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Sobba v. Elmen

November 22, 2006

LEE SOBBA, INDIVIDUALLY AND DERIVATIVELY IN THE NAME OF AND ON BEHALF OF SOBEL, INC., BELSO, INC., AND ELSOB, INC. PLAINTIFF
v.
SPENCER ELMEN; SODAKCO, LLC; AND SUITE 107, LLC DEFENDANTS AND SOBEL, INC., BELSO, INC., AND ELSOB, INC. NOMINAL DEFENDANTS



The opinion of the court was delivered by: J. Leon Holmes United States District Judge

OPINION AND ORDER

Lee Sobba brought this shareholder derivative action on behalf of Sobel, Inc., Belso, Inc., and Elsob, Inc., against Spencer Elmen, Sodakco LLC, and Suite 107 LLC, alleging breach of fiduciary duty, trademark infringement in violation of section 43 of the Lanham Act, 15 U.S.C. § 1125, and unfair competition under the Arkansas Deceptive Trade Practices Act*fn1 and the common law. Sobba named the corporations Sobel, Belso, and Elsob as nominal defendants. Both the defendants and the nominal defendants have filed answers to the complaint. Sobba now moves to strike the answer of the nominal defendants pursuant to Federal Rule of Civil Procedure 12(f). For the following reasons, that motion is granted.

I.

Sobel, Belso, and Elsob are Arkansas corporations that operate three stores named Cupids, two of which are in Little Rock and the third in Hot Springs. According to the complaint, the stores sell "lingerie and adult-themed products." Each of the three corporations has three directors.*fn2 Sobba and Elmen are both officers and directors of the corporations as well as the primary shareholders, while A.W. Bailey, an accountant, is the third director. Sobba owns 46% of Sobel,*fn3 50% of Belso, and 50% of Elsob. Elmen owns 50% of Sobel, 50% of Belso, and 50% of Elsob. The corporations use "purple neon" in their advertising and extensively at their stores. They have engaged in promotion and advertising to the residents in central Arkansas.

Sobba makes the following allegations in his complaint: Sobba and Elmen discussed that Elmen might open stores on his own separate from the corporations, but those discussions did not include authorization for Elmen to use the name Cupids and the "purple neon" trade dress; despite these discussions, Elmen, through Sodakco LLC and Suite 107 LLC, opened stores in Conway and Jacksonville that displayed the name Cupids and the "purple neon" trade dress; while opening the Jacksonville and Conway stores, Elmen diverted assets of the corporations to himself and to Sodakco and Suite 107; and Elmen also intermingled assets of the corporations with the assets of Sodakco and Suite 107. Sobba alleges that by these actions Elmen breached the fiduciary duties he owed to the corporations as an officer and director in that he usurped corporate opportunities and misused corporate assets. Sobba's complaint asks for injunctive relief and also for compensatory, treble, and punitive damages to be awarded to the corporations who are named as nominal defendants.

The defendants Elmen, Sodakco, and Suite 107 filed an answer denying that Elmen had breached any fiduciary duties to the corporations and affirmatively alleging that Sobba and Elmen reached an agreement that they would both open new stores using the name Cupids separate from the corporations. The defendants raised the affirmative defenses of consent, equitable estoppel, waiver, unclean hands, laches, and the business judgment rule. Similarly, the nominal defendants filed an answer denying that Elmen had breached any fiduciary duties to them and affirmatively alleging that Sobba and Elmen agreed that each would have the separate right and opportunity to open additional Cupids stores in various assigned cities in Arkansas. They also raised the affirmative defenses of waiver, estoppel, unclean hands, consent, laches, and the business judgment rule in their answer. The answer of the nominal defendants was filed by the Rose Law Firm, which was retained to defend this suit on behalf of the nominal defendants by a 2-1 vote of each corporation's board of directors. Both Elmen and Bailey voted in favor of the Rose Law Firm defending the suit on behalf of the corporations, while Sobba voted against it.

II.

Federal Rule of Civil Procedure 12(f) states:

Upon motion made by a party before responding to a pleading or, if no responsive pleading is permitted by these rules, upon motion made by a party within 20 days after the service of the pleading upon the party or upon the court's own initiative at any time, the court may order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.

District courts have "liberal discretion" under Rule 12(f). Nationwide Ins. Co. v. Cent. Mo. Elec. Co-op, Inc., 278 F.3d 742, 748 (8th Cir. 2001). However, because striking a pleading or a portion of a pleading is a drastic remedy, motions to strike under Rule 12(f) "are viewed with disfavor and infrequently granted." Stanbury Law Firm, P.A. v. I.R.S., 221 F.3d 1059, 1063 (8th Cir. 2000). Accordingly, a plaintiff must show that the allegations being challenged in the defendant's answer are "so unrelated to the plaintiff's claims as to be unworthy of any consideration as a defense and that their presence in the pleading throughout the proceeding will be prejudicial to the moving party." 5C CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 1380 (3d ed. 2004).

III.

In his motion to strike, Sobba argues that the nominal defendants are the real parties in interest to his derivative suit and must remain neutral for the duration of this action. Sobba is correct. While the shareholder who brings the action is the nominal plaintiff, the corporation on whose behalf the action is brought is the real party in interest, even though the corporation is named as a defendant and served with process as a defendant. Morgan v. Robertson, 271 Ark. 461, 465, 609 S.W.2d 662, 664 (Ct. App. 1980). "In legal effect, a stockholders' suit is one by the corporation conducted by the stockholders as its representative. The stockholder is only a nominal plaintiff, the corporation being the real party in interest." Id. at 463, 609 S.W.2d at 663. "[I]n reality the corporation is the plaintiff, the stockholder being only a nominal plaintiff." Id. at 464, 609 S.W.2d at 664.

In a derivative suit, any recovery the suing shareholder obtains goes to the corporation. Bell Atlantic Corp. v. Bolger, 2 F.3d 1304, 1307 n.4 (3d Cir. 1993); 19 AM. JUR. 2D Corporations § 1949 (2006). "Although the corporation is named in the complaint as a defendant, its interests are not necessarily adverse to those of the plaintiff since it will be the beneficiary of any recovery." 13 WILLIAM MEADE FLETCHER ET AL., FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 5997 (perm. ed., rev. vol. 2004). "A derivative suit is for the benefit of the corporation and all stockholders, and the real controversy is between the corporation and the person whose acts are complained of, the corporation being the beneficial plaintiff." 18 C.J.S. Corporations § 413 (2006).

Because the corporation is the real party in interest and any recovery by the derivative plaintiff goes to the corporation, the general rule for corporate participation in a derivative action is that "[u]nless the derivative action threatens rather than advances corporate interests, [the corporation] cannot participate in the defense on the merits." FLETCHER, supra, § 5997. While Arkansas has not expressly held that a corporation ordinarily cannot defend a derivative suit on the merits, the overwhelming weight of authority supports this rule of corporate neutrality,*fn4 and the Arkansas cases are consistent with the general rule to the extent that they have addressed ...


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