 

In the Missouri Court of Appeals
Eastern District

DIVISION TWO

DALE VAN LEEUWEN ) EDl03392

)
Appellaiit, ) Appeal from the Circuit Couit

) of St. Lonis County

v. )
) l¢iSL-CC(B 986

DANIEL J. LOWERY, DOROTHY )

LOWERY, DENNIS J. LOWERY, )

LSI-LOWERY SYSTEMS, INC., and )

LOWERY HOLDINGS, LLC, ) Honorable Thoinas W. DePriest, Jr.
)

Respondents. ) FILED: March 22, 2016

introduction

This appeal stems from a second derivative action brought on behalf of LSl-Lowery
Systeins, lnc. (LSI) by its minority shareholder, Dale Van Leeuwen (Van Leeuwen), against
Daniel J. Lowery (Dan Lowery), Dorotliy Lowery, Dennis J. Lowery, LSI, and Lowery
Holdings, LLC (togetlier, Defendants), asserting allegations of wrongdoing by LSI’S directors
and employees. The first derivative action, in which Van Leetlwen did not paiticipate, was filed
by three plaintiff-sllareliolders against the same Defendants and inaking the same allegations of
wrongdoing, and was voluntarily dismissed with prejudice following a private settlement
between the parties. The settlement and disinissal, however, did not comply with Missouri Rule
of Civil Procedure 52.09’3 mandatory pi'ocedures, which provide that a derivative action “shall

not be dismissed or compromised without the approval of the court, and notice of the proposed

3

dismissal or compromise shall be given to sliareliolders,’ Nevertheless, the trial court here
granted summary judgment to Defeiidants, concluding in part that the second derivative action
was barred by the prior settlement and dismissal.

ln this case of fi1'st impression in l\/lissouri, we are asked to determine whether a different
shareholder is barred from bringing a second derivative suit asserting an identical cause of action
where the first derivative action has been settled and dismissed in a manner that does not comply
with Rule 52.09’5 approval and notice requirements We hold that the second suit is not barred
under these circumstances where the court did not approve the settlement and the other
shareholders were not given notice to object. Van Leeuwen raises additional points of error in
the trial court’s grant of summary judgment that we address as necessary. We reverse and
remand for further proceedings in accordance with this opinion.

Background

Dan Lowery is the president of LSI, a distributor and provider of computer ltardu'are and
software products Dorothy Lowery is his \vife, and Dennis Lowery is his son. Dorothy and Dan
Lowery are the sole directors of LSI. Dan Lowery and Dennis Lowery also own Lowery
Holdings, LLC (Lowery Holdiiigs), which operates Massage Envy franchises Prior to 2013, LSI
had five sliareholders: Dan Lowery held 82% of LSI’s shares, while Philip Treacy (Treacy),
Avery Myrick (Myrick), Jon Woodrllm (Woodrtlm), and Van Leeuwen held the remaining
shares.

ln 2010, then-shareholders 'l`reacy, Myrick, and Woodruln filed a derivative action
against Defendants on behalf of LSI and its shareholders (Lowery I). 'l`he fourth amended

petition in Lowery l asserted claims for breach of fiduciary duty, civil conspiracy to commit

breach of fiduciary duty, and dissolution, seeking actual and punitive damages and requesting

2

Settlements that benefit the plaintiff-shareholders at expense of the corporation and lion-party
shareholders are precisely what Rule 52.09 was intended to prevent by requiring disclosure of
the settlement terms to the trial court and remaining sliareholders.

Because the dismissal and settlement in Lowery I did not coinply with the mandatory
language of Rule 52.09, Van Leeuwen’s current derivative suit bringing identical claims against
the same Defendants is not barred. § l, 582 F.2d at 268-69; Papilsky, 466 F.Zd at 257.
Van Leeuwen did not receive notice of the settlement and dismissal in Lowery I and did not have
the opportunity to object to that settlement if it did not in fact benefit LSI, or if it benefitted the
plaintiff-sliarehoiders at the expense of the non-party shareholders Likewise, the trial court in
Lowery i did not have the opportunity to determine whether the settlement was a fair and
adequate remedy for LSI and the other non-party shareholder, Van Leeuwen. With none of the
safeguards observed to ensure LSI’s and Van Leettweii’s interests were represented in the
Lowery I settlement, we decline to bar Van Leeuwen’s current derivative suit. There is no way
to determine from this record whether the settlement in Lowery I was collusive or obtained by
fraud. If it was, barring Van Leeuweri’s derivative suit would leave LSI without a remedy for
Def`endants’ alleged wrongdoing § Papilsky, 466 F.2d at 258 (purpose of approval and notice
requirements is to protect corporation and non-party shareholders from collusive settlements
benefitting plaintiff-shareholders and defendants at expense of corporation). Thus, we reverse
the trial court’s grant of summary judgment, finding that Van Leeuwen’s derivative suit was not
barred by the settlement and prior dismissal with prejudice of the same claims against the sanie
Defendants in Lowery l.

Point IV is granted. In light of our decision to reverse the grant of summary judgment

and to remand for further proceedings, we do not need to address Van Leeuwen’s Points I, II, HI,
11

and VII, which also concern the prior settlement Although Point IV is well taken, the trial court
granted su:nmary judgment on Van Leeuwen’s derivative claims on two grounds, so we must
also consider Point V.
 

In his fifth point on appeal, Van Leeuwen argues the trial court erred in granting
summary judgment to Defendartts on the basis that he was not a proper party to bring a
derivative action on behalf of LSI. Van Leeuwen contends that whether he desired Defendants
to buy out his shares prior to litigation is not a material fact that would provide a basis for
surnmary judgment on this basis. We agree that summary judgment was not proper.

The purpose of summary judgment is to identify cases in which there is no genuine
dispute as to the niaterial facts, and the agreed~uporr facts show a legal right to judgment for the
niovarrt. ITT Cornmercial Fin. Corp., 854 S.W.Zd at 380. Because summary judgment "borders
on denial of due process in that it denies the opposing party his [or her] day in court," the
procedure is considered "an extreme and drastic remedy" that should be implemented with "great
care." Ld. at 377. Once the defending party has asserted a right to judgment as a matter of law,
"[t]ire non-movant must show by affrdavit, depositions, answers to interrogatories, or admissions
on file, that one or more material facts shown by the movant to be beyond any genuine dispute is,
in fact, genuinely disputed." Ackerinan Buicl<, Inc., v. Gen. Motors Corp., 66 S.W.3d 5l, 54
(Mo. App. E.D. 2001).

The record here, viewed in the light most favorable to Van Leeuwen, the iion-rnovant,
shows that Dan Lowery and Van Leeuwen are the two renraining shareholders of LSI. Van
Leeuwen filed a derivative action on behalf of LSI accusing Dan Lowery and others of

rnisappropriating LSI funds for Lowery Holdings. Van Leeuwen requested monetary damages
12

55

"awarded to LSI and payable to LSI exclusively Defendants requested summary judgment
asserting that Van Leeuwen was not a proper party to assert a derivative action on behalf of LSI,
because during negotiation proceedings prior to filing this suit, he requested Dan Lowery buy out
his shat'es. Thus, Defendants concluded Van Leeuwen had filed his derivative suit solely with
the intent to force Defendants to purchase his stock, and thus the action was for personal gain not
to benefit LSI. The trial court granted summary judgment accordingly.

The grant of sunnnary judgment may rest only upon admissible evidence. _S§§ Mo. R.
Civ. P. 74.04(e). Statements that are "opinion, conclusions and speculations [are] iieitiiei'
admissible nor useable at trial," and thus "{e]videiice that rests on speculation does not suffice to
raise an issue of inaterial fact." E Am. Fatn. Mut. ins. Co. v. Lacy, 825 S.W.Zd 306, 311 (Mo.
App. W.D. 1991). For suinmary judgment, Defendants argued Van Leeuwen’s intention in filing
his derivate suit was to force Dan Lowery to buy out his shares; however, this assertion was
"opinion, conclusion[] and speculation[]" inferred from Van Leeuwen’s prior buy-out requests
and was not based on personal knowledge or Van Leeuwen’s admissions. Ratlier, Van Leeuwen
denied having an improper purpose or any intention of profiting personally. Thus, the trial
court’s summary judgment based only on Defendants’ speculation and conclusions, rather than
on facts established by or admitted in the record was improper. Moreover, Def`endants’
conclusion that Van Leeuwen had improper intent was based solely on Defendants’ inference
interpreting Van Leellweii’s buy-out request. However, on review of the trial court’s grant of
summary judgment, we view all inferences in favor of the non-moving party. § g
Comniercial Fin. Corp., 854 S.W.Zd at 376.

Ratlier, our review of the record shows that Van Leeuwen is a proper piaintiff. Rule

52.09 provides that "the derivative action may not be maintained if it appears the plaintiff does

13

not fairly and adequately represent the interests of the shareholders or members similarly situated
in enforcing the right of the corporation." To meet the "fairly and adequately" standard, the
plaintiff must be a contemporaneous shareholder, he must be able to "deinonstrate to the court an
intent and desire to prosecute the matter vigorously,” and he must not have participated in the
alleged wrongdoing Cltarles Hansen & Don G. Lents, MISSOURI CORPORATION LAW &

PRACTICE § 5.4 at 5-13 (l0tl1 ed. 2015); see also Dawson v. Dawson, 645 S.W.Zd 120, 128 (Mo.

App. W.D. 1982). Generally, if the plairrtiff~sliareliolder' engages competent counsel and has no
animosity or conflict of interest among the other similarly situated shareholders, he or she may
"fairly and adequately" represent the corporation.  , 645 S.W.Zd at 128-29.

Here, Van Leeuwen and Dan Lowery are the only two shareholders of LSI, and Dan
Lowery is a named defendant accused of repeatedly inisappropriatilig funds from LSI. There is
no dispute that Van Leeuwen was a conteinporaneoris shareholder and engaged competent
counsel As the sole shareholder not accused of wrongdoing against LSI, the record shows there
are no other "sirnilarly situated" shareholders with whom Van Leetl\veii could have animosity or
a conflict of interest. Even if Van Leeuwen is not a perfect plaintiff, he is the only shareholder
who could bring a derivative action on behalf of LSl asserting lnisappropriation of LSl funds by
Dan Lowery. Dan Lowery is the only other shareholdei' and certainly would have no incentive to
bring suit against himself If Van Leetlvveri is not allowed to bring suit against LSI’s directors,
then no one remains to act for the benefit of LSI.

Thus, we hold that the trial court further erred in granting summary judgment to
Defendants on the issue of whether Van Leeuweir was a proper party to bring a derivative action

under Rule 52.09. Point granted.

14

Cliaptei' 351.2] 5

111 his sixth point on appeal, Van Leeuwen argues the trial court erred in granting
summary judgment to Defendants on his single non-derivative claim, because the statute of
limitations on his request for corporate records made under Section 351.215 had not yet begun to
run, in that the statute of limitations begins to run when the request is denied and Defendants
here had not "expressly" denied his request At oral argument, counsel for Van Leeuwen
conceded that he could at any time make another request for corporate records linder Section
351.2]5, and thus we deny this point on appeal.

Conclusion
The judgment of the trial court is reversed and remanded for further proceedings in

accordance with this opinion.

 

Philip M. Hess, P.J., concurs.
Angeia T. Quigless, J., concurs.

i5

that the court appoint a receiver or custodian to conduct the dissolution of LSI, The petition
alleged Dan Lowery, Dorothy Lowery, and Dennis Lowery had tised tens of thousands of LSI’s
funds to pay for personal expenses and to operate Lowery Holdings, had engaged in tax fraud,
had stolen $50,000 from LSI, and had maintained two sets of financial records so that false
financial records could be shown to auditors and be used to prepare fraudulent tax returns.

The Lowery l docket sheet shows that in November of 2012, the cause was passed for
settlement, and in January of 2013, the parties voluntarily dismissed with prejudice all claims
and counterclaims. Defendants did not seek the trial court’s approval of the settlement pursuant
to Rule 52.09 and did not give notice of the settlement and dismissal to the sole non-pa1'ty
shareholder, Van Leeiiwen. 'l`he Lowery l settlement contained a confidentiality provision and is
not included in the record before this Court.

in 2014, Van Leeuwen filed a derivative action against Defendants on behalf of LSI and
its shareholders. The second amended petition asserted four derivative causes of action1 breach
of fiduciary duty, money had and received, tinjtlst enrichment, and dissolution The petition
claimed Defendants had lnisappropriated LSI funds for Lowery Holdiiigs without the approval of
LSl’s shareholders, in that LSI had loaned money to Lowery Holdings, LSI employees had done
free work for Lowery Holdings, and Defendants had purchased goods and services for Lowery
Holdings using LSI credits cards. For support, the petition attached portions of Dan Lowery’s
deposition testimony from Lowery I. Van Leetlwen sought an order to return all monies taken

from LSI, damages in favor of LSI, and the appointment of a receiver or custodian to supervise

and conduct the dissolution of LSI. The petition also included a non-derivative claim for a
records request under Section 351.2151, requesting statutory damages of $250.

Deiendants moved for summary judgment, arguing, as relevant to our analysis on appeal,
Van Leeuwen’s derivative claims for breach of fiduciary duty, money had and received, tlnjtlst
enrichment, and dissolution (Counts I-III and V) were barred by the prior settlement in Lo\very
l_which was based on the exact same or substantially similar allegations against the same
Defendants brought by LSl’s shareholdersfbecause the settlement in Lowery f liad released and
dismissed those claims with prejudice Also as to Counts I~HI and V, Defeiidants contended Van
Leeuwen was not the proper party to bring a derivative action, because he was attempting to use
the lawsuit for his own personal gain and against the interests of LSI. Second, Defendants
asserted Van Leeuwen’s non-derivative Section 351.215 claim was time~barred because he did
not file his suit within five years of Defendants’ denial of his request, as is required under
Section 516.120(2), and, regardless, the form of Van Leeuwen’s request had been improper.

Van Leeuwen denied Defendants’ argued bases for suinmary judgment, but the trial court
granted summary judgment in favor of Defendants and against Van Leeuwen on several grounds.
The court concluded Van Leeuwen’s derivative claims were barred both (l) by the settlement
and prior dismissal with prejudice of the same claims against the same Defendants in Lowery l,
and (2) because Van Leeuwen was not a proper party to bring a derivative action on behalf of
LSI. The trial court found Van Leeuwen had initiated this action as a strategy to force Dan
Lowery to buy out his shares in LSI, and thus the court determined Van Leeuwen was attetnpting

to profit personally from the litigation. As for Van Leeuwen’s lion-derivative claim for damages

' Furtlter statutory references are to RSMO. (2000), unless otherwise indicated
4

under Section 351.215, the court granted summary judgment, finding the claim was both
improper and tinre-barred. This appeal follows.
Standard of Review

Summary judgment is appropriate where the moving party demonstrates a right to
judgment as a matter of law based on material facts about which there is no genuine dispute
ITT Connnercial Fin. Corp. v. Mid~Ain. Marine Stlpply Corp., 854 S.W.Zd 3'71, 376 (Mo. banc
1993). The movant has the burden to establish both a legal right tojudgment and the absence of
any genuine issue of rnaterial fact supporting that claimed right to judgment L at 378. Our

review is essentially de novo. Cardinal Partners L.L.C. v. Desco lnv. Co., 301 S.W.3d 104, 108

 

(Mo. App. E.D. 2010). Wlien considering an appeal from summary judgment, we review the
record in a light most favorable to the party against whom judgment was entered, and we afford
the iron~inovairt the benefit of all reasonable inferences from the record. l;d. at 108-09.
Discussion

Van Leeuwen raises seven points on appeal. He asserts the trial court erred in granting
Defendants’ motion for summary judgment, because he was not barred from bringing a lawsuit
when he was not a party to the prior lawsuit (Point I) and thus not bound by the prior settlement
(Point Il), in that his claims were not released by the prior settlement agreement (Point III). As
well, he argues the trial court erred in granting summary judgment, because the settlement and
dismissal in Lowery I did not comply with Ruie 52.09, and thus the present derivative action is
not barred (Point IV). Moreover, he asserts his desire to have his shares bought out during pre-
trial negotiations is not material to his claims in this action and thus the trial court erred in
finding that to be a basis for summary judgment (Point V). Next, he contends the trial court

erred in granting sunnnary judgment on his claim pursuant to Section 351.215, because
5

Defendants never denied his records request, and thus the statute of limitations never began to
run (Point VI). Last, Van Leeuweit argues the trial court erred in granting summary judgment as
to Dennis Lowery, because employees 1nay be liable for breach of fiduciary duty, civil
conspiracy, and aiding and abetting a crime (Point VII). Because Point IV is dispositive of
Points I-IV and Vll, we begin our analysis there.
Rule 52.09

In his fourth point on appeal, Van Leeuwett asserts the trial court erred in granting
summary judgment to Defendants, because the settlement and dismissal of the derivative claims
in Lowery l, which did not comply with Rule 52.09’s approval and notice requirements, did not
bar his later derivative action on the same facts. We agree.

Generally, Rule 52.092 provides that a shareholder may bring a derivative action to
enforce a right of a corporation that the corporation has failed to enforce, and it sets forth various

pleading requirements and bars to the derivative action. §_Qe_ Rule 52.09; see also Fed. R. Civ. P.

2 ln full, Rule 52.09 reads:

In a derivative action brought by one or more sltareltolders or members to
enforce a right of a corporation or of an ttnincorporated association, the
corporation or association having failed to enforce a right that may properly be
asserted by it, the petition shall be verified and shall allege that the plaintiff was
a sliareltolder‘ or member at the time of the transaction of which there is a
cornplaiitt or that the plaintiffs share or nrembership thereafter devolved on the
plaintiff by operation of la\v. 'l`he petition shall also allege with particularity the
et`forts, if any, made by the plaintiff to obtain the action desired front the
directors or cotnparable authority and, if necessary, front the shareholders or
inembers and the reasons for the failure to obtain the action or for not making
the et`fort. The derivative action may not be maintained if it appears that the
plaintiff does not fairly and adequately represent the interests of the shareholders
or inentbers siinilarly situated in enforcing the right of the corporation or
association T/re action shall riot be disrrrr'ssed or' corrrpr'orrrr'sed ivr`tlrorrt the
approval of the corrr't, and rrofr'ce of the proposed dismissal or' corrrpr'orrrise sr'zcrl/
be given to tire strar'e)’ro!der's or' rrrerrrber's r`[rr] sarah a rrrarrrrer' as the court
dr'r'ecrs. (einpltasis added)

6

23.13; Kainen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991) (derivative suits ai'e actions in
equity with purpose "to place in the hands of the individual shareholder a means to protect the
interests of the corporation froin the iiiisfeasance and malfeasance of ‘faithless directors and
nianagers"’). Derivative actions allow shareholders to inaintaiii an action for the recovery of
corporate funds or property improperly diverted or appropriated by the corporation’s officers and
directors. Place v. P.M. Stores Co., 950 S.W.Zd 862, 865 (Mo. App. W.D. l996). The injury is
to the corporation and the shareholders collectively, and thus the suit cannot benefit the
shareholders individually and the plaiiitiff~sliarelioldei' must fairly and adequately represent the
interests of all shareholders similarly situated. lgi_.

The final sentence of Rule 52.09 mandates that "[t]lie action shall not be dismissed or
compromised without the approval of the court, and notice of the proposed disinissal or
compromise shall be given to shareholders or members i[n] such manner as the court directs."
The specific issue before us in this appeal is whether a prior derivative action brought by
different shareholders that _was dismissed without compliance with Rule 52.09’3 requirements of
notice to the non-party shareholders and approval by the court bars a later derivative action on an
identical cause of action. We have found no l\/lissouri case law on this exact issue, and thus we
turn to federal opinions applying the substantially siinilarly worded Federal Rule 23.1 and to
other state-court opinions for guidance in applying our Rule 52.09, § Keiniedy v. Stoner, 885
S.W.Zd 339, 341 (Mo. App. S.D. 1994) (looking to federal opinions applying Federal Rule 23.1

for aid in applying Rule 52.09); see also Buemi v. Kercl<lioff, 359 S.W.3d 16, 23 (Mo. banc

2011) ("fw]hile not binding, [Missouri courts] should give significant consideration to federal

3 Mo. R. Civ. P. 52.09 is virtually identical to Fed. R. Civ. P. 23.].

7

court decisions construing a federal rule when this Court subsequently adopts a rule on the same
subject and uses the same or virtually identical language").

The purpose of the notice and approval mandates included in both Federal Rule 23.1 and
our Rule 52.09 is to prevent the parties from reaching a collusive settlement that benefits the
plaintiff-shareholders but not the corporation and the non-party shareholders. § Burks v.

Lasker, 441 U.S. 471, 485 n.l6 (1979) (Federal Rule 23.1’3 requirement that derivative action

shall not be voluntarily dismissed or compromised by parties without approval of trial court was
"intended to prevent plaintiffs from selling out their fellow sliareholders"); Papiisky v. Berndt,
466 F.Zd 251, 258 (Zd Cir. 1972) ("Withotlt the requirements of notice and court approval,  it
would be easier for alleged wrongdoers to ‘buy off’ the corporation’s representative"); l
Chickering v. Giles, 270 A.Zd 373, 376 (Del. Ch. 1979) (iiiterpreting Delaware Court Rule
23.1(c)4). Federal Rule 23.1 and Missouri Rule 52.09 specifically name dismissals as well as
settlements-termed compromises-to prevent agreed-upon dismissals from disguising private
settlements that may not best serve the interests of the corporation. § 7C Charles Alan Wright,
er al., FEDERAL PRACTICB & PRocEt)URE § 1839, at 195 (3d ed. 2007). Likewise, the notice and
approval niandates protect the corporation and non-party shareholders in the event the plaintiff~

shareholder becomes "fainthearted" prior to litigation and is willing to settle the derivative suit

4 Similar to Missollri Rule 52.09, Dela\vare Court Rule 23.l(c) (2007) states a derivative action "shail not be
disn‘oissed or compromised \vitlrotlt the approval of the Cou1't, and notice by mail, publication or otherwise of the
proposed dismissal or compromise shall be given to the shareholders or tnernbers in such inannet' as the Court
directs."

although the disposition would not be in the best.interests of the corporation g § at 196; see

@ @My, 466 F.za ar 253.5

The established procedure is that once the parties reach an agreenient, they submit the
agreement to the trial court along \,vitli a request for a hearing on its propriety. _S_ee 15 MISSOURI
PRACTICE SERIES § 52.09:2 at 258 (*'~ltlt ed. 2012) (citing Feldman v. Pennroad Corp., 155 F.Zd
773 (3<1 Cir. ]946)); _s_ee__ei_l@ 7C Wriglit, et a!., PEDERAL PaAcrlcn & PROCEDURE § 1839 at 197 .
The trial court will set a liearing and direct that notice be given to the absent shareholders
indicating they have the right to intervene and to object to the proposal. §ee 7C Wriglit, et crl.,
FEDERAL PRACTICE & PROCEDURE § 1839 at 197-99; l Maher v. Zapata Corp., 714 F.Zd
436, 450-51 (Sth Cir. 1983). Whetliei' to accept the proposed settlement and dismissal is at the

discretion of the trial court. § Maher, 714 F.Zd at 455; accord In re lnfinity Broadcasting

Corp. Shareholders Litigation, 802 A.Zd 285, 289 (Del. 2002). The trial court "has a duty" to
determine whether the pa1'ties’ agreement is fair and reasonable and in the best interest of the
corporation and all the sliareliolders.é g Bell Atlantic Corp. v. Bolger, 2 F.3d 1304, 1311 (3d
Cir. 1993). The court may not simply “rubber stamp" the parties’ agreement. §§_e_ Seigal v.

l\/[errick, 590 F.Zd 35, 37 (Zd Cir. 1978).

5 We note, lio\vever, that when a trial court has decided a derivative claim on the merits, a subsequent derivative
action on the same cause of action against the same parties is barred even if notice was not given. § Papilsl<y v.
Berndt, 466 F.Zd 251, 258-59 (2d Cir. |972). The intent of the notice and approval requirements of Missouri Rule
52.09 and Federa| Rtl|e 23.1 is to prevent the defendants and plaintiff-sliareholders from reaching bad-faith and
collusive settlements that are not in the corporation’s interests, which is not a concern where the niatter has been
openly litigated before a trial court _S§e L:L

6 In determining the reasonableness of a settlement, the trial court should consider such factors as the probable
validity of the claims, any applicable defenses, the apparent difficulties in enforcing the claims through the couits,
the collectability of anyjudgrnent amount, the delay and expenses involved in litigation, and the views of the parties
Charles Hansen & Don G. Leiits, MISSOUR! CORPORATION LA\V &; PRACT!CE § 5.8 at 5-45 (l0th ed. 2015) (citing

Poll< v. Good, 507 A.2d 531 (Del. 1986)).

If the parties to a settlement and dismissal in a derivative action do not give notice to the
non-party shareholders, then the judgment of dismissal does not bar an identical cause of action
asserted by a different stockholder in a later derivative suit. §§ Cramer v. Gen. Tel. & Elec.
L;L, 582 F.2d 259, 268-69 (3d Cir. 1978) (wlien parties do not provide notice of settlement and
dismissal to non»party shareholders pursuant to Federal Rule 23.1, "the voluntary dismissal will
not bar a subsequent action by a shareholder who did not participate in the prior suit"); Papilsky,
466 F.Zd at 257 ("[w]iiere notice is a prerequisite to a dismissal of a derivative action, a
judgment of dismissal will not be accorded re.s' juclicata effect unless such notice \vas given").
The reasoning behind this safeguard is plain: to provide a remedy to the corporation and the
non-party shareholders whose interests were not protected by the prior settlement, and to provide
the parties to a derivative suit with the incentive to comply with the notice and approval
requirements that might otherwise be inconvenient.

ln the case at bar, the record shows that in Lowery I, the parties reached a private
settlement and as part of this settlement the piaintiff-sharelrolders voluntarily dismissed their
claims against Defendants. The settlement was never noticed for a liearing and never received
approval froin the trial cotu't, and the remaining iron-plaintiff shareholder_Van Leeuwen_did
not receive notice of the settlement and dismissal. This confidential settlement has not been
made part of the record lierein and we do not know its content. We can surniise from the record
that Defendants bought out the shares of the plaintiff-shareholders7 and that LSI was not
dissolved; however, we cannot determine whether Defendants agreed to reiinburse LSI the

monies allegedly misdirected and niisappropriatcd, or to reinedy the alleged tax fraud.

7 In 201 0, there were five shareholders, while in 2014, there were two: Dan Lo\very and Van Leeuweii.

10

