegal off-shore Internet gambling websites, Bwin Interactive Entertainment AG and NETeller Plc. As a result of government crackdowns, these websites forfeited substantial assets and ceased operations, leading to significant financial losses for the Fund.

The district court dismissed Gomes's complaint, determining that he failed to adequately state a claim and did not make a pre-suit demand on the Fund's board of directors as required under Federal Rule of Civil Procedure 23.1, which mandates that derivative action complaints state with particularity any efforts made to obtain action from the directors and the reasons for not doing so. Gomes appealed the dismissal, and the Eighth Circuit, reviewing the case de novo, affirmed the district court's decision, emphasizing that a complaint must present sufficient facts for a plausible claim, adhering to the heightened pleading standard set by Rule 23.1.

A complaint must allege facts that allow a federal court to determine if a demand requirement has been satisfied, particularly in cases of derivative claims arising under state law without a pre-suit demand. Federal courts apply state law to decide if a demand is excused in such scenarios. For derivative claims under federal law, state law can be used unless it contradicts federal objectives. In the context of Gomes' racketeering claim, he argues that applying Maryland's demand requirement would contradict RICO’s broad remedial purpose. However, the requirement of demand is not inherently inconsistent with RICO's objectives. The Supreme Court has maintained that even remedial statutes like the Investment Company Act can have demand requirements where they serve to regulate corporate governance. The Court has previously ruled that independent directors may terminate derivative claims in certain situations, even if they serve a remedial purpose. Furthermore, the Daily Income Fund case allowed claims to proceed without a demand due to unique circumstances not applicable here. Ultimately, under Kamen, applying Maryland's demand requirement does not frustrate RICO’s policies, and an investor's requirement to offer a corporation the chance to pursue a claim does not prevent them from suing if the demand is refused.

Maryland law applies to Gomes's claims regarding the demand requirement. Demand is only excused under Maryland law in limited circumstances: (1) if waiting for a response would cause irreparable harm to the corporation, or (2) if a majority of directors are so conflicted that they cannot respond in good faith. Gomes argues demand was futile because fiduciaries rejected a similar pre-suit demand, but futility is assessed at the time the derivative action is initiated, not afterward. If demand was not futile at that time, Gomes had no right to initiate the action. 

Gomes also claims the fiduciaries could not respond in good faith due to their involvement in the alleged wrongdoing. He references Parish v. Maryland, which states that demand is futile if a majority of the board participated in the wrongdoing. However, the more recent case, Werbowsky, emphasizes stricter enforcement of the demand requirement and rejects the notion that mere participation in wrongdoing automatically excuses demand. Instead, it allows directors, even those with conflicts, an opportunity to reconsider the decision in dispute. This shift indicates a move away from the broad application of the futility exception established in Parish.

No Maryland court has established that demand is excused solely due to directors' participation in a transaction leading to a claim, which may expose them to personal liability. Gomes references a federal case, Felker v. Anderson, suggesting demand was excused under Maryland law when directors were involved in harmful decisions. However, other federal courts have criticized Felker's approach and opted not to follow it, with Seidl v. Am. Century Co. presenting a more favorable interpretation of Maryland law regarding demand requirements. The conclusion drawn is that demand is necessary for all of Gomes’s derivative claims, as mere participation by directors in alleged misconduct does not suffice to waive this requirement. Consequently, the district court's dismissal of Gomes’s complaint is upheld, and there is no need to evaluate whether Gomes adequately alleged that the purported RICO violations caused the Fund's losses. The district court's judgment is affirmed.