Lyric H. Hale v. Victor Chu

In the
United States Court of Appeals
For the Seventh Circuit
No. 09-3262
LYRIC H. HALE, et al.,
Plaintiffs-Appellants,
v.
VICTOR CHU, et al.,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 1:08-cv-05548—Virginia M. Kendall, Judge.
ARGUED JUNE 1, 2010—DECIDED AUGUST 9, 2010
Before BAUER, FLAUM and TINDER, Circuit Judges.
BAUER, Circuit Judge. The district court dismissed a
derivative action that was brought on behalf of a dis-
solved corporation. We affirm.
I. BACKGROUND
Plaintiffs Lyric Hale, Michael Grainger, and Dr. Ronald
Michael, individually and as derivative representatives

-- 1 of 7 --

2 No. 09-3262
A derivative suit permits a shareholder to bring an action on 1
behalf of a corporation. Ross v. Bernhard, 396 U.S. 531, 538
(1970). A derivative suit has dual aspects: first, the stockholder’s
right to sue on behalf of the corporation; and second, the claim
of the corporation against directors or third parties. Id. The
corporation is a necessary party to the action; without it the
case cannot proceed. Id. Although named a defendant, it is
the real party in interest, the stockholder being at best the
nominal plaintiff. Id. Preconditions for a derivative action
include both a valid claim on which the corporation could
have sued, and that the corporation itself has refused to
proceed after suitable demand, unless excused by extra-
ordinary conditions. Id. at 534.
This Court understands that neither Pansy Ho Chiu-King 2
nor Stanley Ho Chiu-King were served with the summons
or Complaint.
of China Online, Inc., filed a corporate derivative
lawsuit against defendants China Online, Victor Chu,
Pansy Ho Chiu-King, and Stanley Ho Chiu-King, in the
Circuit Court of Cook County, Illinois. The complaint1
contained two counts asserting that the defendants
breached their fiduciary obligations and duties owed
to China Online and its shareholders: the first claiming
that Chu breached his fiduciary obligation to China
Online by engaging in a series of illegal acts designed
to undercut the financial health of China Online, and
the second claiming that Pansy Ho Chiu-King and Stanley
Ho Chiu-King knew of Chu’s fiduciary obligation to
China Online and aided and abetted him in subverting
the corporate health of China Online as described in the
first count. Chu filed a notice of removal, asserting2

-- 2 of 7 --

No. 09-3262 3
that the district court had jurisdiction under 28 U.S.C.
§§ 1332, 1441, and 1446, because the plaintiffs, citizens
and residents of Illinois, fraudulently joined China
Online, incorporated in Delaware with its principal place
of business in Illinois, as a defendant and as such, should
be disregarded as a defendant. Chu maintains that
when China Online is disregarded as a defendant, com-
plete diversity exists because Chu is a resident of
Hong Kong and a citizen of Great Britain and Pansy
Ho Chiu-King and Stanley Ho Chiu-King are both
citizens and residents of Hong Kong.
Pending before the district court were two motions.
First, the plaintiffs filed a motion to remand the action
to state court, arguing that complete diversity did not
exist as China Online was a necessary party (and not
fraudulently joined) because a corporation is a neces-
sary party defendant in a derivative action. Second, Chu
filed a motion to dismiss, arguing fraudulent joinder
and failure to state a claim.
Before ruling on these motions, the district court
ordered the parties to file supplemental briefs ad-
dressing the following issues:
1) if shareholders can bring a derivative lawsuit on
behalf of a dissolved corporation, 2) if they can,
whether demand is excused, and 3) if demand
is not excused, whom the shareholders are to make
the demand upon, as China Online has no current
board of directors.
6/2/2009 Minute Order.

-- 3 of 7 --

4 No. 09-3262
After reviewing the supplemental briefs, the district
court denied the plaintiffs’ motion to remand and
granted Chu’s motion to dismiss.
In denying the motion to remand, the district court
concluded that China Online was a fraudulently joined
defendant because there was no possibility that the plain-
tiffs’ complaint could state a derivative cause of action
against China Online. In reaching this conclusion, the
district court noted that China Online was dissolved
prior to the plaintiffs filing their action and that under
Delaware law, dissolution of a corporation terminates
an individual’s status as a shareholder of the corpora-
tion, which bars the individual from bringing a deriva-
tive action on behalf of the dissolved corporation. Hale
v. China Online, Inc., No. 08 C 5548, 2009 WL 2601357, *2
(N.D. Ill. August 21, 2009) (citing Giordano v. Marta,
No. CIV. A. 11613, 1998 WL 227888, at *4 (Del. Ch.
April 28, 1998)) (plaintiff was no longer stockholder of
dissolved corporation and never complained or took
any action with respect to the dissolution and therefore
no longer had standing to sue derivatively on behalf of
corporation). The district court further held that even if
the plaintiffs had standing to bring a derivative action,
they failed to make the requisite demand upon China
Online’s former board of directors before instituting suit
and failed to plead demand futility. Hale v. China Online,
Inc., 2009 WL 2601357, at *3.
Similarly, in granting Chu’s motion to dismiss, the
district court found that the plaintiffs’ complaint failed
to state a claim: it failed to state a derivative cause of

-- 4 of 7 --

No. 09-3262 5
action because the plaintiffs lacked standing to bring
a derivative cause of action on behalf of a dissolved
corporation, and even if they did have standing, they
failed to plead demand futility. Hale v. China Online, Inc.,
2009 WL 2601357, at *5. The district court dismissed the
plaintiffs’ individual claims, ruling that they failed to
state a cause of action because their individual claims
would seek to assert rights that may only be asserted by
China Online, i.e., their claims would be derivative of the
harm suffered by China Online. Id. Finally, the district
court sua sponte dismissed the plaintiffs’ complaint
against the remaining defendants.
The plaintiffs appealed. On appeal, the plaintiffs agree
that they could not bring a derivative lawsuit in the
name of China Online because it was dissolved before
they filed this lawsuit. Appellants’ Br. at 12. However,
they argue that the district court should not have dis-
missed their complaint because there were sufficient
facts before it to establish that the complaint, while
styled as a derivative lawsuit brought on behalf of
China Online, was really a lawsuit brought directly by
China Online and that “substance should prevail over
form.” Appellants’ Br. at 14. The plaintiffs make this
contention despite never arguing to the district court
that the complaint asserted direct claims by China On-
line. The plaintiffs also seek remand so that the
district court can address whether there is personal
jurisdiction over Chu (the district court had previously
denied Chu’s motion to dismiss for lack of personal
jurisdiction as moot).

-- 5 of 7 --

6 No. 09-3262
II. DISCUSSION
We review a district court’s order granting a motion
to dismiss de novo. Tamayo v. Blagojevich, 526 F.3d 1074,
1081 (7th Cir. 2008). All well-pleaded facts are accepted
as true, and all reasonable inferences are drawn in the
plaintiff’s favor. Id. The allegations in the complaint
“must plausibly suggest that the plaintiff has a right
to relief, raising that possibility above a ‘speculative
level’; if they do not, the plaintiff pleads itself out of
court.” EEOC v. Concentra Health Servs., Inc., 496 F.3d
773, 776 (7th Cir. 2007) (citing Bell Atl. Corp. v. Twombly,
127 S. Ct. 1955, 1965, 1973 n.14 (2007)).
Here, the plaintiffs do not object to the district court’s
ruling that dismissed their derivative action. Instead,
they argue that the district court should have known
that their complaint, which was styled as a derivative
action and that stated “China Online, as a derivative
plaintiff,” was really a direct action brought by China
Online in its own name.
It is well-established that a party waives the right to
argue an issue on appeal if he fails to raise that issue
before the trial court. Moulton v. Vigo County, 150 F.3d 801,
803 (7th Cir. 1998); Stevens v. Umsted, 131 F.3d 697, 705
(7th Cir. 1997) (“It is axiomatic that arguments not
raised below are waived on appeal.”). The record con-
tains no evidence that the plaintiffs ever alerted the
district court that China Online was pursuing a direct
claim against the defendants, despite having ample
opportunity to do so. Failure to raise this argument
before the district court is particularly egregious be-

-- 6 of 7 --

No. 09-3262 7
cause the district court gave both parties the oppor-
tunity to address whether shareholders could bring a
derivative lawsuit on behalf of a dissolved corporation.
At no time did the plaintiffs move to amend their com-
plaint to include a direct cause of action.
We conclude that the plaintiffs have waived this argu-
ment. And, because allegations in the complaint did not
plausibly suggest that the plaintiffs had a right to
relief, we conclude that the district court correctly dis-
missed the complaint. Once again, Chu’s motion to dis-
miss for lack of personal jurisdiction is moot.
III. CONCLUSION
For the reasons stated above, we AFFIRM the district
court’s order.
8-9-10

-- 7 of 7 --