McCall v. Scott

McCall v. Scott,

Nos. 99-6370/6387 (6th Cir. Feb. 13, 2001)

Insisting that a large, national health care corporation’s Board of Directors intentionally
ignored indications of widespread and systematic health care fraud, the corporation’s
shareholders brought this consolidated stockholder derivative suit against the
current and former directors of the corporation. Claiming that the corporation
had engaged in various forms of Medicare fraud and interference with physician
relationships in pursuit of its acquisition goals, the stockholders’ complaint
specifically alleged intentional and negligent breach of the fiduciary duty
of care and intentional breach of the fiduciary duty of care by illegal insider
trading. The district court, granting the directors’ motion to dismiss the consolidated
claim under Federal Rule of Civil Procedure 12(b)(6), held that the stockholders
failed to sufficiently allege the demand futility necessary to excuse the stockholders’
failure to make a pre-suit demand on the corporation’s Board of Directors.

Reversing the district court with respect to the
stockholders’ claim for intentional and reckless breach of the duty of care,
the court of appeals held that the shareholders presented the particularized
factual statements essential to their claim. The court, stressing that its
decision addressed only the sufficiency of the pleadings, recognized that
director liability under the shareholders’ claim of intentional or reckless
breach of the duty of care may stem from “an unconsidered failure of the
board to act in circumstances in which due attention would, arguably, have
prevented the loss.” In light of directors’ prior business experience,
coupled with media reports of illegal activities, federal criminal
investigations into the corporation’s business practices, and a qui tam action
against the corporation, the court held that the shareholders presented
sufficient evidence to establish their claim that the directors could not
exercise “independent and disinterested business judgment in responding to
a demand” from the shareholders.