The opinion
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
RICHARD SULLIVAN,
Plaintiff,
Vv.
Civil Action No. 19-19510(MAS)(ZNQ)
BOROUGH OF ATLANTIC CITY
HIGHLANDS, et al., MEMORANDUM OPINION
Defendants, and
THOMAS PAINE HOUSE, LLC,
Nominal Defendant.
This matter comes before the Court upon Plaintiff Richard Sullivan’s (“Plaintiff”) Motion
for Leave to file a Second Amended Complaint (the “Motion’’). (Mot. for Leave to file Second
Amended Compl., ECF No. 33). Defendants Borough of Atlantic Highlands (the “Borough”),
Adam Hubeny, Martin Hawley, Richard Rast, Peter Johnson, and Tracie Ahern (“Defendants”)
opposed (Defs.’ Opp’n, ECF No, 34), and Plaintiff replied (P1.’s Reply, ECF No. 35). The Court
has carefully considered the arguments and decides the matter without oral argument pursuant to
Federal Rule of Civil Procedure 78 and Local Civil Rule 78.1. For the reasons set forth herein,
Plaintiff’s Motion is granted.
I. BACKGROUND
Plaintiff is a member of TPH, LLC (“TPH”), a New Jersey limited liability company. (Pl.’s
Moving Br. Ex. A, Proposed Second Am. Compl. {J 1, 16, ECF No. 33-2.) TPH owned property
located at 170 Ocean Boulevard, Atlantic Highlands, New Jersey 07716 (“the Property”) between
December 2014 and October 2017. dd.) Plaintiff managed the Property on a day-to-day basis, and
between 2009 and 2015, Plaintiff oversaw a complete rebuild of the pre-existing Revolutionary
War-era home on the Property. (/d.) In 2015, Plaintiff and TPH applied to the Borough Planning
Board (the “Planning Board’’) for conditional use and site approval to convert the Property into a
bed and breakfast establishment. | 2.) The application was granted, subject to the condition
that Plaintiff and TPH obtain a license to operate as a bed and breakfast. (/d.) In order to obtain
the required license, Plaintiff and TPH needed approval from defendant Hawley, the Borough’s
fire marshal who also served on the Planning Board. (/d.) Plaintiff alleges that Hawley improperly
used his position as fire marshal to prevent Plaintiff from obtaining a license. (/d.)
In or around 2016, during negotiations for the bed and breakfast license, Plaintiff made
efforts to rent the Property on a short-term basis through Airbnb.com (‘‘Airbnb”) and other short-
term rental services. Ud. 7 5.) Plaintiff alleges that although no Borough ordinance or law
prevented Plaintiff from renting out the property on a short-term basis, Defendants treated him
differently from others to prevent him from renting out his home in violation of his constitutional
property rights. Ud.) Plaintiff alleges Defendants treated him differently because of their personal
and political animus towards him. (/d. 4.) The Borough filed a lawsuit against Plaintiff and TPH
to obtain restraints against them from using the Property as an event space, banquet hall, or short-
term rental location. (id. { 12.) The Borough obtained a permanent restraining order against
Plaintiff and TPH. (/d.)
Plaintiff filed this lawsuit on October 19, 2019 and filed an Amended Complaint on
December 27, 2019 asserting the following claims: (1) violation of Plaintiffs right to substantive
due process under the Fourteenth Amendment to the United States Constitution, pursuant to 42
U.S.C, §§ 1983, 1988, (First Am. Compl. {f 85-90, ECF No. 10); (2) violation of Plaintiff's right
to equal protection under the Fourteenth Amendment, pursuant to §§ 1983, 1988, (id. 91-101);
(3) violation of Plaintiff's right to procedural due process under the Fourteenth Amendment,
pursuant to §§ 1983, 1988, (id. 102-107); and (4) tortious interference with Plaintiff's
prospective economic relationship, (id. [{[ 108-115.) Plaintiff asserted these claims both directly
and derivatively on behalf of TPH. (/d. [fl 15-16.)
On January 10, 2020, Defendants moved to dismiss the Amended Complaint, alleging
Plaintiff did not satisfy the pleading requirement for derivative actions under Fed. R. Civ. P. 23.1,
Plaintiff lacked standing to bring the action, Plaintiff’s Amended Complaint was barred by the
two-year statute of limitations applicable to § 1983 claims, and Plaintiff's Amended Complaint
was barred by the entire controversy doctrine, res judicata, and collateral estoppel. (See generally
Defs.’ Mot. to Dismiss, ECF No. 12.) On August 31, 2020, the Court granted the Borough
Defendants’ motion with regard to Plaintiff’s derivative claims but denied the motion with regard
to Plaintiff’s direct claims. (Mem. Op., ECF No. 30.) In the First Amended Complaint (“FAC”),
Plaintiff alleged that he did not make demand on the only other TPH member because demand
would have been futile, as Plaintiff and the other TPH member were in litigation during that time.
(FAC { 16.) Plaintiff also alleged that he proposed to the other member that they should bring the
current action on numerous occasions, but the member refused those proposals. (/d.) The Court
found that Plaintiff did not adequately establish futility and as a result, the Court dismissed
Plaintiff's derivative claims. Plaintiff now seeks leave to file a Second Amended Complaint
(“SAC”) to cure the defects found by the Court in the August 31, 2020 Memorandum Opinion, by
alleging facts establishing that he did in fact make a demand on the other member and TPH to
bring the present action. (SAC { 86.) Plaintiff also alleges facts in the SAC that establish that the
member’s refusal to bring an action against Defendants on behalf of TPH was not a valid exercise
of the member’s business judgment. (/d. J] 89-93.)
Defendants argue that the Court should deny Plaintiff’s Motion because it is futile, and it
will cause undue delay and prejudice. (See generally Defs.’ Opp’n.) Defendants also seek leave to
file a motion for sanctions pursuant to Rule 11 and 28 U.S.C. § 1927. (id. at 32.)
I. LEGAL STANDARD
A. Amendment of Pleadings
Rule 15(a)(2) authorizes a party to amend its pleadings “only with the opposing party’s
written consent or the court’s leave.” Rule 15(a)(2) further instructs that “[t]he court should freely
give leave when justice so requires.” Though within the discretion of the Court,
[iJn the absence of any apparent or declared reason—such as undue
delay, bad faith or dilatory motive on the part of the movant,
repeated failure to cure deficiencies by amendments previously
allowed, undue prejudice to the opposing party by virtue of
allowance of the amendment, futility of amendment, etc.—the leave
sought should, as the rules require, be “freely given.”
Foman v. Davis, 371 U.S. 178, 182 (1962).
“Futility ‘means that the complaint, as amended, would fail to state a claim upon which
relief could be granted.’” Great Western Mining & Mineral Co. v. Fox Rothschild, LLP, 615 F.3d
159, 175 (3d Cir, 2010) (citing In re Merck & Co. Sec., Derivative, & ERISA Litig., 493 F.3d 393,
400 (3d Cir. 2007). “The standard for assessing futility is the ‘same standard of legal sufficiency
as applies under Federal Rule of Civil Procedure 12(b)(6),’” meaning that all pleaded allegations
are taken as true and viewed in a light most favorable to plaintiff. Jd. (citing Shane v. Fauver, 213
F.3d 113, 115 (3d Cir. 2000); Winer Family Trust v. Queen, 503 F.3d 319, 330-31 (3d Cir. 2007).
“[D]elay alone does not justify denying a motion to amend.” Allegheny Plant Servs., Inc. v.
Carolina Cas. Ins. Co., No. 14-4265, 2017 WL 772905, at *4 (D.N.J. Feb. 27, 2017). [Prejudice
to the non-moving party is the touchstone for the denial of an amendment.” Phillips v. Borough of
Keyport, 179 F.R.D. 140, 144 (D.N.J. 1998) (quoting Cornell & Co. v. Occupational Safety &
Health Review Comm’n, 573 F.2d 820, 823 (3d Cir.1978)) (alteration in original). The Third
Circuit has contemplated that the standard for denial of amendment is high, stating “[g]enerally,
Rule 15 motions should be granted.” United States ex rel. Customs Fraud Investigations, LLC. V.
Victaulic Co., 839 F, 3d 242, 249 (3d Cir. 2016),
B. Judicial Estoppel
Judicial estoppel is a “judge-made doctrine that seeks to prevent a litigant from asserting a
position inconsistent with one that she has previously asserted in the same or in a previous
proceeding.” Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355, 358 (3d Cir.
1996). This doctrine “is not intended to eliminate all inconsistencies... rather, it is designed to
prevent litigants from playing ‘fast and loose with the courts.’” /d. (citing Scarano v. Central R.
Co. of New Jersey, 203 F.2d 510, 513 (3d Cir. 1953)). Importantly, judicial estoppel “is not meant
to be a technical defense for litigants seeking to derail potentially meritorious claims, especially
when the alleged inconsistency is insignificant at best and there is no evidence of intent to
manipulate or mislead the courts.” /d. at 365. “Judicial estoppel is a doctrine intended to prevent
the perversion of the judicial process.” New Hampshire v. Maine, 532 U.S. 742, 750 (2001)
(quoting Allen v. Zurich Ins. Co., 667 F.2d 1162, 1166 (4th Cir. 1982).
In determining whether to apply judicial estoppel, this Court must consider whether (1)
the party’s present position is inconsistent with a position formerly asserted and (2) if the party’s
positions are inconsistent, whether the party asserted the inconsistent positions in bad faith. Ryan
Operations, 81 F.3d at 361; McNemar v. Disney Store, 91 F.3d 610, 618 (3d Cir. 1996). “Bad faith
is evidenced by a party’s intent to play fast and loose with the court.” McNemar, 91 F.3d at 618
(quoting Ryan Operations, 81 F.3d at 361). “Whether the party sought to be estopped benefitted
from its earlier position or was motivated to seek such a benefit may be relevant insofar as it
evidences an intent to play fast and loose with the courts.” Ryan Operations, 81 F.3d at 361.
Additionally, there must be a showing that estoppel addresses the harm and no lesser sanction is
sufficient. G-I Holdings, Inc. vy. Reliance Ins. Co., 586 F.3d 247, 262 (3d Cir. 2009). Notably,
“judicial estoppel is generally not appropriate where the defending party did not convince the
District Court to accept its earlier position.” /d. “Absent success in a prior proceeding, a party’s
later inconsistent position introduces no risk of inconsistent court determinations” and “therefore
poses little threat to judicial integrity.” New Hampshire v. Maine, 532 U.S. at 750-751 (quoting
United States v. C. I. T. Constr. Inc., 944 F.2d 253, 259 (Sth Cir. 1991). Importantly, judicial
estoppel is invoked at the Court’s discretion. Jd. at 750.
C. Derivative Pleading Standards (Rule 23.1 and N.J.S.A. § 42:2C-68(a))
a. Rule 23.1
Federal Rule of Civil Procedure 23.1 sets forth the pleading standards in derivative suits.
Rule 23.1 provides that in a derivative suit, the complaint must be verified and:
(1) allege that the plaintiff was a shareholder or member at the time of the
transaction complained of, or that the plaintiff's share or membership later
devolved on it by operation of law;
(2) allege that the action is not a collusive one to confer jurisdiction that the
court would otherwise lack; and
(3) state with particularity:
(A) any effort by the plaintiff to obtain the desired action from the
directors or comparable authority and, if necessary, from the
shareholders or members; and
(B) the reasons for not obtaining the action or not making the effort.
Fed. R. Civ. P. 23.1(b). Rule 23.1 addresses the procedural requirements for pleading in a
derivative suit, and the substantive requirements are addressed by applicable state law. See
Blasband v. Rales, 971 F.2d 1034, 1047 (3d Cir, 1992),
b. N.J.S.A. § 42:2C-68(a)
New Jersey law provides pre-suit requirements that a member in a limited liability
company must follow before bringing a derivative action. The statute provides:
A member may maintain a derivative action to enforce a right of a limited liability company
a. the member first makes a demand on the other members in a member-managed
limited liability company, or the managers of a manager-managed limited
liability company, requesting that they cause the company to bring an action to
enforce the right, and the managers or other members do not bring the action
within a reasonable time; or
b. A demand under subsection a. of this section would be futile.
N.J.S.A. § 42:2C-68(a). Accordingly, a derivative complaint must plead that pre-suit demand was
made or that demand was not made and is excused because making demand would be futile. New
Jersey law places the burden on Plaintiff to establish demand-futility.
D. Business Judgment Rule
The business judgment rule protects boards of directors from “being questioned or second-
guessed on conduct of corporate affairs except in instances of fraud, self-dealing, or
unconscionable conduct.” PSE& G, 801 A.2d at 276. To determine whether a shareholder demand
was properly denied, New Jersey courts apply the modified business judgment rule. Jd. at 286, The
modified business judgment rule places an initial burden on the corporation or company “to
demonstrate that in deciding to reject or terminate a shareholder’s suit the members of the board
(1) were independent and disinterested, (2) acted in good faith and with due care in their
investigation of the shareholder’s allegations, and that (3) the board’s decision was reasonable.”
Id, “All three elements must be satisfied.” Jd.
TW. PARTIES’ ARGUMENTS
A. Plaintiff’s Argument
Plaintiff argues that the SAC will not cause undue delay or prejudice because the Motion
for leave to file the SAC is timely filed in accordance with the Court’s August 31, 2020 Order and
no discovery has taken place in the case. (Pl.’s Moving Br. 7.) Plaintiff also argues that the SAC
is not futile. Ud.) Plaintiff explains that the allegations of the SAC satisfy the pleading
requirements set forth by Rule 23.1 and N.J.S.A. § 42:2C-68 because the SAC alleges that Plaintiff
made a pre-litigation demand on the other TPH member prior to bringing the derivative suit, but
the member refused that demand. (/d. at 9-10.) The SAC alleges Plaintiff made demand when he
informed the only other member of TPH that the member should “consider collectively suing the
[Borough] of Atlantic Highlands.” (SAC J 86; PL’s Mot. at 9.) Plaintiff argues that the language
in the demand was sufficient to constitute a pre-litigation demand upon TPH because there are no
special words required to make a formal demand and demand is sufficient so long as it (1) identifies
the alleged wrongdoers, (2) identifies the alleged wrongdoing and the resulting injury to the
corporation, and (3) specifies the legal action the shareholder wants the board to take. (Id.)
Plaintiff also seeks to allege in the SAC that the member’s refusal of Plaintiff’s demand
was not a valid exercise of business judgment because the member was not disinterested, acted in
bad faith, and was not reasonable in refusing to bring forth an action on behalf of TPH. (/d. at 10-
11.) Therefore, Plaintiff seeks to argue that the member’s refusal to sue Defendants is not protected
by New Jersey’s modified business judgment rule, and Plaintiff’ filing of the derivative action is
permissible. Jd.
B. Defendants’ Opposition
Defendants argue that Plaintiff’s SAC is futile for several reasons. First, Defendants argue
that Plaintiff is judicially estopped from filing the SAC. (Defs.’ Opp’n 14-17.) Defendants argue
that Plaintiff made two fundamentally inconsistent positions regarding whether demand was made
to bring this lawsuit because initially, Plaintiff alleged in the FAC that he did not make demand
because doing so would have been futile and now Plaintiff alleges in the SAC that he did make
demand on the other member but the demand was refused. (/d. at 14.) Defendants further argue
that Plaintiff’s inconsistent positions are asserted in bad faith. (/d. at 16- 17.)
Next, Defendants argue the SAC is futile because Plaintiff already amended his initial
Complaint once under Rule 15(a) and is now precluded from filing another amended complaint.
(Id, at 17.) Defendants also argue the SAC is futile because Plaintiff does not satisfy the heightened
pleading requirements for derivative actions under Rule 23.1 and N.J.S.A. 42:2C-68 as Plaintiff’ □
message to the other member did not constitute a demand. (/d. at 22-25.) Defendants claim that
Plaintiff's message was not a demand because (1) Plaintiff merely asked the other member to
consider collectively suing Defendants, (2) Plaintiff did not mention TPH in the alleged demand,
and (3) the alleged demand was made via email in response to the other member’s message about
an unrelated litigation. Ud. at 25.) Defendants also argue that Plaintiff failed to show instances of
fraud, self-dealing, or unconscionable conduct to overcome the business judgment rule. (/d. at 25.)
Additionally, Defendants argue that Plaintiff cannot establish that demand was futile. (/d. at 32.)
Defendants also argue that Plaintiff cannot maintain a cause of action on behalf of TPH
because on August 14, 2017, TPH and the Borough entered into a settlement agreement whereby
TPH and the Borough mutually released each other from all manner of actions. (/d. at 30-31.)
Defendants further argue that granting Plaintiff leave to file the SAC will cause undue
delay and prejudice to Defendants because Defendants will have to defend a case where “material
facts have been changed to meet new legal theories.” (/d. at 31-32.) Defendants also seek leave to
file a motion for sanctions pursuant to Rule 11 and 28 U.S.C. § 1927. (id. at 32.) Defendants argue
that Plaintiff and his counsel have violated Rule 11 and 28 U.S.C. § 1927 because Plaintiff’s prior
submissions to the Court lacked evidentiary support. (/d. at 35-36.) Defendants also claim that they
have incurred additional costs, including attorneys’ fees, because Plaintiff acted with bad faith and
made intentional misrepresentations to the Court. (/d.)
C. Plaintiff’s Reply
Plaintiff argues that judicial estoppel does not apply to the SAC. (Pl.’s Reply 2.) Plaintiff
concedes that his prior pleadings alleged that no pre-suit demand had been made and that the SAC
alleges that demand was made, but he argues he is not estopped from changing positions because
(1) his positions are not irreconcilably inconsistent, as he has always alleged that he made requests
of the other member to bring suit on behalf of TPH, (2) he did not benefit from the position taken
in prior pleadings, and (3) he has not made the allegations in bad faith or with the intent to play
fast and loose with the court. (/d.)
Plaintiff also argues that the SAC successfully pleads that a pre-suit demand was made as
there are no specific words that are required to make a formal demand. (/d. at 6.) Plaintiff further
argues that the email message he sent to the other member sufficiently constituted a pre-suit
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demand pursuant to the requirements of Rule 23.1 and N.J.S.A. § 42:2C-68. (Ud. at 6-7.) With
respect to the business judgment rule, Plaintiff argues that the modified business judgment rule
should apply and that under the modified business judgment rule, the company has the initial
burden to demonstrate that in rejecting a member’s pre-suit demand, the members were
independent and disinterested, acted in good faith and with due care in their investigation of the
allegations, and the decision was reasonable. (/d. at 7-8.)
Plaintiff argues that Rule 15 does not preclude him from filing the SAC. Ud. at 8-9.)
Plaintiff explains that the Court authorized him to move for leave to file the SAC. (/d.) Plaintiff
further explains that Defendants’ argument is based on Rule 15(a)(1)(B), but Rule 15(a)(2) is
applicable and allows Plaintiff to amend the complaint with the court’s leave. (/d.)
Next, Plaintiff argues that granting leave to file the SAC will not result in undue delay and
will not prejudice Defendants because Defendants failed to explain how the SAC will cause any
delay, specifically the kind of undue delay that would warrant denial of the motion for leave to
amend. (/d. at 9.) Additionally, Plaintiff argues that Defendants failed to explain how they will be
prejudiced as no discovery has been taken in this case so Defendants will not have to take new or
additional discovery if the SAC is allowed. (/d. at 9-10.)
With respect to the settlement agreement, Plaintiff argues that this is the first time
Defendants have raised the existence of this settlement agreement so it should be waived, and it
should not be relied on to dismiss the claims at this stage. (/d. at 10.) Plaintiff further argues the
settlement agreement should be rejected because (1) Defendants Hubeny, Hawley, and Rast are
not parties to the agreement so no claims against them were or could have been released, (2) the
agreement appears to be the result of fraud and a breach by the other member of his fiduciary
duties to Plaintiff as the member knew that Plaintiff wanted to file suit against the Borough and he
11
released those claims without notice to or consent of Plaintiff, and (3) the agreement is signed by
TPH’s purported attorney, John Maloney, who did not have authority to act on behalf of TPH
because at the time the agreement was entered into, Maloney was representing the other member
as his personal attorney, (/d. at 10-11.)
Plaintiff argues that Defendants’ request for sanctions must be denied because it is
procedurally improper under Local Civil Rule. 7.1(h) and it violates Rule 11(c)(2). Ud. at 11.)
Plaintiff further argues that Defendants’ request for sanctions must be denied on the merits because
Plaintiff should not be judicially estopped from filing the SAC. (Id. at 11.) Finally, Plaintiff argues
that he and his counsel have not acted in bad faith and have not made intentional misrepresentations
because Plaintiff has alleged in the Complaint, the Amended Complaint, and the SAC that the
other member rejected Plaintiff’s requests to file this suit. (fd. at 12.)
IV. DISCUSSION
A. Amendment of Pleadings
Rule 15(a)(2) authorizes a party to amend its pleadings “only with the opposing party’s
written consent or the court’s leave.” Fed. R. Civ. P. 15(a)(2). Although leave is within the Court’s
discretion, in the absence of any reason such as undue delay, bad faith or dilatory motive by the
movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice,
or futility, leave should be freely given. Foman, 371 U.S. at 182.
i. Undue Delay and Prejudice
Delay alone is typically not enough to justify denying a motion to amend. Adams v. Gould,
Inc., 739 F.2d 858, 868 (3d Cir. 1984), In the present matter, the lapse of time is not excessive to
the point where it is presumptively unreasonable. See Victaulic Co., 839 F.3d at 252. Discovery in
this case has not yet taken place. Although there may be some delay, the Court does not find that
12
it rises to the level of undue delay that warrants denial of an amendment.
“[P]rejudice to the non-moving party is the touchstone for the denial of an amendment.”
Phillips, 179 F.R.D, at 144. In examining prejudice, the Third Circuit considers “whether allowing
an amendment would result in additional discovery, cost, and preparation to defend against new
facts or new theories.” Cornell & Co. v. Occupational Safety & Health Review Comm'n, 573 F.2d
820, 823 (3d Cir. 1978). Discovery has not yet taken place. Additionally, Plaintiff’ s alleged request
that the member take action against Defendants on behalf of TPH was not raised for the first time
in the SAC. Plaintiff has alleged that he requested that the member take action on behalf of TPH
in the Complaint and FAC. (Compl. { 8; FAC {[ 16.) Accordingly, the Court does not find that the
SAC will prejudice Defendants.
ii. Futility
As the Court finds no threat of undue delay or prejudice, the Court next considers whether
the SAC is futile. In determining whether a proposed amendment is futile, the Court “applies the
same standard of legal sufficiency as applies under Rule 12(b)(6).” In re Burlington Coat Factory
Sec. Litig., 114 F.3d 1410, 1434 (3d Cir. 1997) (citations omitted), An amended complaint is futile
if as amended, it “would fail to state a claim upon which relief could be granted.” Id. The Court
“determines futility by taking all pleaded allegations as true and viewing them in the light most
favorable to [the moving party].” Great W. Mining & Mineral Co., 615 F.3d at 175. “To survive a
motion to dismiss, a complaint must contain sufficient factual mater, accepted as true, to state a
claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal
quotation marks omitted). Defendants argue that the SAC is futile because (1) Plaintiff is judicially
estopped from filing a SAC, (2) Plaintiff’s SAC does not comply with Rule 23.1 and N.J.S.A. §
42:2C-68(a), and (3) Plaintiff does not establish that the member’s failure to bring the action on
13
behalf of TPH was not a valid exercise of business judgment.
a. Judicial Estoppel
Judicial estoppel is a “judge-made doctrine that seeks to prevent a litigant from asserting a
position inconsistent with one that she has previously asserted in the same or in a previous
proceeding.” Ryan Operations, 81 F.3d at 358. In examining whether to apply judicial estoppel,
the Third Circuit considers (1) whether the party’s present position is inconsistent with a position
formerly asserted and (2) whether the party asserted the inconsistent positions in bad faith. Ryan
Operations, 81 F.3d at 361; McNemar, 91 F.3d at 618. Additionally, there must be a showing that
estoppel addresses the harm and no lesser sanction is sufficient. G-I Holdings, 586 F.3d at 262.
First, Plaintiff asserted in his Complaint and FAC that he did not make demand on the other
member to bring forth a derivative suit against Defendants on behalf of TPH. (FAC { 16.) In
Plaintiff's proposed SAC, Plaintiff seeks to allege that he did in fact make demand when he sent
an email to the other member asking him to collectively bring suit. (SAC { 86.) Although the SAC
presents a position that is inconsistent with the position taken in the Complaint and FAC, in both
the Complaint and FAC, Plaintiff alleged that he requested the other member bring an action
against Defendants on behalf of TPH. (Compl. { 8; FAC § 16.) Thus, the SAC is not the first time
that Plaintiff is alleging that he asked the other member to bring an action against Defendants on
behalf of TPH, and as a result, the Court does not find Plaintiff’s new position to be irreconcilably
inconsistent.
Moreover, the Court does not find that Plaintiff changed his position in bad faith. “Whether
the party sought to be estopped benefitted from its earlier position or was motivated to seek such
a benefit may be relevant insofar as it evidences an intent to play fast and loose with the courts.”
Ryan Operations, 81 F.3d at 361. Here, Plaintiff did not benefit from alleging that he made demand
14
as the Court dismissed his derivative claim. (See Mem. Op., ECF No. 30 at 9.)
Additionally, the Third Circuit has found bad faith in instances where a statement (1) “is
susceptible to more than one interpretation,” (2) “contains a legal conclusion, as distinguished
from a purely factual inconsistency,” and (3) “where a party lacked sufficient knowledge of the
statement’s truth when it was made.” Palcsesz v. Midland Mut. Life Ins. Co., 87 F. Supp. 2d 409,
413-14 (D.N.J. 2000). The second prong applies here. Whether Plaintiff made demand is a matter
of law and is not solely a matter of fact.
Importantly, “judicial estoppel is generally not appropriate where the defending party did
not convince the District Court to accept its earlier position.” G-I Holdings, 586 F.3d at 262.
“Absent success in a prior proceeding, a party's later inconsistent position introduces no ‘risk of
inconsistent court determinations’ and thus poses little threat to judicial integrity.” New Hampshire
v. Maine, 532 U.S. at 750-751. Here, the Court did not accept Plaintiff’s earlier position that
Plaintiff made demand. Plaintiff’s derivative claim was dismissed for failure to make demand and
the Court granted Plaintiff leave to move to file a SAC. (Mem. Op., ECF No. 30.) The Court finds
that Plaintiff did not convince the District Court to accept his previous position and this finding
weighs against applying judicial estoppel. Therefore, as the Court cannot make a finding of bad
faith, the Court declines to apply judicial estoppel.
b. Rule 23.1 and N.J.S.A. § 42:2C-68(a)
Next, the Court considers whether the SAC complies with the pre-suit demand
requirements set forth in the Rule 23.1 and N.J.S.A. § 42:2C-68(a). Rule 23.1 provides the
procedural pleading standards in derivative suits. See Blashand, 971 F.2d at 1047. Rule 23.1
requires that the complaint in a derivative suit “state with particularity any effort by the plaintiff
to obtain the desired action from the directors or comparable authority and, if necessary, from the
15
shareholders or members; and the reasons for not obtaining the action or not making the effort.”
Fed. R. Civ. P. 23.1(b)(3). Thus, a member or shareholder must make a pre-suit demand on the
board of directors or other shareholders prior to filing a derivative action on behalf of the company.
If the plaintiff does not make a pre-suit demand, the plaintiff must provide an adequate reason for
not doing so.
Moreover, New Jersey law provides pre-suit requirements that a member in a limited
liability company must follow before bringing a derivative action. N.J.S.A. § 42:2C-68(a) provides
that a member may bring a derivative action on behalf of a limited liability company if the member
first makes demand on the other members requesting that they bring an action on behalf of the
company and the members do not bring an action within a reasonable time or making demand
would be futile. See In re PSE& G Shareholder Litig., 801 A.2d at 307. N.J.S.A. § 42:2C-70
requires that the derivative complaint alleges with particularity, the date and content of plaintiff’ □
demand and the response to the demand by the other members.
Plaintiff alleged with particularity that he made demand on the other TPH member to bring
an action on behalf of TPH against Defendants. Specifically, Plaintiff relies upon the following
message:
“T would like you to consider collectively suing the Boro [sic] of
Atlantic Highlands, for the following; [sic] prejudicial behavior, tortious
interference, candor towards tribunal, SLAPP restraint of business,
malicious prosecution. And... even a 1987 [sic] case (civil rights
violations), freedom of speech, interference with the free and enjoyable
use of the home, all could be brought against them, etc. etc... . J think
we would have an excellent case [on the civil rights claims] against the
town with regard to the prior charges.”
(SAC { 86.) Contrary to Defendants’ argument, Rule 23.1 does not set forth the substantive
requirements for demand. It merely provides the procedural requirement that Plaintiff make pre-
suit demand. Accordingly, the Court finds that the SAC complies with the procedural requirements
16
set forth in Rule 23.1,
The Court also finds that Plaintiff made demand before bringing the derivative action in
accordance with N.J.S.A. § 42:2C-68(a) and N.J.S.A. § 42:2C-70, Plaintiff alleges in the SAC that
the member did not bring an action against TPH within a reasonable time. Additionally, the SAC
provides the date demand was made, April 14, 2017, the content of Plaintiff’s demand, and the
other member’s response, or lack thereof, to Plaintiff’s demand. (SAC [{ 86, 89.) Therefore, the
Court finds that the SAC complies with the requirements set forth in N.J.S.A. § 42:2C-68(a) and
N.J.S.A. § 42:2C-70.
The substantive requirements of a demand are addressed by state law. See Blasband, 971
F.2d at 1047. Here, TPH is a New Jersey company, and as a result, New Jersey law applies. See
id. “New Jersey courts generally follow Delaware’s pronouncements on corporate law.” (See
Mem. Op., ECF No, 30 at 8-9 (quoting In re Merck, 493 F.3d at 399)). Therefore, the “adequacy
of demand must be determined on a case by case basis,” however, the “application of certain basic
principles, if followed, will invariably result in a demand being deemed adequate.” Allison on
behalf of General Motors Corp. v. General Motors Corp., 604 F, Supp. 1106, 1117 (D. Del. 1985).
A demand is adequate if it alerts the Board of Directors so that the Board “can take such corrective
action, if any, as it feels is merited.” /d. (citing Daily Income Fund, Inc. v. Fox, 104 S. Ct. 831,
837 (1984)). “At a minimum, demand must identify the wrongdoers, describe the factual basis of
the wrongful acts and the harm caused to the corporation, and request remedial relief.” Id.
In applying these elements to the instant demand, the Court finds that the demand is
adequate. The demand identifies the Borough as the alleged wrongdoer, and it identifies the
requested remedial relief by listing the claims to be brought against the Borough. (SAC J 86.) The
Court finds Plaintiffs argument that “the prior charges” mentioned in the demand was understood
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by Plaintiff and the member to mean the prior charges that the Borough filed against TPH,
persuasive. Therefore, the “prior charges” mentioned in the demand is the harm TPH suffered.
The Court declines to address Defendants’ argument that Plaintiff cannot establish demand
futility under New Jersey law because Plaintiff does not allege in the SAC that making demand
would have been futile. Plaintiff alleges that he did in fact make demand on the other TPH member.
(SAC { 86.)
c. Business Judgment Rule
Because the Court finds Plaintiff made pre-suit demand, the next question is whether the
other member’s refusal to file suit on behalf of TPH was a valid exercise of the member’s business
judgment. The business judgment rule protects boards of directors from “being questioned or
second-guessed on conduct of corporate affairs except in instances of fraud, self-dealing, or
unconscionable conduct.” PSE& G, 801 A.2d at 276. In determining whether a member’s demand
was properly denied, New Jersey courts apply the modified business judgment rule.' Jd. at 286.
The modified business judgment rule places an initial burden on the company “to demonstrate that
in deciding to reject or terminate a shareholder’s suit the members of the board (1) were
independent and disinterested, (2) acted in good faith and with due care in their investigation of
the shareholder’s allegations, and that (3) the board’s decision was reasonable.” Jd. at 286.
Therefore, the burden is on the member on behalf of TPH to show that the member’s decision not
to bring an action against Defendants was independent and disinterested, the member acted in good
faith and with due care, and that the member’s decision was reasonable.
' Although Defendants argue that the modified business judgment rule should not apply because of the
2013 amendment to the New Jersey Business Corporation Act (““NJBCA”), which changed the modified
business judgment rule back to the original business judgment rule, the NJBCA does not apply because
TPH is a New Jersey limited liability company. Therefore, Revised Uniform Limited Liability Act applies
here.
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In examining whether board members are disinterested and independent, courts consider
whether “divided loyalties are present” or whether the “director stands to receive a personal
financial gain from the transaction not equally shared by the shareholders.” Jd, at 289-290. To
determine whether a board member or shareholder acted in good faith and with due care, courts
consider “the procedures employed by the board in making its determination.” Jd. at 291. In
determining whether a board member’s decision was reasonable, courts “consider all relevant
justifications for management’s determination, including the seriousness and weight of the
plaintiff[’s] allegations. Id. at 295.
Although the modified business judgment rule places the burden on TPH, the company,
the Court finds that the facts alleged in the SAC do not support a finding of a valid exercise of
business judgment by the member. The SAC alleges that the member was not independent or
disinterested because the member had divided loyalties as he was interested in using Plaintiff’ s
demand as leverage to get Plaintiff to sign the Standstill Agreement.” The Standstill Agreement
purportedly “would transfer managerial and control of TPH from Plaintiff to the member.” (SAC
{I 87-92.) The SAC also alleges that the member acted in bad faith and without due care because
the member used the demand as a “bargaining chip” with respect to the Standstill Agreement and
the member made no investigation into the potential merits of the claims raised by Plaintiff in the
demand. Ud. [ 87-91, 92.) Additionally, the SAC alleges that the member’s rejection of the
demand was not reasonable because he made no effort to inform himself of the substance of
Plaintiff's allegations. Ud. J 92.)
After viewing the pleaded allegations as true and in the light most favorable to Plaintiff,
7 In April 2017, when Plaintiff made demand, Plaintiff and the member were in an ongoing litigation
concerning another matter. Plaintiff and the member were negotiating the Standstill, Tolling, and Transition
Agreement (“Standstill Agreement”). The Standstill Agreement relinquished the day-to-day managerial and
operational control of TPH to the other member.
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the Court finds that Plaintiff has stated a claim upon which relief can be granted. The Court finds
that judicial estoppel does not apply here, the SAC complies with the requirements set forth in
Rule 23.1 and N.J.S.A. § 42:2C-68(a), and the SAC establishes that the member’s refusal to file
suit on behalf of TPH was not a valid exercise of the member’s business judgment. Accordingly,
the Court does not find that the SAC is futile.
After having found no undue delay, prejudice, or futility, and within the Court’s discretion,
the Court finds that Plaintiff should be granted leave to file the SAC.
B. Settlement Agreement
Defendants argue that Plaintiff cannot bring a derivative action on behalf of TPH against
the Borough because TPH and the Borough entered into a settlement agreement on August 14,
2017 that mutually released both parties from all actions. (Defs.’ Opp’n 31.) Plaintiff argues that
the SAC is not barred by the settlement agreement because this is the first time Defendants are
raising this argument and Plaintiff was unaware of this agreement until it was presented in this
instance. (PL’s Reply 10.) Plaintiff further argues that “the agreement appears to be the result of a
fraud and a breach by [the member] of his fiduciary duties” to Plaintiff because Plaintiff did not
consent to the agreement and because the member was aware that Plaintiff wanted to sue
Defendants, specifically the Borough. (/d. at 10-11.) Plaintiff also argues that the member’s
personal attorney represented the member in a lawsuit against the Borough and therefore was not
authorized to represent TPH in this matter because it is a conflict of interest. (/d.) Based on the
parties’ conflicting arguments, the Court finds that this issue would be better decided at the
summary judgment stage, after more thorough briefing and discovery.
C. Sanctions
Upon consideration of the parties’ arguments, along with the Courts analysis and
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conclusions stated above, the Court does not find that the imposition of sanctions is appropriate
here. As a result, the Court denies Defendants’ request for leave to seek sanctions under Rule 11
and 28 U.S.C. § 1927.
V. Conclusion
For the reasons stated above, and other good cause shown, Plaintiff’s Motion for Leave to
Amend his Complaint is hereby granted. An appropriate Order follows.
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ZAHID N. QURAISHI \
UNITED STATES MAGISTRATE JUDGE
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