The opinion
IN THE UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF ARKANSAS
CENTRAL DIVISION
BARBARA BONESSI PLAINTIFF
v. No. 4:19-cv-567-DPM
GEORGE GLEASON, et al. DEFENDANTS
MEMORANDUM ORDER AND OPINION
This shareholder derivative action is a companion to Strathclyde
Pension Fund v. Bank OZK, No. 4:18-cv-793-DPM, which alleges
securities fraud arising from two big real estate loans that went bad.
Standing in place of the Bank’s board of directors, shareholder Barbara
Bonessi seeks to press eight claims about the loans by Bank OZK itself
against various current and former officers and board members. Her
allegations about the bad loans echo Strathclyde’s, which the Court
summarized in Doc. 50 in the other case and will not repeat here. The
Bank OZK defendants seek dismissal. Their layered arguments start
with a pleading matter unique to this kind of case. Bonessi did not
demand, before filing suit, that the current board take responding
action about the bad loans. She acknowledges her omission. In this
circumstance, the controlling Arkansas statute requires, and the
applicable Federal Rule of Civil Procedure confirms, that Bonessi must
plead “with particularity . .. why [s]he did not make the demand.”
ARK. CODE. ANN. § 4-27-740(b); see also FED. R. CIv. P. 23.1(b)(3)(B). She
acknowledges this obligation, too, pleading that any demand would
have been futile. Doc. 25 at §§ 189-96. If so, the omission is
understandable and excusable. “The law does not require a futile
ceremony.” Red Bud Realty Co. v. South, 153 Ark. 380, 397, 241 S.W. 21,
27 (1922).
Bank OZK is an Arkansas corporation. Because demand futility
is a matter of substance, Arkansas law controls. Kamen v. Kemper
Financial Services, Inc., 500 U.S. 90, 108-09 (1991). On this the parties
agree. But applicable Arkansas law is sparse. Red Bud Realty predates
Ark. Code Ann. § 4-27-740 by a half century. More recently, though
still a few years before the statute was adopted, the Arkansas Court of
Appeals considered whether a pre-suit demand would have been futile
in Morgan v. Robertson, 271 Ark. 461, 609 S.W.2d 662 (1980). Judge J.
Leon Holmes’s Order for this Court in Weinberger v. American
Composting, Inc., 2012 WL 1190970 (E.D. Ark. 2012), is directly on point.
Recognizing the lack of Arkansas precedent, the parties’ solid briefs fill
gaps with Delaware law. The Court agrees, and predicts that the
Arkansas Supreme Court would look to that jurisdiction in developing
Arkansas’s law. Blankenship v. USA Truck, Inc., 601 F.3d 852, 856 (8th
Cir. 2010).
Bank OZK’s board has sixteen directors. Appendix A lists the
then-serving directors who would have considered any demand from
Bonessi, along with their roles. The law presumes that directors are
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independent and disinterested. In Cardozo’s famous phrase, each must
discharge his or her fiduciary duties to the Bank and its shareholders
with, “the punctilio of an honor the most sensitive.” Meinhard v.
Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (1928). The presumptions
of independence and disinterest fade, however, if the stockholder in
Bonessi’s place casts reasonable doubt on them with good reasons.
Morgan, 271 Ark. at 466, 609 S.W.2d at 664-65. The legal conclusion
that a demand would be futile arises from all the facts, the
circumstances being so various that the law cannot define them with
precision. Morgan, 271 Ark. at 467, 609 S.W.2d at 665. Bonessi does not
plead her case as one where independence was doubtful. Compare Red
Bud Realty, 153 Ark. at 397, 241 S.W. at 27. Instead, she says that, for
differing reasons, it’s plausible that a majority of the board members
were not disinterested. Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993).
The math is against Bonessi. Taking the facts alleged at their
strongest, and granting her all reasonable inferences from those facts,
there are good reasons to doubt the disinterest of several directors. Mr.
Gleason, of course, was knee-deep in the supposedly bad loans. It’s
difficult, if not impossible, for any person to make a disinterested
judgment about his own actions. Mr. East’s company had done
approximately $250,000 of business with the Bank in 2016, and the
prospect of doing more casts a bit of doubt on his disinterestedness.
And several other directors— Ms. Freedberg, Mr. Kenny, Mr. Mullen,
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and Mr. Proost—sold some Bank OZK stock during the period when
Bonessi alleges that the price was inflated by imperfect disclosures
about the bad loans. The Bank OZK defendants explain why this fact
is both unremarkable and innocent, which it may be. But the Court
calls the issue for Bonessi at this point. That leaves ten directors
standing, a majority of the Bank’s sixteen-member board. Their names
are in bold in Appendix A.
Could they have put Bank OZK’s interests first, and weighed any
pre-suit demand about the bad loans fairly and impartially? Bonessi
answers no, for one main reason. She says a majority of the directors
face a substantial likelihood of personal liability on one or more of her
claims, thus putting their disinterestedness in doubt. E.g., Cottrell ex rel.
Wal-Mart Stores, Inc. v. Duke, 829 F.3d 983, 989-90 (8th Cir. 2016). This
potential personal liability arises, she continues, because the directors
served on various board committees that either knew or should have
known about the bad loans and the allegedly faulty public financial
disclosures that resulted. Some board members also signed some of
those disclosures.
Bonessi’s argument fails. She makes no plausible allegation “with
particularity,” Ark. Code Ann. § 4-27-740(b), that any director (other
than Mr. Gleason) actually knew about the problems with these loans.
As the Bank defendants emphasize, personal knowledge is essential for
personal liability on each claim Bonessi makes. She pleads no adequate
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particulars. She points to the membership of various directors on the
board’s audit committee, risk committee, and loan committee. See
Appendix A. These undisputed roles, though, are insufficient in
themselves. “Numerous cases from Delaware courts, as well as other
courts applying Delaware law, have time and again held that an
allegation that the underlying cause of a corporate trauma falls within
the delegated authority of a board committee does not support an
inference that the directors on that committee knew of and consciously
disregarded the problem for purposes of Rule 23.1.” Cottrell, 829 F.3d
at 994 (quotation omitted). The board members were entitled to rely on
the information provided by the Bank’s officers and employees.
Graham v. Allis-Chalmers Manufacturing Co., 41 Del. Ch. 78, 85, 188 A.2d
125, 130 (1963). And Bonessi’s complaint lacks any allegation that the
members of any of these committees ever got any revealing details or
reports about either of the two problem loans. That’s the death knell
for her amended complaint. The law’s presumption of
disinterestedness holds. Brehm v. Eisner, 746 A.2d 244, 264 n.66 (Del.
2000). On the facts pleaded with specificity, at least ten of Bank OZK’s
sixteen directors could have considered her demand disinterestedly.
Arkansas law therefore required the pre-suit demand that she did not
make. ARK. CODE. ANN. § 4-27-740(b); Morgan, 271 Ark. at 468, 609
S.W.2d at 665.
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+ + +
The motion to dismiss, Doc. 32, is granted. But the Court declines
the Bank defendants’ passing suggestion on reply, Doc. 36 at 42, to
dismiss with prejudice.
So Ordered.
D.P. Marshall Jr.
United States District Judge
Y Sypkmpynr 2.020 _
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Appendix A
___BoardMember CRRle
Nicholas Brown e Personnel & Compensation Committee
e Executive Committee
e Information System Steering Committee
e CRA/Fair Lending Committee
e CRA/Fair Lending Committee
Robert East e Chair, Nominating Committee
e Chair, Governance Committee
e Risk Committee
e Executive Committee
Kathleen Franklin e Nominating & Governance Committee
e Personnel & Compensation Committee
e Risk Committee
e Nominating & Governance Committee
e Information System Steering Committee
George Gleason e Board Chair/CEO
e Chair, Executive Committee
e Directors’ Loan Committee
e Asset-Liability Committee
Peter C. Kenny e Chair, Investment Committee
e Nominating & Governance Committee
e Personnel & Compensation Committee
e Executive Committee
e Asset-Liability Committee
e Directors’ Loan Committee
e Executive Committee
e Information System Steering Committee
Walter J. Mullen e Investment Committee
e Risk Committee
e Asset-Liability Committee
e Directors’ Loan Committee
Robert Proost e Investment Committee
e Audit Committee
e Asset-Liability Committee
e Directors’ Loan Committee
John Reynolds e Trust Committee
e Information System Steering Committee
e Personnel & Compensation Committee
e Information System Steering Committee
Ross Whipple e Chair, Risk Committee
e Executive Committee
e Directors’ Loan Committee