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Cannonball Fund, LTD. v. Dutchess Capital Management, LLC

Superior Court of Massachusetts, Suffolk, Business Litigation Session

September 29, 2016

Cannonball Fund, LTD. et al.
Dutchess Capital Management, LLC et al No. 135327

          September 30, 2016, Filed


          Mitchell H. Kaplan, Justice

         This case is again before the court on the Dutchess Defendants'[1] motion to dismiss the derivative claims asserted against them by the Cannonball Plaintiffs[2] for lack of subject matter jurisdiction. The Dutchess Defendants argue that, under Cayman law, the Cannonball Plaintiffs lack standing to assert derivative claims against them on behalf of Dutchess Private Equities Cayman Fund Ltd. (Dutchess Ltd.), a corporation organized under the laws of the Cayman Islands. Interestingly, this is the second Mass.R.Civ.P. 12(b)(1) motion that the Dutchess Defendants have filed in this action based on their contention that the Cannonball Plaintiffs do not have standing to assert these derivative claims and, therefore, the Superior Court is without jurisdiction over them.

         The first Rule 12(b)(1) motion was filed some five years ago. In that motion, the Dutchess Defendants argued that the complaint did not sufficiently allege that (i) DCM obtained a benefit from the defendants' alleged wrongdoing, and (ii) Novielli, Smith, and Leighton had control over Dutchess Ltd. to meet the requirements of Cayman law for the assertion of derivative claims. The Dutchess Defendants' arguments were rejected by the Appeals Court: " Because both control and benefit are sufficiently alleged, the plaintiffs have established derivative standing to sue DCM, Novielli, Smith, and Leighton on behalf of Dutchess Ltd. under Cayman law." See Cannonball Fund, Ltd. v. Dutchess Capital Mgmt., LLC, 84 Mass.App.Ct. 75, 94, 993 N.E.2d 350 (2013) ( Cannonball ). In this first subject matter jurisdiction motion no mention was made of the argument on which the instant motion is premised: the Cannonball Plaintiffs are not registered owners of shares in Dutchess Ltd.

         Here, the Dutchess Defendants point out that ABN Amro Global Custody Services N.V. (Custody Services), formerly Fortis Bank (Nederland) N.V., is the registered owner of the Cannonball Plaintiffs' shares; they are only the beneficial owners. This, of course, is a fact that the Dutchess Defendants have known since these shares were purchased. The Dutchess Defendants, nonetheless, now argue that under " settled" Cayman law, only the registered owner of shares in a Cayman corporation may bring a derivative action. In consequence, they contend, the court does not have subject matter jurisdiction of this claim.

         The Cannonball Plaintiffs, justifiably exorcised by this second subject matter jurisdiction motion filed after years of pretrial litigation, argue that the Dutchess Defendants' have waived their right to take a second bite of the Rule 12(b)(1) motion to dismiss apple. Although their argument certainly has surface appeal, " standing is an issue of subject matter jurisdiction." See Indeck Maine Energy, LLC v. Comm'r of Energy Res., 454 Mass. 511, 516, 911 N.E.2d 149 (2009). Further, " a jurisdictional issue must be decided, regardless of the point at which it is first raised . . . Subject matter jurisdiction cannot be conferred by consent, conduct or waiver . . . Accordingly, [a] court must take note of lack of jurisdiction whenever it appears, whether by suggestion of a party or otherwise." Litton Bus. Sys., Inc. v. Comm'r of Revenue, 383 Mass. 619, 622, 420 N.E.2d 339 (1981) (internal citations omitted). The court will therefore take note of the jurisdictional issue, although raised in a grossly untimely manner, and address its merits.


         The " facts" necessary to decide this motion are nearly all set out in Cannonball, and the myriad other Superior Court decisions generated by this litigation and need not be restated. The only additional factual matters requiring attention are the efforts made by the Cannonball Plaintiffs to cure the problem raised by the undisputed fact that they are not (or were not) the record owners of their Dutchess Ltd. shares. In response to the Dutchess Defendants' motion the plaintiffs have taken two steps. First, they contacted Custody Services to arrange to have it transfer direct ownership of the shares to them. According to the Cannonball Plaintiffs, Custody Services is willing to assign the shares to them; indeed, this may have already occurred. For the purposes of this motion, the court assumes that this transaction has been completed. The Cannonball Plaintiffs also have attempted to find a Dutchess Ltd. shareholder who is the registered owner of shares it owns beneficially and willing to serve as a derivative plaintiff in this case. The last filing from the Cannonball Plaintiffs reported that they had not yet located such a plaintiff. The court will assume that no such additional plaintiff has or will step forward (although, if one did, this motion would be moot).

         In response to the transfer of legal ownership of the shares from Custody Services to the Cannonball Plaintiffs, the Dutchess Defendants direct the court to Article 12.5 of Dutchess Ltd.'s Articles of Association which states:

The Board may in its absolute discretion and without assigning any reason therefore refuse to register the transfer of a share. If the Board refuses to register a transfer of any share the Secretary shall, within three months after the date on which the transfer was lodged with the Company, send to the transferor and transferee notice of the refusal.

         They then state that the Board, which is controlled by defendants Novielli and Leighton, have exercised this authority to refuse to allow the shares to be registered in the name of the Cannonball Plaintiffs and will continue to refuse to register them. The Dutchess Defendants have stated that the reason that the Board's action is justified is because the " Board will not perpetuate this frivolous lawsuit, which has already drained hundreds of thousands of dollars of Dutchess Ltd.'s assets . . ."


         As stated in Cannonball : " Because Dutchess Ltd. is a Cayman Islands corporation, Cayman law determines whether the plaintiffs have standing to bring a claim derivatively on its behalf." 84 Mass.App.Ct. at 93.[3] Further, " Cayman law is the common law of Britain and other Commonwealth countries, supplemented by Cayman Islands court decisions and statutes." Id. at n.35. There does not appear to be a dispute that two Cayman Island appellate court decisions state that a beneficial owner of shares held in trust by another party does not have standing to bring a derivative action on the company's behalf. See Schultz v. [1992-93] CILR 59, at 69; Svanstrom v. Jonasson [1997] CILR 192. Indeed, in Svanstrom, the three justices that issued written opinions were emphatic in dispelling any misconception that the decision in Schultz might have suggested that circumstances could exist in which a beneficial owner of shares in a Cayman Island corporation could bring a derivative action on behalf of that corporation by naming the registered owner of the shares as an additional defendant. The Svanstrom court pointed out that any inequities that might result from the inability of the beneficial owner of shares to bring an action could have been resolved with appropriate language in the instrument creating the trust that directed the trustee as to the actions that he must take under these circumstances. The justices deemed the principle that " companies are under no obligation to recognize any trust which may exist in relation to its shares, " to be the principle of law of paramount importance and that it would be impaired if beneficial owners of shares could sue on behalf of the company.

         The Dutchess Defendants also argue that the Cayman Island courts have been clear in holding that only a court in the Cayman Island may order the Board of a Cayman Island corporation to register shares. There is a provision in the Cayman Islands Companies Law (now section 46, but previously section 45) that permits a person aggrieved by a Board's refusal to register shares to " by motion to the Court, apply for an order that the register be rectified." Referring to that section, a Cayman court has explicitly stated that: " There is only one place where issues regarding the perfecting of title to shares by rectification of the register can be dealt with and that is before the Grand Court of the Cayman Islands." Canada, Inc. v. Socia ...

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