Conforti v. Owen

UNITED STATES DISTRICT COURT

MIDDLE DISTRICT OF TENNESSEE

NASHVILLE DIVISION

BRENT CONFORTI, individually and on )

behalf of all others similarly situated, )

)

Plaintiffs, )

)

v. ) Case No. 3:23-cv-0059

) Judge Aleta A. Trauger

JEFFREY C. OWEN; MICHAEL M. )

CALBERT; WARREN BRYANT; ANA )

CHADWICK; PATRICIA FILI-KRUSHEL; )

TIMOTHY MCGUIRE; WILLIAM C. )

RHODES III; DEBRA A. SANDLER; )

RALPH SANTANA; TODD VASOS; )

CARMAN WENKOFF; JOHN GARRATT; )

RHONDA TAYLOR; STEVE )

SUNDERLAND; and AMELIA ELLIOTT, )

)

Defendants, )

)

and )

)

DOLLAR GENERAL CORPORATION, )

a Tennessee corporation, )

)

Nominal Defendant. )

MEMORANDUM

The defendants and nominal defendant have filed a Motion to Dismiss the Amended

Stockholder Derivative Complaint (Doc. No. 29), to which plaintiff Brent Conforti1 has filed a

Response (Doc. No. 37), and the defendants have filed a Reply (Doc. No. 42). For the reasons set

out herein, the motion will be granted.

1 In both the original Complaint and the Amended Complaint, Conforti asserts, in the caption, that he is

seeking to sue “on behalf of all others similarly situated.” (Doc. No. 1 at 1; Doc. No. 14 at 1.) As the

defendants point out, however, nothing in the Complaints suggests that this is a class action case. Conforti

is, in fact, seeking to sue on behalf of Dollar General Corporation, the nominal defendant. The court also

notes that at least one defendant’s first name (Anita Elliott) appears to be incorrect in the caption.

I. BACKGROUND2

Dollar General Corporation (“Dollar General”) is a large, Tennessee-based discount

retailer. (Doc. No. 14 ¶ 14.) Ten of the named defendants—Todd Vasos, Jeffrey C. Owen,

Michael M. Calbert, Warren Bryant, Debra Sandler, William C. Rhodes III, Ralph E. Santana,

Ana Chadwick, Patricia Fili-Krushel, and Timothy McGuire—are members of Dollar General’s

Board of Directors. Of those ten, two have held executive positions within the company: Vasos,

who was CEO until 2022, and Owen, who succeeded Vasos in that position. The other eight

board member defendants are directors only. The five remaining defendants—Cameron

Wenkoff, John Garratt, Rhonda Taylor, Steve Sunderland, and Anita Elliott—are Dollar General

executives without seats on the board. (Id. ¶¶ 15–29.) This lawsuit concerns allegations that the

defendants, in their respective positions of responsibility, oversaw an epidemic of employee

safety failures at Dollar General facilities, resulting in numerous injuries and millions of dollars

in penalties assessed by the Occupational Safety and Health Administration (“OSHA”), which

has designated Dollar General a “Severe Violator” of the nation’s occupational safety laws. 3 (Id.

¶¶ 36–41.)

Conforti, who initiated the suit, is a private individual who owns Dollar General stock.

As a stockholder, Conforti stands to suffer some potential harm from poor decisionmaking by

Dollar General’s board and management, insofar as that poor decisionmaking negatively affects

2 These facts are taken primarily from the Verified Stockholder Derivative Complaint (Doc. Nos. 14

(redacted), 17 (unredacted)) and are accepted as true for the purpose of the Motion to Dismiss.

3 Retail establishments like Dollar General may not be the type of workplace that first comes to mind

when one imagines a severe OSHA violator. Dangers to the safety of employees, however, are not limited

to factory floors and construction sites. Individuals who work in the retail sector must contend with,

among other things, the many tons of merchandise that move in and out of their stores—often in heavy,

stackable boxes or crates—which can cause both routine and catastrophic injuries. Retail workers also

face dangers arising from their accessibility to the public, including risks of armed robbery or encounters

with otherwise dangerous individuals. And, of course, retail employees face the same potential risks that

can arise in any workplace, such as risk of fire, toxic mold, unsafe floor surfaces, and so on.

the value of his shares of Dollar General stock. Conforti, however, did not bring this lawsuit

based solely on that limited, personal exposure. Rather, Conforti wishes to assert these claims on

behalf of Dollar General itself, in what is known as a “stockholder derivative” suit—a “form of

action [that] permits an individual shareholder to bring ‘suit to enforce a corporate cause of

action against officers, directors, and third parties.’” Kamen v. Kemper Fin. Servs., Inc., 500 U.S.

90, 95 (1991)) (quoting Ross v. Bernhard, 396 U.S. 531, 534, (1970)). “Whether or not a

corporation shall seek to enforce in the courts a cause of action for damages”—against its own

executives or against anyone else—“is, like other business questions, ordinarily a matter of

internal management and is left to the discretion of the directors, in the absence of instruction by

vote of the stockholders.” Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 532 (1984) (quoting

United Copper Secs. Co. v. Amalgamated Copper Co., 244 U.S. 261, 263 (1917)). Dollar

General, however, is chartered under Tennessee law, and Tennessee law permits stockholder

derivative suits “[i]n some situations.” Keller v. Est. of McRedmond, 495 S.W.3d 852, 867

(Tenn. 2016) (citations omitted).

Conforti argues that this is one such situation. That, though, is not entirely up to him. “A

shareholders’ derivative action seeks redress for a wrong to the corporation, and the right of the

shareholder to maintain the action is derivative or secondary.” Keller v. Est. of McRedmond, 495

S.W.3d 852, 868 (Tenn. 2016) (citing 12B Fletcher Cyc. Corp. § 5908). The shareholder’s

capacity to sue, therefore, is a qualified one, and it hinges on his satisfaction of both the

substantive requirements of the relevant state’s law of corporations and the procedural

requirements of the relevant court’s rules of civil procedure. See Kamen, 500 U.S. at 97. In a

federal court, derivative actions are governed by Rule 23.1, which provides that such actions are

procedurally allowed, if adequately pleaded by an appropriate plaintiff. Fed. R. Civ. P. 23.1(a).

Rule 23.1, however, does not provide guidance as to when, if ever, a stockholder has a legitimate

right to file a derivative action, leaving that issue to the substantive law of the relevant

jurisdiction.

Tennessee’s requirements for bringing a stockholder derivative suit involving a for-profit

corporation are set out in Tenn. Code Ann. § 48-17-401. The statute states that a “person may not

commence a proceeding in the right of a domestic or foreign corporation unless the person was a

shareholder of the corporation when the transaction complained of occurred or unless the person

became a shareholder through transfer by operation of law from one who was a shareholder at

that time.” Tenn. Code Ann. § 48-17-401(a). The statute also addresses the need for the plaintiff

to make a pre-suit litigation demand on the corporation’s board, but, somewhat confusingly,

discusses Tennessee’s rule as a pleading requirement without endorsing any particular

substantive standard:

A complaint in a proceeding brought in the right of a corporation must be verified

and allege with particularity the demand made, if any, to obtain action by the

board of directors and either that the demand was refused or ignored or why the

person did not make the demand. Whether or not a demand for action was made,

if the corporation commences an investigation of the charges made in the demand

or complaint, the court may stay any proceeding until the investigation is

completed.

Tenn. Code Ann. § 48-17-401(b). On its face, Tenn. Code Ann. § 48-56-401(b) requires nothing

other than adequate pleading of the facts; a plaintiff could plead, with particularity, that he made

no pre-suit demand purely because he did not want to, and, technically, he would have complied

with the express requirements of Tenn. Code Ann. § 48-56-401(b). “[F]or more than a century,”

however, Tennessee courts have construed the state’s laws as including a substantive “demand

requirement.” Memphis Health Ctr., Inc. ex rel. Davis v. Grant, No. W2004-02898-COA-R3CV,

2006 WL 2088407, at *10 (Tenn. Ct. App. July 28, 2006) (citing Lewis ex rel. Citizens Sav. Bank

& Tr. Co. v. Boyd, 838 S.W.2d 215, 221 (Tenn. Ct. App. 1992)). Generally speaking, to meet

that requirement, an aspiring derivative plaintiff must “first make a written demand on the

corporation’s directors requesting them to prosecute the suit or to take other suitable corrective

action.” Lewis, 838 S.W.2d at 221.

The demand requirement, however, “may be excused” if the “demand would be futile.”

Krajenta v. Westphal, No. W2021-00832-COA-R3-CV, 2022 WL 4483412, at *4 (Tenn. Ct.

App. Sept. 27, 2022) (citing Humphreys v. Plant Maint. Servs., Inc., No. 02A01-98-11-CV-

00323, 1999 WL 553715, at *6 (Tenn. Ct. App. July 30, 1999); Lewis, 838 S.W.2d at 221). This

approach, broadly speaking, follows the pattern of the Delaware demand requirement, which this

court and others have been frequently called upon to apply, due to that state’s popularity as a site

of incorporation. See, e.g., Anders v. Baier, No. 3:21-CV-0373, 2022 WL 4097332, at *8 (M.D.

Tenn. Sept. 7, 2022). Those broad similarities, however, do not necessarily mean that the

standards are identical in their details, and a federal district court’s duty, when it considers a

question of Tennessee law, is to try to apply the law in the manner that the Tennessee Supreme

Court would. See Berrington v. Wal-Mart Stores, Inc., 696 F.3d 604, 607 (6th Cir. 2012)

(“Faithful application of a state’s law requires federal courts to ‘anticipate how the relevant

state’s highest court would rule in the case,’ and in doing so we are ‘bound by controlling

decisions of that court.’”) (quoting In re Dow Corning Corp., 419 F.3d 543, 549 (6th Cir. 2005)).

Conforti initiated this lawsuit on January 20, 2023. (Doc. No. 1.) He alleges that the

defendants have presided over a “sustained failure . . . to implement and maintain an effective

system of internal controls,” resulting in persistently “hazardous working conditions for [the

company’s] employees.” (Doc. No. 14 ¶ 1.) He seeks to assert derivative claims for breach of the

defendants’ fiduciary duty to Dollar General, waste of Dollar General’s assets, and unjust

enrichment at Dollar General’s expense. (Id. ¶¶ 148–73.) Conforti concedes, however, that he

did not provide Dollar General with a formal litigation demand before filing suit. (Id. ¶ 119.) He

argues that such a demand would have been futile, because Dollar General’s directors—whom he

has named as defendants—would have been unable to evaluate the litigation demand objectively

and in the interests of the corporation.

On April 3, 2023, the defendants filed a Motion to Dismiss pursuant to Rule 12(b)(1) and

Rule 12(b)(6) of the Federal Rules of Civil Procedure. (Doc. No. 29). The defendants argue that

the court should dismiss Conforti’s claims because he has failed to allege facts sufficient to

support the exercise of federal jurisdiction. (Doc. No. 29 at 2.) They also argue that, insofar as

the court does exercise jurisdiction in this case, it should dismiss the claims because Conforti did

not comply with the demand requirement and has not alleged facts sufficient to support the

conclusion that he is excused from that requirement. (Id.) Finally, the defendants argue that, even

if Conforti is able to overcome those two obstacles, the court should dismiss the claims because

he has not sufficiently alleged the elements of any cause of action. (Id.)

II. LEGAL STANDARD

A. Rule 12(b)(1)

“If the court determines at any time that it lacks subject-matter jurisdiction, the court

must dismiss the action.” Fed. R. Civ. P. 12(h)(3). Motions to dismiss for lack of subject matter

jurisdiction fall into two general categories: facial attacks and factual attacks. United States v.

Ritchie, 15 F.3d 592, 598 (6th Cir. 1994). A facial attack “questions merely the sufficiency of the

pleading,” and the court therefore takes the allegations of the complaint as true. Wayside Church

v. Van Buren Cnty., 847 F.3d 812, 816 (6th Cir. 2017) (quoting Gentek Bldg. Prod., Inc. v.

Sherwin-Williams Co., 491 F.3d 320, 330 (6th Cir. 2007); citing Ohio Nat’l Life Ins. Co. v.

United States, 922 F.2d 320, 325 (6th Cir. 1990)). The defendants allege that Conforti has failed

to “plead facts to support the Court’s diversity jurisdiction,” making their argument a facial

attack. (Doc. No. 30 at 14.)

B. Rule 12(b)(6)

In deciding a motion to dismiss for failure to state a claim under Fed. R. Civ. P. 12(b)(6),

the court will “construe the complaint in the light most favorable to the plaintiff, accept its

allegations as true, and draw all reasonable inferences in favor of the plaintiff.” Directv, Inc. v.

Treesh, 487 F.3d 471, 476 (6th Cir. 2007); Inge v. Rock Fin. Corp., 281 F.3d 613, 619 (6th Cir.

2002).

Typically, the Federal Rules of Civil Procedure require only that a plaintiff provide “‘a

short and plain statement of the claim’ that will give the defendant fair notice of what the

plaintiff’s claim is and the grounds upon which it rests.” Conley v. Gibson, 355 U.S. 41, 47

(1957) (quoting Fed. R. Civ. P. 8(a)(2)). The complaint’s allegations, however, “must be enough

to raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544,

555 (2007). To establish the “facial plausibility” required to “unlock the doors of discovery,” the

plaintiff cannot rely on “legal conclusions” or “[threadbare] recitals of the elements of a cause of

action,” but, instead, the plaintiff must plead “factual content that allows the court to draw the

reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal,

556 U.S. 662, 678 (2009).

Moreover, the ordinary pleading requirements of Rule 8 may be supplemented by

additional, more demanding pleading requirements specific to certain claims or allegations. Rule

23.1 requires that a stockholder derivative complaint:

(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; see McCall v. Scott, 239 F.3d 808, 815–16 (6th Cir. 2001).

III. ANALYSIS

A. Diversity Jurisdiction

Federal courts possess “only such jurisdiction as is defined by the Constitution and

granted by Congress.” United States v. Glover, 242 F.3d 333, 335 (6th Cir. 2001) (internal

quotation marks and citation omitted). It is, therefore, “presumed that a cause lies outside this

limited jurisdiction, and the burden of establishing the contrary rests upon the party asserting

jurisdiction.” Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994) (internal

citation omitted). Moreover, “jurisdiction is not the kind of thing that can be waived or

forfeited.” Williams v. United States, 927 F.3d 427, 434 (6th Cir. 2019) (citation omitted).

Federal courts, therefore, have “an independent obligation to ensure that they do not exceed the

scope of their jurisdiction, and . . . must raise and decide jurisdictional questions that the parties

either overlook or elect not to press.” Id. (quoting Henderson v. Shinseki, 562 U.S. 428, 434

(2011)).

“The Constitution provides that the ‘judicial Power shall extend’ to”—among other

things—“‘Controversies . . . between Citizens of different States.’” Hertz Corp. v. Friend, 559

U.S. 77, 84 (2010) (quoting U.S. Const., art. III, § 2). That language has been construed as an

authorization, not a mandate, leaving it up to Congress to decide whether, and to what extent, the

“judicial Power” to hear such cases translates to actual federal court jurisdiction. Congress,

however, has provided for at least some federal jurisdiction over cases between citizens of

different states—often referred to as “diversity jurisdiction”—since the early days of the federal

judicial system. See id. (“Congress first authorized federal courts to exercise diversity

jurisdiction in 1789 . . . .”). Diversity jurisdiction is the form of jurisdiction that Conforti has

invoked in this case, based on the fact that he is a citizen of Oregon, and the defendants—like

Tennessee-based Dollar General—are not.

“In a diversity action, ‘the plaintiff must state all parties’ citizenships such that the

existence of complete diversity can be confirmed.’” Washington v. Sulzer Orthopedics, Inc., 76

F. App’x 644, 645–46 (6th Cir. 2003) (quoting Chem. Leaman Tank Lines, Inc. v. Aetna Cas. &

Sur. Co., 177 F.3d 210, 222 n.13 (3d Cir. 1999)). Conforti’s Amended Complaint—like his

original Complaint—fails that requirement. As the defendants point out, “the Complaint only

alleges [that Conforti] ‘resides’ in Oregon and Dollar General is a Tennessee citizen, and says

nothing about the citizenship of the individual defendants.” (Doc. No. 30 at 14.) Conforti, in his

Response, offers no meaningful defense of his jurisdictional pleading, arguing only that the

deficiencies “can easily be remedied by amendment” and providing a list of the defendant-by-

defendant assertions of non-Oregon citizenship that such an amendment would make. (Doc. No.

37 at 29–30 & n.12.)

The court could grant the defendants’ Motion to Dismiss based on Conforti’s insufficient

pleading alone. That course of action would hardly be the most efficient, though, given that

Conforti could simply refile his claims with the geographic details he says he is ready to assert.

The court will, therefore, move on to the question of whether those facts, if actually pleaded,

would sufficiently support the exercise of this court’s jurisdiction.

Diversity jurisdiction exists only when “no plaintiff and no defendant are citizens of the

same state.” Curry v. United States Bulk Transp., Inc., 462 F.3d 536, 540 (6th Cir. 2006). If any

defendant is a citizen of the same state as any plaintiff, “then complete diversity, and with it

federal jurisdiction, [is] destroyed.” Delay v. Rosenthal Collins Grp., LLC, 585 F.3d 1003, 1005

(6th Cir. 2009) (citing Caudill v. N. Am. Media Corp., 200 F.3d 914, 916 (6th Cir. 2000)).

Stockholder derivative suits, however, present a challenge to that approach by introducing a

tension between the parties’ practical roles and their formal ones. As a practical matter, this

lawsuit involves claims initiated by Oregon-based Conforti, challenging actions taken by

Tennessee-based Dollar General and a number of Dollar General executives, none of whom are

alleged to be citizens of Oregon. As a formal matter, though, Conforti is asserting claims on

behalf of Dollar General, not against it. That raises the unavoidable question of which side of the

diversity jurisdiction formula Dollar General should be considered to be on: the defendants’ side,

which would arguably capture its actual role in this litigation, or the plaintiff’s side, which would

arguably be more consistent with the formal allocation of rights being asserted. That question, in

this instance, is determinative, because several of the defendants are, like Dollar General,

citizens of Tennessee, meaning that, if they appear opposite to the company, then this court lacks

jurisdiction.

Theoretically, the courts could resolve questions such as these in a purely formalistic

way. Under that approach, this court would probably lack jurisdiction here, because Dollar

General is, technically speaking, asserting claims in the manner of a plaintiff—even if it has been

dragged into that position against its will. The Supreme Court, however, has definitively rejected

such a mechanical approach. See Smith v. Sperling, 354 U.S. 91, 97–98 (1957). Instead, the court

must consider “the alignment of the parties,” based not only on how the parties have chosen to

“align themselves,” but also “their actual ‘interests in the litigation.’” Evanston Ins. Co. v. Hous.

Auth. of Somerset, 867 F.3d 653, 656 (6th Cir. 2017) (quoting Cleveland Hous. Renewal Project

v. Deutsche Bank Tr. Co., 621 F.3d 554, 559 (6th Cir. 2010)). In so doing, “[a] court has to pluck

out the ‘primary dispute in the controversy’ from the tangle of interests that the lawsuit

implicates,” consider the “fiscal, legal, and practical realities of” that primary dispute, and “align

the parties according to their interests.” Id. (quoting Cleveland Hous. Renewal Project, 621 F.3d

at 559).

The primary dispute in this case concerns whether Dollar General should have devoted

more resources and attention to the safety of its employees. Conforti suggests that the short-term

expenses associated with that approach would have been worth the cost, but there is no going

back and changing decisions that were already made. Dollar General’s interest in this litigation,

then, is to downplay the extent of its fault in its past employee safety-related decisions. That

interest aligns the company squarely with the defendants. The court, accordingly, concludes that

Conforti’s proposed jurisdictional allegations, if included in an actual complaint, would be

sufficient to assert diversity jurisdiction. The court, therefore, will turn to the defendants’ other

arguments, to determine whether amendment is necessary or whether the court should simply

dismiss the claims for some other reason.

B. Demand Futility

1. Tennessee’s Modified Aronson Test

Tennessee recognizes the “business judgment rule,” which creates a “presumption that a

corporation’s directors, when making a business decision, acted on an informed basis, in good

faith, and with the honest belief that their decision was in the corporation’s best interest.”

Summers v. Cherokee Child. & Fam. Servs., Inc., 112 S.W.3d 486, 528 (Tenn. Ct. App. 2002)

(citing Lewis ex rel. Sav. Bank & Tr. Co. v. Boyd, 838 S.W.2d 215, 222 (Tenn. Ct. App. 1992)).

That presumption applies to a decision not to pursue a lawsuit, just as it would apply to any other

decision made by a corporate board. Id. at 529. Typically, then, permitting a single stockholder

to circumvent a board decision not to pursue litigation would violate the basic principles of

corporate governance in Tennessee.

Those basic principles, however, become more complicated when the directors who

would choose to pursue or reject a potential lawsuit are also the potential defendants whom that

lawsuit would target. Generally speaking, the presumption afforded by the business judgment

rule “does not apply when the director or officer has an interest in the decision.” Id. at 528

(citations omitted). Some litigants have therefore suggested that, any time a lawsuit against a

majority of directors is proposed, a formal pre-suit demand can be assumed to have been futile.

See Lukas v. McPeak, 730 F.3d 635, 638 (6th Cir. 2013) (discussing plaintiffs’ interpretation of

Deaderick v. Wilson, 67 Tenn. 108, 131 (1874)). That categorical rule, however, would pose its

own potential complication: any stockholder could bypass the board simply by naming enough

directors as defendants, regardless of their actual complicity in the wrongful activity alleged. An

approach that simply assumed that a board could not consider a lawsuit in which its members

were named would avoid director conflicts, but it would risk doing so in a way that rewarded

gamesmanship at the expense of the integrity of the corporate form.

There are, in other words, points to be made in favor of a liberal approach to stockholder

derivative suits and other points to be made in favor of a more demanding standard. It is not,

however, up to this court to choose between those options, for two reasons. First, and as the court

has already mentioned, this is a question of Tennessee law, and this court therefore must try to

answer it in the same manner as the Tennessee Supreme Court has or would. See Berrington, 696

F.3d at 607. As Conforti points out, however, “the law in Tennessee is far from settled” in this

area. (Doc. No. 37 at 9 n.5.) That fact, though, brings the court to the second reason why this

court does not have free rein here: while the Tennessee Supreme Court has not resolved the

question of what standard should apply to demand futility assertions under Tennessee law, the

Sixth Circuit has addressed the issue, and decisions of the Sixth Circuit on issues of state law are

binding on this court in the absence of intervening state-law developments that would render the

relevant precedent out of date. See Rutherford v. Columbia Gas, 575 F.3d 616, 619 (6th Cir.

2009).

Specifically, in Lukas v. McPeak, 730 F.3d 635, the Sixth Circuit expressly rejected a

reading of Tennessee law that would provide “that demand is automatically futile whenever a

majority of company directors is named in a derivative suit.” Id. at 639. Instead, the Sixth Circuit

interpreted Tennessee caselaw to embrace a modified form of what is typically referred to as the

“Aronson test,” after Aronson v. Lewis, 473 A.2d 805, 809 (Del. 1984). Lukas, 730 F.3d at 640.

The Aronson test requires a plaintiff to plead, with sufficient particularity that either (1) “the

directors are not independent or disinterested” or (2) there is “a reasonable doubt . . . that . . . the

challenged transaction was otherwise the product of a valid exercise of business judgment.” In re

J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808, 820 (Del. Ch. 2005) (citations and

internal quotation marks omitted). The Sixth Circuit noted, however, that most Tennessee

opinions applying a test along the lines of Aronson had treated its requirements as “conjunctive,”

rather than “disjunctive,” meaning that a plaintiff would need to establish both prongs, not just

one or the other. Lukas, 730 F.3d at 640.

The Sixth Circuit acknowledged that the Tennessee Supreme Court had not resolved the

issue and that “at least one” decision by the Tennessee Court of Appeals appeared to limit itself

to only the first Aronson prong. Id. (discussing Memphis Health Ctr., 2006 WL 2088407, at

*10). Ultimately, the court concluded that it did not need to decide which version of the modified

Aronson test the Tennessee Supreme Court would adopt—the conjunctive two-pronged test or

the first-prong-only test—because the case at hand could be resolved by relying solely on the

first Aronson prong. Id.

As a matter of Sixth Circuit law, then, a Tennessee plaintiff must show that the proposed

defendant directors are not independent or disinterested. Id. Whether a plaintiff must also show a

reasonable doubt regarding whether the challenged decision was a valid exercise in business

judgment is less settled, but the Sixth Circuit found that approach to be more supported by

Tennessee caselaw than the alternative. In either case, however, the Sixth Circuit’s approach

suggests that Delaware cases applying the Aronson framework can provide persuasive guidance,

where Tennessee’s comparatively less robust caselaw of corporations does not definitively

resolve a question.4

2. Application of the Modified Aronson Test to Conforti’s Allegations

The defendants do not dispute that a substantial risk of personal liability by a majority of

Dollar General’s directors would be sufficient to satisfy the first (and, potentially, only) prong of

Tennessee’s modified Aronson test. They argue, however, that Conforti has not sufficiently

4 The court notes that Delaware courts do not themselves follow Aronson in its entirety anymore.

Specifically, the Delaware Supreme Court has superseded the second prong of the test in order to

“refocus[] the inquiry on the decision regarding the litigation demand, rather than the decision being

challenged.” United Food & Com. Workers Union & Participating Food Indus. Emps. Tri-State Pension

Fund v. Zuckerberg, 262 A.3d 1034, 1058–59 (Del. 2021) (citation omitted). Whatever the merits of this

change, the relevant test, under Sixth Circuit precedent construing Tennessee law, is a modified version of

the original Aronson inquiry, and the court is aware of no authority that would permit it to abandon a

Sixth Circuit precedent construing Tennessee law based on a change in the law of some other state.

pleaded such liability here, particularly in light of the fact that Dollar General’s charter includes

what is often referred to as an “exculpatory provision.” Specifically, the charter states:

A director of the corporation shall have no liability to the corporation or its

shareholders for monetary damages for breach of fiduciary duty as a director

provided that this Section 12 shall not eliminate or limit liability of a director for

(i) any breach of the director’s duty of loyalty to the Corporation or its

shareholders; (ii) acts or omissions not in good faith or which involve intentional

misconduct or a knowing violation of law, or (iii) unlawful distributions under

Section 48-18-304 of the Tennessee Business Corporation Act. If the Tennessee

Business Corporation Act or any successor statute is amended or other Tennessee

law is enacted after adoption of this provision to authorize corporate action further

eliminating or limiting the personal liability of directors, then the liability of a

director of the corporation shall be eliminated or limited to the fullest extent

permitted by the Tennessee Business Corporation Act, as so amended from time

to time, or such successor statute or other Tennessee law. Any repeal or

modification of this Article 12 or subsequent amendment of the Tennessee

Business Corporation Act or enactment of other applicable Tennessee law shall

not affect adversely any right or protection of a director of the corporation

existing at the time of such repeal, modification, amendment or enactment or with

respect to events occurring prior to such time.

(Doc. No. 31-29 ¶ 12.)5

Generally speaking, “plaintiffs must plead a non-exculpated claim for breach of fiduciary

duty against an independent director protected by an exculpatory charter provision, or that

director will be entitled to be dismissed from the suit.” In re Cornerstone Therapeutics Inc,

S’holder Litig., 115 A.3d 1173, 1179 (Del. 2015); see also Owens ex rel. Esperion Therapeutics,

Inc. v. Mayleben, No. CV 12985-VCS, 2020 WL 748023, at *7 (Del. Ch. Feb. 13, 2020) (citing

Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 62 (Del. Ch. 2015)). For

demand futility purposes, then, a “serious threat of liability may only be found to exist if the

5 Though included in the filings, Dollar General’s charter is not included in the Amended Complaint. The

court, however, will consider it pursuant to the principle that, “when a document is referred to in the

pleadings and is integral to the claims, it may be considered without converting a motion to dismiss into

one for summary judgment.” Comm’l Money Ctr., Inc. v. Ill. Union Ins. Co., 508 F.3d 327, 335–36 (6th

Cir. 2007) (quoting Jackson v. City of Columbus, 194 F.3d 737, 745 (6th Cir.1999)). The court will also

rely on that rule to consider other documents addressed by the Amended Complaint, such as internal audit

committee reports.

plaintiff pleads a non-exculpated claim against the directors based on particularized facts.” Wood

v. Baum, 953 A.2d 136, 141 (Del. 2008) (quoting Guttman v. Huang, 823 A.2d 492, 501 (Del.

Ch. 2003)). Based on the terms of Dollar General’s exculpatory clause, such a claim must

involve at least one of the following: (1) breach of the duty of loyalty to Dollar General or its

shareholders; (2) bad faith, intentional misconduct, or knowing violation of the law; or (3)

unlawful distributions.6 (Doc. No. 31-29 at 2.)

The defendants characterize Conforti’s claims as “Caremark claims,” another concept

taken from a Delaware case—in this instance, In re Caremark Int’l Inc. Derivative Litig., 698

A.2d 959, 960 (Del. Ch. 1996). Caremark involved a stockholder derivative suit filed in the

wake of a substantial criminal investigation of Caremark, a pharmacy company that was indicted

for committing multiple felonies and ultimately entered a guilty plea to one of the charged

counts. Id. at 960. Unlike in this case, the question of demand futility came before the court not

in connection with a motion to dismiss, but in the context of a motion to approve a settlement of

the shareholder derivative action. That motion “require[d] the court to assess the strengths and

weaknesses of the claims asserted in light of the discovery record.” Id. at 961. “The proposed

settlement provide[d] very modest benefits,” meaning that, in order for it to be approved, that

approval would have to rest, at least in part, on “the weakness of the plaintiffs’ claims.” Id. at

972. The court considered a number of substantive issues, concluding, “in light of the discovery

record, that there [was] a very low probability that it would be determined that the directors of

6 Conforti, apparently recognizing the potential problems that the exculpatory provision creates for his

claims, argues that the court should disregard any “argument based on the exculpatory clause . . . as a

matter of law,” because “an exculpatory provision can only shield directors from liability if the complaint

unambiguously states a claim only for a breach of the duty of care.” (Doc. No. 37 at 29 (emphasis

omitted).) That supposedly dispositive argument, however, is simply a statement of the governing

standard that the court must apply—not a shortcut to avoid applying it. There are, as no party disputes,

some types of wrongdoing that the exculpatory provision would not protect. If Conforti has actually

sufficiently pleaded that type of wrongdoing, then he has pleaded potential for individual liability.

Whether he has done so is what the court is called on to decide.

Caremark breached any duty to appropriately monitor and supervise the enterprise.” Id. at 961.

That assessment—that the plaintiffs had a low, but not nonexistent, chance of success—was

consistent with the parties’ modest agreement. The court therefore approved the settlement. Id. at

972.

The Caremark plaintiffs had alleged that “the directors allowed a situation to develop and

continue which exposed the corporation to enormous legal liability and that in so doing they

violated a duty to be active monitors of corporate performance.” Id. at 967. The court described

that theory of individual liability as “possibly the most difficult theory in corporation law upon

which a plaintiff might hope to win a judgment,” particularly in light of the “good policy reasons

why it is so difficult to charge directors with responsibility for corporate losses for an alleged

breach of care, where there is no conflict of interest or no facts suggesting suspect motivation

involved.” Id. (citation omitted). The court explained:

What should be understood, but may not widely be understood by courts or

commentators who are not often required to face such questions, is that

compliance with a director’s duty of care can never appropriately be judicially

determined by reference to the content of the board decision that leads to a

corporate loss, apart from consideration of the good faith or rationality of the

process employed. That is, whether a judge or jury considering the matter after

the fact[] believes a decision substantively wrong, or degrees of wrong extending

through “stupid” to “egregious” or “irrational”, provides no ground for director

liability, so long as the court determines that the process employed was either

rational or employed in a good faith effort to advance corporate interests. To

employ a different rule—one that permitted an “objective” evaluation of the

decision—would expose directors to substantive second guessing by ill-equipped

judges or juries, which would, in the long-run, be injurious to investor interests.

Id. (footnote omitted).

Ultimately, the court held that, “[i]n order to show that the Caremark directors breached

their duty of care by failing adequately to control Caremark’s employees, plaintiffs would have

to show either (1) that the directors knew or (2) should have known that violations of law were

occurring and, in either event, (3) that the directors took no steps in a good faith effort to prevent

or remedy that situation, and (4) that such failure proximately resulted in the losses complained

of . . . .” Id. at 971. The court further explained that a “lack of good faith” could be “evidenced

by sustained or systematic failure of a director to exercise reasonable oversight.” Id. at 971. “Bad

faith is established, under Caremark, when ‘the directors [completely] fail[] to implement any

reporting or information system or controls[,] or[,] having implemented such a system or

controls, consciously fail[] to monitor or oversee its operations thus disabling themselves from

being informed of risks or problems requiring their attention.’” Marchand v. Barnhill, 212 A.3d

805, 821 (Del. 2019) (quoting Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362,

370 (Del. 2006)).

The defendants argue that “[n]o Tennessee court has excused demand based on a

Caremark theory.” (Doc. No. 30 at 1.) Even if that is true, however, this court has no difficulty in

concluding that, whether or not the Tennessee Supreme Court would adopt every word of the

Caremark decision, Tennessee law does not wholly foreclose a demand futility argument in the

Caremark model. The defendants do not dispute that directors may be liable for violations of the

duty of loyalty and/or for acting in bad faith—just as Dollar General’s exculpatory clause

acknowledges that they may. Why, then, would that cease to be the case when the matter at issue

happens to be a director’s knowing, bad faith decision to tolerate widespread illegality? The

defendants treat Caremark liability as if it represents a unique, outlier doctrine that Tennessee

would have to bend over backwards to adopt, but the opposite is the case. Caremark simply

acknowledges that toleration of illegality can, like any other bad corporate decision, give rise to

director liability if all necessary preconditions are met. Denying that rule would amount to

erecting an artificial barrier around one particular type of corporate wrongdoing and treating it as

uniquely incapable of giving rise to director liability. This court does not believe that the

Tennessee Supreme Court would adopt such an approach. The court therefore holds that it is

possible to establish a potential for director liability based on the director’s knowing or reckless

toleration of illegality without taking remedial measures.

The mere availability of such a theory, however, does not mean that Conforti has

adequately pleaded it, which, the defendants argue, he has not. There is no dispute that most or

all of the director defendants—particularly Bryant, Sandler, Rhodes, and Chadwick, who served

on the Board’s Audit Committee (Doc. No. 14 ¶¶ 18–20, 22)—were generally aware that Dollar

General faced an employee safety problem. Significant employee safety issues were brought to

the attention of the Audit Committee no later than its November 29, 2016 meeting, where the

committee members discussed an audit revealing growing safety problems—in the form of, for

example, substantial year-to-year increases in blocked exits and blocked electrical panels—as

well as “increased scrutiny” by OSHA and others. (Doc. No. 17 ¶¶ 65–67.) An August 28, 2018

Audit Committee report identified “regulatory non-compliance”—including, specifically, with

regard to OSHA—as among the “Catastrophic Risks” facing the company. (Id. ¶ 71.) A March

20, 2019 Audit Committee meeting attended by Rhodes, Bryant, Calbert, Fili-Krushel, McGuire,

Santana, Vasos, Elliott, Garratt, and Taylor featured a presentation noting the increased OSHA

scrutiny and the risks that the company faced in connection with its failures to comply with

regulations. (Id. ¶ 72.) The same issues were raised in Board and Audit Committee meetings in

2020 and 2021. (Id. ¶¶ 75–77.) The problem, therefore, was clearly on the company’s—and the

individual directors’—radar. Knowledge, though, is not enough to establish liability of

exculpated directors. Conforti was also required to allege that a majority of the director

defendants, equipped with that knowledge, “took no steps in a good faith effort to prevent or

remedy that situation.” Caremark, 698 A.2d at 971.

To that end, Conforti relies heavily on emphasizing the severity of the problem, on the

apparent assumption that he can establish bad faith by juxtaposing the enormity of Dollar

General’s problem with the meagerness of the Board’s response. Those facts are not irrelevant to

the court’s inquiry, but, as the caselaw makes clear, “bad faith” means more than just “bad

management.” If Conforti were an employee or a regulator seeking to hold Dollar General

accountable for its alleged wrongdoing, then the company’s mismanagement of its problems

might be enough. Conforti, however, is neither of those things—he is an investor, seeking to

pursue a case under the theory that Dollar General is a victim in this situation, due to the

wrongdoing of the individuals who operated it. To do so, he must establish that a majority of the

Board responded to the problem either by doing nothing whatsoever or engaging only in bad

faith and/or disloyal responses. Without such allegations, the directors are insulated from liability

by the exculpatory shield that Dollar General chose to grant them in its charter.

Those allegations, moreover, must address the liability of individual directors—not

simply the company’s leadership as a whole. Delaware courts, in their application of the Aronson

standard, do not permit a plaintiff to “rely on the ‘group’ accusation mode of pleading demand

futility.” In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 121 n.36 (Del. Ch. 2009).

This court sees no reason to conclude that Tennessee’s modified Aronson standard, as applied

through Rule 23.1, would be any different. To the contrary, it is well-established that

particularized pleading, as that concept is understood in the Federal Rules, generally requires

defendant-specific allegations. See, e.g., D.E.&J Ltd. P’ship v. Conaway, 284 F. Supp. 2d 719,

730 (E.D. Mich. 2003) (acknowledging the impermissibility of group pleading under the

particularity requirement of Rule 9(b)).

Such group pleading is particularly inappropriate when a derivative plaintiff not only

treats the company’s board as a single, undifferentiated group, but does so with regard to the

entirety of the company’s leadership—that is, both its directors and its non-director officers. For

example, in this case, the officer defendants were the ones charged with the day-to-day operation

of Dollar General, and their potential culpability regarding the company’s failings may be easier

to establish than that of the eight non-officer directors. Those officer defendants, though, were

not the ones to whom Conforti was required, unless excused, to address his litigation demand.

What matters is the specific potential liability of the directors—all but two of whom were not

engaged in the ground-level management of the company.

Neither Conforti’s pleading nor his briefing fully accounts for these obstacles. The

closest that he gets to alleging any kind of particularized individual actions by directors, other

than the two directors who have served as Dollar General CEO, is that several of them were on

the Board’s Audit Committee or Nominating Committee, both of which were kept abreast of the

company’s safety problems. Merely placing a person on a key committee, however, is not an

individualized allegation of actual liability. “Just as in a general failure of oversight claim,”

plaintiffs seeking to establish demand futility based on membership on an audit committee “must

provide particularized allegations.” In re Coca-Cola Enterprises, Inc. Derivative Litig., 478 F.

Supp. 2d 1369, 1378 (N.D. Ga. 2007) (citation omitted), aff’d sub nom. Staehr v. Alm, 269 F.

App’x 888 (11th Cir. 2008). Moreover, the fact that some directors served on the relevant

committees appears, in this instance, to be most relevant to establishing those directors’

knowledge of the underlying problem, and knowledge is not reasonably disputed here.

Conforti argues that his “allegations do much more than merely place ‘a person on a key

committee,’ as [the defendants] claim.” (Doc. No. 37 at 13.) That “much more,” however, never

arrives, in either Conforti’s Amended Complaint or his briefing. He emphasizes the important

responsibilities of the relevant committees in connection with employee safety, but that is

nothing more than establishing that the relevant committees were, in the very terminology

Conforti dismisses, “key committees.” He emphasizes repeatedly just how severe Dollar

General’s problems were, but that kind of reasoning backward from the challenged decision is, at

most, relevant to the (possible) second prong of the modified Aronson inquiry, not the first, and

has been expressly rejected as a way to establish Caremark liability.

Moreover, the materials that Conforti describes as having been presented at Audit

Committee and Board of Directors meetings confirm that the Committee was both regularly

monitoring the company’s employee safety problems and making some efforts to respond to

them. For example, Conforti describes a March 15, 2022 Board of Directors meeting, at which

employee safety issues were discussed and the Board recommended the use of a “store

compliance cross-functional team . . . to identify and understand patterns and behaviors

impacting various compliance areas.” (Doc. No. 17 ¶ 93.) Conforti scoffs at this course of action,

stating that, “[a]fter six consistent years of labeling Dollar General’s workplace safety problems

as ‘catastrophic,’ corporate action should have been taken that exceeded the realms of

identification and understanding.” (Id.) He may well be right that Dollar General’s response was

inadequate, but making the leap from an inadequate response to a substantial risk of non-

exculpated liability is precisely the type of reasoning that courts applying Caremark have

typically rejected.

The sheer volume of information provided to the Audit Committee and the Board

regarding Dollar General’s issues regarding employee safety forecloses two of the potential

routes to establishing liability acknowledged by Caremark: showing that the directors

completely failed to establish a system for monitoring the problem; or, in the alternative,

showing that, despite the availability of such a system, the directors ignored it. See Marchand,

212 A.3d at 821. Of course, simply monitoring a problem is not the same thing as addressing it,

and Conforti could still show bad faith by establishing that the directors took no meaningful,

good faith steps in response to what they learned. Conforti’s allegations, however, do not bear

that theory out. For example, Audit Committee materials dating back to 2016 confirm that the

Board was not simply inertly watching the company’s safety problems, but was overseeing

specific actions to be taken in response—such as increased investment in pest control services

and door repairs. (See Doc. No. 17 ¶¶ 66–67; Doc. No. 34-2 at 1686.) Third-party contractors

performed thousands of store audits regarding safety.7 (Doc. No. 17 ¶¶ 77–78; Doc. No. 34-6 at

372.) The Board considered and proposed other concrete steps, such as reviewing company

procedures for approaching shoplifters and improving the company’s structures for addressing

employee complaints. (Doc. No. 34-19 at 625, 637.) Board materials also show a number of

steps taken in the name of “robbery avoidance,” including the installation of “[r]obust

interior/exterior” surveillance equipment. (Doc. No. 34-11 at 1473.) One can doubt whether the

aforementioned steps were enough—or even close to enough—given the risks that Dollar

General’s employees were facing. “Whether the response fixed the problem,” however, “is not

7 Conforti attempts to negate these steps by pointing out that inspections were disrupted due to what the

defendants state were COVID-related staffing issues with a contractor. (Doc. No. 17 ¶¶ 77–80.) Conforti

has not, however, pleaded any facts suggesting that this failure was due to bad faith or violation of the

duty of loyalty, and Board materials show that it acknowledged the lapse and planned to expand audits in

2022. (Doc. No. 34-18 at 70.)

the test” in this context. In re McDonald’s Corp. S’holder Derivative Litig., 291 A.3d 652, 684

(Del. Ch. 2023).

Unable to establish the kind of bad faith or disloyalty that Caremark would require,

Conforti’s pleading and briefing return, repeatedly, to the same general argument: that Dollar

General’s employee safety issues were so severe that the Board’s failure to take decisive action,

in and of itself, shows that the individual directors can be assumed to face potential personal

liability, despite the protection they can claim under Dollar General’s clear exculpatory clause.

That is a coherent argument, and it is not difficult to imagine some court, in some jurisdiction,

adopting it. What matters for the purposes of this case, however, is what the Tennessee Supreme

Court would do. The Sixth Circuit has said that Tennessee would apply a modified Aronson test,

so that much of the question already has an answer. The only open question is whether the

Tennessee Supreme Court would construe that test in a way that would leave room for the kind

of reasoning backward from corporate wrongdoing that Conforti proposes but that Delaware

courts, as the original proponents of the Aronson and Caremark approaches, have typically

rejected. This court’s best guess is that the Tennessee Supreme Court would be more likely to

hew closely to Delaware’s demanding view than to adopt Conforti’s more forgiving one. The

court, therefore, finds that Conforti’s allegations of liability for breach of fiduciary duty are

insufficient to establish demand futility under Tennessee law.

The waste and unjust enrichment claims present an additional complication, because

those claims involve not simply the alleged mismanagement of the company, but also the

company’s payments to individual directors. Specifically, Conforti alleges that Dollar General

compensated its officers and directors exorbitantly and that, “[i]n light of Dollar General’s

management not achieving its stated goals, the Board should have clawed back executive

compensation for both officers and directors.” (Doc. No. 14 ¶ 164.) Because these allegations

implicate a direct economic interest of named defendants, they are arguably sufficient to satisfy

the first Aronson prong. The court, however, finds that, whether or not the Tennessee Supreme

Court would adopt the conjunctive, two-prong modified Aronson test in all situations, it would

likely do so for claims that specifically involve the conferral of economic benefits on defendant

directors. Otherwise, demand would be categorically excused in any case that challenged director

compensation or directors’ financial interests, no matter how well- or poorly-founded the

allegations. The court therefore concludes that, at least where the allegations at issue involve

financial benefits of directors, a plaintiff must satisfy the second Aronson prong—reasonable

doubt regarding the directors’ exercise of business judgment—to demonstrate demand futility

under Tennessee law.

Conforti, however, has offered only conclusory assertions that the payments made to

most of the directors were so outside the realm of reasonableness as to escape protection by the

business judgment rule. Vasos, in particularly, appears to have been compensated very

generously, to the point that one could reasonably question whether that level of payment was in

the best interest of the company. Vasos, though, is only one director out of ten, and Conforti has

not sufficiently alleged liability for waste or unjust enrichment with regard to enough other

directors to render a litigation demand futile. See In re Goldman Sachs Grp., Inc. S’holder Litig.,

No. CIV.A. 5215-VCG, 2011 WL 4826104, at *16 (Del. Ch. Oct. 12, 2011) (“[T]o excuse

demand on a waste claim, the Plaintiffs must plead particularized allegations that ‘overcome the

general presumption of good faith by showing that the board’s decision was so egregious or

irrational that it could not have been based on a valid assessment of the corporation’s best

interests.’”) (quoting Citigroup, 964 A.2d at 136).

Because the court finds that Conforti has failed to allege demand futility, Dollar General

is entitled to dismissal. The court, therefore, will not consider the substantive merits of Dollar

General’s decisions any more than has been necessary to resolve that limited issue. It may be that

Dollar General has deeply and repeatedly failed in its obligations to its employees. Indeed, if this

were simply a lawsuit about whether Dollar General had done enough to protect its employees,

the court would likely have little difficulty concluding that Conforti had alleged at least enough

to proceed to discovery. This, though, is not a labor enforcement action. It is a case about Dollar

General’s rights against its directors and officers, and Dollar General elected to grant those

directors aggressive protection from liability in its charter. Because Conforti has not pleaded

facts sufficient to defeat that protection with regard to a majority of the Board, he was required to

give that Board the opportunity to evaluate this proposed lawsuit itself. Because he did not, he

lacks the right to bring a stockholder derivative suit under Tennessee law, and the claims that he

has attempted to assert will be dismissed, without prejudice to their being raised in a

procedurally appropriate manner in future litigation.

IV. CONCLUSION

For the foregoing reasons, the defendants’ Motion to Dismiss the Amended Stockholder

Derivative Complaint (Doc. No. 29) will be granted, and all claims will be dismissed.

An appropriate order will enter.

Mid beag-—

United States District Judge

26