     07-3750-cv
     Halebian v. Berv

1                          UNITED STATES COURT OF APPEALS

2                              FOR THE SECOND CIRCUIT
3
4                                 August Term, 2008

5    (Argued: February 5, 2009                  Decided: December 29, 2009)

6                               Docket No. 07-3750-cv

7                       -------------------------------------

8                                  JOHN HALEBIAN,

9                               Plaintiff-Appellant,

10                                     - v. -

11   ELLIOT J. BERV, DONALD M. CARLTON, A. BENTON COCANOUGHER, MARK T.
12      FINN, STEPHEN RANDOLPH GROSS, DIANA R. HARRINGTON, SUSAN B.
13             KERLEY, ALAN G. MERTEN, R. RICHARDSON PETTIT,

14                              Defendants-Appellees,

15                              CITIFUNDS TRUST III,

16                          Nominal Defendant-Appellee.*

17                      -------------------------------------

18   Before:     SACK and PARKER, Circuit Judges, and STANCEU, Judge.**

19               Appeal from a judgment of the United States District

20   Court for the Southern District of New York (Naomi Reice

21   Buchwald, Judge) dismissing a three-count complaint arising from

22   the renegotiation of certain investment advisory agreements.      We

23   reserve decision while certifying to the Supreme Judicial Court

24   of Massachusetts a question as to the circumstances under which


           *
            The Clerk of Court is directed to amend the official
     caption as set forth above.
           **
            The Honorable Timothy C. Stanceu, of the United States
     Court of International Trade, sitting by designation.
1    the business judgment rule may be asserted in response to a

2    shareholder derivative suit under the Massachusetts Business

3    Corporation Act.

4              Question certified; decision reserved.

5                              JOEL C. FEFFER (Daniella Quitt, James G.
6                              Flynn, on the brief) Harwood Feffer LLP,
7                              New York, NY, for Plaintiff-Appellant.

 8                             JAMES S. DITTMAR, Goodwin Procter LLP,
 9                             Boston, MA (Michael K. Isenman, Matthew
10                             Hoffman, Goodwin Procter LLP,
11                             Washington, DC, on the brief) for
12                             Defendants-Appellees.

13   SACK, Circuit Judge:

14             John Halebian, a shareholder of an investment fund

15   within CitiFunds Trust III ("CitiTrust" or the "Trust"), appeals

16   from a judgment of the United States District Court for the

17   Southern District of New York (Naomi Reice Buchwald, Judge).    The

18   court dismissed his three-count complaint against members of the

19   Trust's board of trustees, the defendants here, in connection

20   with the sale of an adviser of the Trust and the approval of new

21   investment advisory contracts following that sale.   Claim One,

22   styled as a derivative claim on behalf of the Trust, alleges that

23   the defendants breached their fiduciary duties to the Trust "in

24   considering the . . . transaction and in recommending the new

25   advisory agreements."   Complaint ¶ 54, Halebian v. Berv, No. 06

26   Civ. 4099 (S.D.N.Y. filed May 30, 2006) (Doc. No. 1) ("Compl.").

27   Claims Two and Three, styled as direct claims, allege that the

28   defendants violated federal and state law by issuing materially



                                      2
1    false and misleading statements encouraging their shareholders to

2    approve the new investment advisory contracts.

3              We conclude that we cannot decide the propriety of the

4    district court's dismissal of Count One without resolving a

5    question of Massachusetts law which appears to us to be one of

6    first impression.   We think that issue would best be decided by

7    the Massachusetts Supreme Judicial Court in the first instance.

8    Accordingly, we certify that question to the Supreme Judicial

9    Court.   Although we are of the view that dismissal of Counts Two

10   and Three was proper, in light of our decision to certify a

11   question to the Supreme Judicial Court in connection with Count

12   One and because our resolution of the propriety of the district

13   court's dismissal of Counts Two and Three also involves the

14   application of Massachusetts law, we think it the more prudent

15   course to reserve judgment in this respect, too, pending the

16   Supreme Judicial Court's response to the question certified.

17                               BACKGROUND

18             The following recitation is based on Halebian's

19   complaint and other documents "integral" to that complaint, see

20   Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002),

21   the factual assertions of which, for purposes of this discussion,

22   we assume to be true, see Ashcroft v. Iqbal, 129 S. Ct. 1937,

23   1949 (2009).   Halebian is a citizen of New York State.   At all

24   relevant times, he owned shares in the Citi New York Tax Free

25   Reserves Fund (the "New York Fund"), one of six "series

26   portfolios," or mutual funds (the "Funds"), contained in the

                                      3
1    Trust.    See Compl. ¶ 7.   CitiTrust is a Massachusetts business

2    trust with its principal place of business in Maryland.       Id. ¶ 8.

3    CitiTrust is "named as a nominal defendant . . . solely in a

4    derivative capacity."    Id. ¶ 9.    The actual defendants, none of

5    whom is a New York citizen, are members of CitiTrust's Board of

6    Trustees (the "Board").     Id. ¶¶ 10-19.

7                The Transaction

8                On June 23, 2005, Citigroup sold substantially all of

9    its asset management business, including a subsidiary that served

10   as an adviser to CitiTrust, to Legg Mason, Inc.       Id. ¶ 32.    In

11   connection with this transaction (the "Transaction"), the Funds'

12   existing advisory contracts were terminated and new contracts

13   were executed with the Funds' new advisers, id. ¶ 33, for which

14   the Funds' shareholders' approval was required, id. ¶ 34.         In

15   August 2005, the Board approved the Funds' new investment

16   advisory agreements with Legg Mason.      Id. ¶ 39.   Thereafter, the

17   Board issued a proxy statement to its shareholders describing the

18   advisory agreements and recommending that they vote to approve

19   the new agreements, id. ¶¶ 34-35, which they did, id. ¶ 61.

20               Two aspects of the Transaction are relevant to this

21   appeal.    First, the new advisory agreements authorize the payment

22   of "soft dollars."    Id. ¶ 43.1    As described by the district

23   court, soft-dollar payments "permit the advisor to select brokers



          1
            The prior advisory agreements also permitted soft-dollar
     payments. See Halebian v. Berv, 631 F. Supp. 2d 284, 289
     (S.D.N.Y. 2007).

                                         4
1    or dealers who provide both brokerage and research services to

2    the Funds, even though the commissions charged by such brokers or

3    dealers might be higher than those charged by other brokers or

4    dealers who provide execution only or execution and research

5    services."    Halebian v. Berv, 631 F. Supp. 2d 284, 289 (S.D.N.Y.

6    2007).

7              Second, the voting procedures employ "echo voting," in

8    which Citigroup-affiliated service agents who were record holders

9    of shares for which instructions had not been received would vote

10   those shares "in the same proportion as the votes received from

11   its customers for which instructions have been received."    Compl.

12   ¶ 45 (internal quotation marks omitted).2

13             The Demand Letter and the Board's Response

14             On February 8, 2006, Halebian, through counsel,

15   expressed his dissatisfaction with the Transaction by letter to

16   the Board.    Compl. ¶ 48.   He asserted that in connection with the



          2
            This practice is described in the Trust's most recent
     prospectus, in the "Trust Instrument" (the source of the
     shareholders' contractual rights), and in the relevant proxy
     statement. Halebian, 631 F. Supp. 2d at 289 n.2. The proxy
     statement notified the shareholders that:

               With respect to any shares for which a
               Citigroup-affiliated service agent (other
               than a broker-dealer) is the holder of record
               and for which it does not receive voting
               instructions from its customers, such service
               agent intends to vote those shares in the
               same proportion as the votes received from
               its customers for which instructions have
               been received.

     Id. at 289.

                                        5
1    Transaction and contrary to its fiduciary duty, the Board "placed

2    the interests of Citigroup before those of the Fund and . . .

3    [its] shareholders" and "failed to avail itself of the

4    opportunity presented to seek to negotiate lower fees" on behalf

5    of the Trust "or to seek competing bids from other qualified

6    investment advisers."   Letter from Joel C. Feffer to the Bd. of

7    Trs. of the Citi N.Y. Tax Free Reserves Series of Citi Funds

8    Trust III 1-2 (Feb. 8, 2006).   The letter demanded "that the

9    board take action which would include, among other things, the

10   institution of an action for breach of fiduciary duty against any

11   and all persons who are responsible for the board's dereliction

12   of its duties in connection with the . . . transaction" and that

13   "appropriate remedial measures . . . be undertaken, including

14   seeking bids for the advisory contract from other qualified

15   investment advisers, negotiating new terms more favorable to the

16   [New York] Fund with Legg Mason, or both."   Id. at 2.

17              The demand letter noted that "shareholder approval does

18   not appear to have been obtained properly," presumably a

19   reference to the echo voting practices described in the proxy

20   statement.   The letter did not, however, make a demand with

21   respect to this purported impropriety because, the letter said,

22   the impropriety "gives rise to direct, rather than derivative,

23   claims."   Id. at 1 n.1.

24              The Board acknowledged receipt of the demand letter.

25   Compl. ¶ 49.   It later advised Halebian that it had created a

26   "Demand Review Committee" to review his complaint, and that the

                                      6
1    committee had retained counsel.    Id. ¶ 50.   Throughout this

2    period of time, counsel for both Halebian and the Demand Review

3    Committee remained in communication with one another.

4                Halebian's Complaint

5                On May 30, 2006, more than ninety days after the date

6    of Halebian's original demand letter, not having received a

7    definitive response from the Demand Review Committee, Halebian

8    filed a three-count complaint in the United States District Court

9    for the Southern District of New York.    In it, he alleges that

10   following his demand letter, Halebian waited "the statutory time

11   required" -- ninety days -- before filing his derivative claim;3

12   that such a period "provide[d] more than adequate time" for the

13   Board to have reviewed Halebian's demand and have taken action;

14   and that "[n]ot surprisingly, defendants have failed to take

15   action against themselves."    Compl. ¶ 51.

16               Claim One, styled as a derivative claim for breach of

17   fiduciary duty, alleges that members of the Board breached their

18   fiduciary duties of good faith and loyalty under Massachusetts

19   law in their "consider[ation of] the Citigroup/Legg Mason

20   transaction and in recommending the new advisory agreements."

21   Id. ¶ 54.    The complaint alleges that the "[d]efendants limited

22   their consideration to whether the . . . transaction would be



          3
            As discussed in greater detail below, prior to the filing
     of a derivative claim under Massachusetts law, a shareholder must
     give the corporation the opportunity to resolve the issue that
     forms the basis of the claim. See Mass. Gen. Laws ch. 156D,
     § 7.42.

                                        7
1    worse for CitiTrust's beneficiaries than their current situation"

2    and "made no effort to investigate whether a transaction could be

3    fashioned which would benefit CitiTrust's beneficiaries, either

4    with Legg Mason or another asset manager."   Id. ¶ 36.   Halebian

5    contends that the soft-dollar arrangements allow for the payment

6    of "higher than necessary brokerage commissions," id. ¶ 43,

7    referring to those payments as "kickback[s]," id. ¶ 44.4

8              Claim Two, styled as a direct claim on behalf of

9    Halebian and members of a class of "all persons and entities who

10   held shares of beneficial interest in CitiTrust on August 22,

11   2005 (the 'Class')," id. ¶ 26, alleges that the proxy statement

12   at issue violated section 20(a) of the Investment Company Act of

13   1940 (the "ICA"), 15 U.S.C. § 80a-20(a), because it contained

14   material misstatements and omissions.   First, the echo voting

15   procedures described in the proxy statement violated federal law

16   -- section 15(a) of the ICA, 15 U.S.C. § 80a-15(a) -- and

17   unspecified provisions of Massachusetts law, and that the proxy

18   statement was misleading because it did not so state.    Compl. ¶¶


          4
            In 2006, the SEC issued an Interpretive Release that
     provides guidance on the use of "soft dollars" under section
     28(e) of the Securities Exchange Act of 1934, 15 U.S.C.
     § 78bb(e)(1). It provides "a safe harbor that allows money
     managers to use client funds to purchase 'brokerage and research
     services' for their managed accounts under certain circumstances
     without breaching their fiduciary duties to clients." Commission
     Guidance Regarding Client Commission Practices Under Section
     28(e) of the Securities Exchange Act of 1934, Exchange Act
     Release No. 54,165, 71 Fed. Reg. 41,978, 41,978 (July 24, 2006).
     To qualify under the safe-harbor provision, money managers must
     "make a good faith determination that the commissions paid are
     reasonable in relation to the value of the brokerage and research
     services received." Id. at 41,991.

                                     8
1    47, 60.    Second, the proxy statement failed to disclose that by

2    virtue of the Transaction, assets of CitiTrust were

3    "diver[ted] . . . for the benefit of others,"    id. ¶ 60,

4    presumably via soft dollar payments.    Based on this "material

5    false and misleading information," Halebian alleges, the

6    "[d]efendants secured approval of the new advisory agreements."

7    Id. ¶ 61.

8                Claim Three, also styled as a direct claim on behalf of

9    Halebian and members of the Class, id. ¶ 26, asserts that the

10   trustees violated Massachusetts law, id. ¶ 64, by failing fully

11   and fairly to disclose in the proxy statement all material

12   information within their control, namely, the "[im]propriety of

13   the[] voting procedures" and "the diversion of CitiTrust assets

14   for the benefit of others," id. ¶ 65.

15               The complaint seeks declaratory and injunctive relief

16   and compensatory damages.    See Compl. at 20-21, "Prayer for

17   Relief."

18               Board's Post-Complaint Conduct

19               By resolution dated July 12, 2006, some six weeks after

20   the timely filing of Halebian's complaint, the Board expressly

21   declined to accede to Halebian's demand, effectively rejecting

22   it.   See Res. of the Bd. of Trs. of CitiFunds Trust III 27

23   (July 12, 2006).    The Board stated that it had "studied a large

24   volume of information on the quality and costs of the adviser's

25   services, including a study that indicated the Fund's management

26   fee was in the lowest quintile measured against fees for similar

                                       9
1    funds, and concluded that the fees were reasonable."      Id. at 22.

2    The Board further "found no authority for the proposition that

3    the 1940 Act or Massachusetts law forbids the use of echo voting

4    by a record holder of shares in a vote to approve an advisory

5    contract with a registered mutual fund" and noted that "[e]cho

6    voting is a common practice in the financial industry [the]

7    utility [of which practice] has been recognized both by the

8    Securities and Exchange Commission and the New York Stock

9    Exchange."    Id. at 25.   According to the Board, "the balance of

10   the Trust's interests weighs against taking the action requested

11   in the Demand Letter."     Id. at 26.   On that basis, the Board

12   declined to institute any action against its members.      It

13   directed its counsel to move to dismiss Halebian's derivative

14   claim instead.    Id. at 27-28.

15                On October 24, 2006, defendants' counsel moved

16   pursuant to, inter alia, Federal Rule of Civil Procedure 12(b)(6)

17   to dismiss the complaint.

18             The District Court Opinion

19             By Memorandum and Order dated July 31, 2007, the

20   district court granted the defendants' motion to dismiss.       See

21   Halebian, 631 F. Supp. 2d at 303.

22             In addressing Count One, the court acknowledged that

23   Halebian had satisfied Massachusetts's statutory universal demand

24   requirement for derivative actions by demanding that the Trust

25   rectify the alleged improprieties in the Legg-Mason transaction

26   and then waiting the requisite 90 days before filing his suit.

                                       10
1    See Mass. Gen. Laws ch. 156D, § 7.42.    The district court

2    nonetheless dismissed Count One on two other bases.

3              First, the court concluded that the complaint failed to

4    comply with Rule 23.1 of the Federal Rules of Civil Procedure

5    because it "asserts no basis for 'plaintiff's failure to obtain

6    the action' from the board as required by Rule 23.1."    Halebian,

7    631 F. Supp. 2d at 297-98 (quoting Fed. R. Civ. P. 23.1 (2006)).

8              Second, the court concluded that dismissal was

9    appropriate pursuant to a then-recently enacted provision of

10   Massachusetts law authorizing the dismissal of derivative actions

11   based on the corporation's good-faith business judgment that

12   prosecution of the action would not be in its best interests.

13   See Mass. Gen. Laws ch. 156D, § 7.44(a).    The district court

14   acknowledged that section 7.44, by its terms, applies only to

15   derivative proceedings "commenced after rejection of a demand"

16   and that Halebian's suit had been filed before any rejection of

17   his demand.   See id.   Nonetheless, the court concluded that

18   dismissal pursuant to section 7.44 would be required "as long as

19   [CitiTrust] rejected the demand after a good faith review,"

20   irrespective of whether that rejection post-dated the timely

21   filing of a derivative claim.    Halebian, 631 F. Supp. 2d at 294.

22   Upon concluding that section 7.44 applied, the district court

23   dismissed Count One based on its finding that the section's

24   various preconditions had been met -- "an independent group [of

25   the Trust's leadership] has determined in good faith after

26   conducting a reasonable inquiry that the maintenance of the

                                      11
1    proceeding is not in the [Trust's] best interest."    See id. at

2    295-96 (citing Mass. Gen. Laws ch. 156D, § 7.44(a)).

3              The district court then addressed Counts Two and Three

4    in tandem, concluding that although Halebian had styled both as

5    direct claims they were in fact derivative claims "because they

6    seek to redress an alleged injury to the Funds."    Id. at 302.    In

7    light of Halebian's failure to make a demand on the corporation

8    with respect to either of these claims, as is required under

9    Massachusetts's law for any properly filed derivative claim, see

10   Mass. Gen. Laws ch. 156D, § 7.42, the district court dismissed

11   both of them, Halebian, 631 F. Supp. 2d at 303.    As an

12   alternative basis for dismissal, the court concluded that Counts

13   Two and Three "sound[ed] in fraud" and failed to meet the

14   "heightened standard of pleading for claims which sound in fraud"

15   as required by Rule 9(b) of the Federal Rules of Civil Procedure.

16   Id.

17             The district court also concluded that Claim Two --

18   Halebian's "direct" claim for violation of section 20(a) of the

19   ICA -- failed because, under Alexander v. Sandoval, 532 U.S. 275

20   (2000), and its progeny, see, e.g., Olmstead v. Pruco Life Ins.

21   Co., 283 F.3d 429 (2d Cir. 2002), no federal private right of

22   action is available for a violation of section 20(a).      Halebian,

23   631 F. Supp. 2d at 298-301.

24             Halebian appeals.   We reserve judgment pending a

25   response by the Supreme Judicial Court of Massachusetts to a

26   question of Massachusetts law that we certify to it.

                                     12
1                                  DISCUSSION

2              I.    Standard of Review

3              We review dismissals pursuant to Rule 12(b)(6) of the

4    Federal Rules of Civil Procedure de novo.     See Velez v. Levy, 401

5    F.3d 75, 84 (2d Cir. 2005).     Where "determination of the

6    sufficiency of allegations of futility depends on the

7    circumstances of the individual case, the standard of review for

8    dismissals based on Fed. R. Civ. P. 23.1 is abuse of discretion."

9    Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d 133, 137 (2d Cir.

10   2004) (internal quotation marks omitted).     Where, however, "a

11   challenge is made to the legal precepts applied by the district

12   court in making a discretionary determination, plenary review of

13   the district court's choice and interpretation of those legal

14   precepts is appropriate."     Id.

15             II.    Federal Procedural Requirements

16   A.   Rule 12(b)(6)

17             In accordance with the Supreme Court's decision in Bell

18   Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), we apply a

19   "plausibility standard" to evaluate whether dismissal pursuant to

20   Rule 12(b)(6) of the Federal Rules of Civil Procedure is

21   appropriate.    Id. at 560.   That standard is guided by "[t]wo

22   working principles."     Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949

23   (2009).   First, "a court must accept as true all [factual]

24   allegations contained in a complaint" but need not accept "legal

25   conclusions."    Id.   For this reason, "[t]hreadbare recitals of

26   the elements of a cause of action, supported by mere conclusory

                                         13
1    statements, do not suffice" to insulate a claim against

2    dismissal.   Id.   Second, a complaint must "state[] a plausible

3    claim for relief."    Id. at 1950.    "Determining whether a

4    complaint [does so] will . . . be a context-specific task that

5    requires the reviewing court to draw on its judicial experience

6    and common sense."    Id.

7    B.   Rule 23.1

8               In addition to meeting the generally applicable rules

9    for pleading under the Federal Rules of Civil Procedure, the

10   pleading of derivative actions must satisfy the requirements set

11   forth in Rule 23.1 of the Rules.      Fed. R. Civ. P. 23.1.    Rule

12   23.1 applies "when one or more shareholders or members of a

13   corporation or an unincorporated association bring a derivative

14   action to enforce a right that the corporation or association may

15   properly assert but has failed to enforce."      Fed. R. Civ. P.

16   23.1(a).   Complaints asserting derivative claims must "state with

17   particularity . . . any effort by the plaintiff to obtain the

18   desired action from the directors or comparable authority and, if

19   necessary, from the shareholders or members; and . . . the

20   reasons for not obtaining the action or not making the effort."

21   Fed. R. Civ. P. 23.1(b)(3).

22              Rule 23.1 is a "rule of pleading that creates a federal

23   standard as to the specificity of facts alleged with regard to

24   efforts made to urge a corporation's directors to bring the

25   action in question."    RCM Secs. Fund, Inc. v. Stanton, 928 F.2d

26   1318, 1330 (2d Cir. 1991).    It does not "'abridge, enlarge or

                                      14
1    modify any substantive right.'"    Kamen v. Kemper Fin. Servs.,

2    Inc., 500 U.S. 90, 95 (1991) (quoting 28 U.S.C. § 2072(b)).      The

3    underlying demand requirement, by contrast, "in delimiting the

4    respective powers of the individual shareholder and of the

5    directors to control corporate litigation[,] clearly is a matter

6    of 'substance,' not 'procedure.'"      Id. at 96-97 (citing Daily

7    Income Fund, Inc. v. Fox, 464 U.S. 523, 543-44 & n.2 (1984)

8    (Stevens, J., concurring in judgment)).      It is therefore governed

9    by state law.   See Shady Grove Orthopedic Assocs., P.A. v.

10   Allstate Ins. Co., 549 F.3d 137, 141-42 (2d Cir. 2008)

11   ("[F]ederal courts . . . apply state substantive law and federal

12   procedural law . . . . to any issue or claim which has its source

13   in state law."(internal quotation marks omitted)), cert. denied,

14   129 S. Ct. 2160 (2009).

15             III. Massachusetts Substantive Requirements

16             Even where an underlying cause of action is based on

17   the ICA, as Claim Two is, whether the action is properly

18   classified as derivative or direct is ordinarily determined by

19   state law.   See, e.g., Strougo v. Bassini, 282 F.3d 162, 169 (2d

20   Cir. 2002) ("We must fill a gap in the ICA with rules borrowed

21   from state law unless . . . application of those rules would

22   frustrate the specific federal policy objectives underlying the

23   ICA."); id. at 176 ("The expectations of private parties that

24   state law will govern their corporate disputes is even higher

25   when the federal statute invoked does not on its face provide

26   notice to the parties of a possibility of a federal private suit

                                       15
1    and thereby suggest that federal law may be applied."); see

2    also Burks v. Lasker, 441 U.S. 471, 478 (1979) ("Congress has

3    never indicated that the entire corpus of state corporation law

4    is to be replaced simply because a plaintiff's cause of action is

5    based upon a federal statute."); Lapidus v. Hecht, 232 F.3d 679,

6    682 (9th Cir. 2000) (relying on Massachusetts state law to

7    determine whether the plaintiffs' claims brought under the ICA

8    were direct or derivative).

9    A.   Claim Classification

10             Under Massachusetts law, a claim based on a "duty owed

11   to the corporation, not to individual stockholders[,]" is

12   properly characterized as derivative, not direct.      Bessette v.

13   Bessette, 385 Mass. 806, 809, 434 N.E.2d 206, 208 (1982); see

14   also Robertson v. Gaston Snow & Ely Bartlett, 404 Mass. 515, 525

15   n.5, 536 N.E.2d 344, 350 n.5 (1989) (observing that any claim by

16   a shareholder alleging a breach of duty to the corporation must

17   be through a derivative action).      In other words, a derivative

18   claim is one where the plaintiff is not "enforc[ing] any personal

19   rights" and has "no direct or personal interest in the suit,

20   excepting as the value of [the plaintiff's] stock might be

21   enhanced."    Shaw v. Harding, 306 Mass. 441, 448, 28 N.E.2d 469,

22   473 (1940).

23             Harm to a corporation may manifest itself as harm to

24   its shareholders in the form of a lower stock price.      But the

25   "wrong underlying a derivative action is indirect, at least as to

26   the shareholders.   It adversely affects them merely as they are

                                      16
1    the owners of the corporate stock; only the corporation itself

2    suffers the direct wrong."     Jackson v. Stuhlfire, 28 Mass. App.

3    Ct. 924, 925, 547 N.E.2d 1146, 1148 (1990) (emphasis in original)

4    (internal quotation marks omitted).     Therefore, "[t]o bring a

5    direct action under Massachusetts law, a plaintiff must allege an

6    injury distinct from that suffered by shareholders generally or a

7    wrong involving one of his or her contractual rights as a

8    shareholder, such as the right to vote."     Lapidus, 232 F.3d at

9    683.5

10   B.      Demand Requirement for Derivative Claims

11                Courts have traditionally required "as a precondition

12   for [a derivative] suit that the shareholder demonstrate that the

13   corporation itself had refused to proceed after suitable demand."

14   Scalisi, 380 F.3d at 138 (citations and internal quotation marks

15   omitted).6    As the Massachusetts Supreme Judicial Court


             5
            Massachusetts law appears to comport with the approach of
     federal law in this regard. In determining whether a suit is
     derivative for purposes of the Federal Rules of Civil Procedure,
     "the term 'derivative action' . . . has long been understood to
     apply only to those actions in which the right claimed by the
     shareholder is one the corporation could itself have enforced in
     court." Daily Income Fund, Inc., 464 U.S. at 529. The Supreme
     Court has characterized derivative actions as "permit[ting] an
     individual shareholder to bring 'suit to enforce a corporate
     cause of action against officers, directors, and third parties.'"
     Kamen, 500 U.S. at 95 (quoting Ross v. Bernhard, 396 U.S. 531,
     534 (1970)) (emphasis in original); accord Cohen v. Beneficial
     Indus. Loan Corp., 337 U.S. 541, 548 (1949) (Through a derivative
     action, a stockholder may "step into the corporation's shoes
     and . . . seek in its right the restitution he could not demand
     in his own.").
             6
            A derivative action has been described as an "equitable
     device" developed "to enable shareholders to enforce a corporate
     right . . . that the corporation had either failed or refused to
     assert on its own behalf." Scalisi, 380 F.3d at 138 (internal
                                     17
1    explained, "[t]he rationale behind the demand requirement is

2    that, as a basic principle of corporate governance, the board of

3    directors or majority of shareholders should set the

4    corporation's business policy, including the decision whether to

5    pursue a lawsuit."   Harhen v. Brown, 431 Mass. 838, 844, 730

6    N.E.2d 859, 865 (2000); accord RCM Secs. Fund, 928 F.2d at 1326

7    ("Whether a corporation should bring a lawsuit is a business

8    decision, and the directors are, under the laws of every state,

9    responsible for the conduct of the corporation's business,

10   including the decision to litigate.   A shareholder demand that

11   the corporation bring litigation is thus a method by which the

12   appropriate corporate authority may be consulted about litigation

13   to be brought in the name of the corporation." (citations and

14   internal quotation marks omitted)).

15             Thus, so long as it is exercising its good faith

16   business judgment, a corporation is ordinarily entitled to decide

17   through its board of directors that refusing, in part or in

18   whole, the demand to take action would be in its best interests.

19   See Harhen, 431 Mass. at 846, 730 N.E.2d at 866 ("It is axiomatic

20   that the decision of a disinterested board to refuse demand

21   receives the protection of the business judgment rule.").


     quotation marks and citation omitted); cf. Hirshberg v. Appel,
     266 Mass. 98, 100, 164 N.E. 915, 915 (1929) ("The law is settled
     that for such injury to a corporation, a stockholder has no right
     to maintain an action at law. A suit for redress must be brought
     by the corporation."). It is "an exception to the normal rule
     that the proper party to bring a suit on behalf of a corporation
     is the corporation itself, acting through its directors or a
     majority of its shareholders." Daily Income Fund, 464 U.S. at
     542.
                                     18
1                   State law generally determines whether, in an action

2    classified as derivative, a pre-suit demand is necessary, and if

3    so, whether the demand made was adequate.       "Where a state claim

4    is involved, . . . the source of the demand requirement must be

5    the law of the state of incorporation."       RCM Secs. Fund, 928 F.2d

6    at 1327.       If a federal derivative claim is involved, however, the

7    "contours of the demand requirement . . . are governed by federal

8    law."       Kamen, 500 U.S. at 97 (emphasis omitted).    But "[i]t does

9    not follow . . . that the content of such a rule must be wholly

10   the product of a federal court's own devising."         Id. at 98.   In

11   "areas [such as corporation law] in which private parties have

12   entered legal relationships with the expectation that their

13   rights and obligations would be governed by state-law standards,"

14   we entertain a strong presumption that "state law should be

15   incorporated into federal common law."       Id.   We will therefore

16   incorporate state law governing pre-suit demand if that law is

17   not "inconsistent with the policies underlying" federal

18   securities law.       Id. at 107.7

19   C.   Massachusetts Business Corporation Act


             7
             As noted, "Rule 23.1 [of the Federal Rules of Civil
     Procedure] is a rule of pleading [regarding] the specificity of
     facts alleged with regard to efforts made to urge a corporation's
     directors to bring the action in question," but "the adequacy of
     those efforts is to be determined by state law absent a finding
     that application of state law would be inconsistent with a
     federal policy underlying a federal claim in the action." RCM
     Secs. Fund, 928 F.2d at 1330; accord Abramowitz v. Posner, 672
     F.2d 1025, 1026 (2d Cir. 1982) (noting that "the authority of
     disinterested directors to terminate shareholder derivative
     litigation is governed by applicable state law, provided that
     such law is consistent with the policies of the federal acts upon
     which the action is based").
                                     19
1              Several years ago, the Massachusetts Legislature

2    enacted a comprehensive statute governing Massachusetts

3    corporations.   The Massachusetts Business Corporation Act (the

4    "Act"), enacted on November 26, 2003, see 2003 Mass. Acts ch.

5    127, and made effective as of July 1, 2004, see 2004 Mass. Acts

6    ch. 178, § 49, is codified as Chapter 156D of Title XXII of the

7    General Laws of Massachusetts.   Subdivision D of Part 7 of the

8    Act contains various provisions governing derivative suits, see

9    Mass. Gen. Laws ch. 156D, §§ 7.40-7.47, three of which are

10   pertinent here.

11             First, the Act adopts a "universal demand requirement,"

12   Johnston v. Box, 453 Mass. 569, 578 n.15, 903 N.E.2d 1115, 1123

13   n.15 (2009), requiring that a shareholder make a written demand

14   upon the corporation and then wait a specified period of time

15   before filing any derivative action on behalf of the corporation.

16   See Mass. Gen. Laws ch. 156D, § 7.42; accord Forsythe v. Sun Life

17   Fin., Inc., 417 F. Supp. 2d 100, 110 n.13 (D. Mass. 2006).

18   Section 7.42 prohibits, without exception, the filing of any

19   derivative action absent such written demand.   See Mass. Gen.

20   Laws ch. 156D, § 7.42; accord ING Principal Prot. Funds

21   Derivative Litig., 369 F. Supp. 2d 163, 170 (D. Mass. 2005).

22   Section 7.42 therefore abrogates prior common law exceptions to

23   the demand requirement.   See, e.g., Pupecki v. James Madison

24   Corp., 376 Mass. 212, 218, 382 N.E.2d 1030, 1034 (1978)

25   (reflecting previous common law doctrine that demand is



                                      20
1    unnecessary "if it is clear that [such a demand] would be

2    futile").

3                Second, the Act authorizes a court to stay any

4    derivative proceeding to allow a corporation to conclude its

5    inquiry into the allegations made in the demand or complaint.

6    See Mass. Gen. Laws ch. 156D, § 7.43.    Section 7.43 provides that

7    "[i]f the corporation commences an inquiry into the allegations

8    made in the demand or complaint, the court may stay any

9    derivative proceeding for a period as the court considers

10   appropriate."    Id.

11               Third, the Act sets forth a procedure by which a

12   corporation can seek dismissal of derivative actions that it

13   concludes would not be in its best interests to prosecute.      See

14   id. § 7.44.    Section 7.44 mandates dismissal of any "derivative

15   proceeding commenced after rejection of a demand" by motion of

16   the corporation if the court finds that the corporation, by

17   "majority vote of independent directors present at a meeting of

18   the board of directors," concluded "in good faith after

19   conducting a reasonable inquiry" that the derivative proceeding

20   "is not in the best interests of the corporation."    Id. §

21   7.44(a), (b)(1).

22               The corporation must support such a motion with a

23   written filing "setting forth facts" that demonstrate that "a

24   majority of the board of directors was independent at the time of

25   the determination by the independent directors" and that the

26   decision was made "in good faith after . . . a reasonable

                                      21
1    inquiry."    Id. § 7.44(d).   Upon the filing of a proper motion,

2    "[a]ll discovery proceedings shall be stayed" pending the court's

3    resolution of that motion, except that "the court, on motion and

4    after a hearing and for good cause shown, may order that

5    specified discovery be conducted."       Id.   Where the corporation's

6    pleadings are proper, the court must dismiss the derivative

7    action "unless the plaintiff has alleged with particularity facts

8    rebutting the corporation's filing in its complaint or an amended

9    complaint or in a written filing with the court."       Id.

10               IV.   Counts Two and Three

11               We first address Halebian's argument that the district

12   court erred in characterizing Counts Two and Three as derivative,

13   despite the fact that the complaint styles them as direct, and

14   dismissing both for failure to comply with Massachusetts's

15   universal demand requirement.     See id. § 7.42.8    The court

16   concluded that the claims were derivative because they "fail[] to

17   articulate a theory by which the alleged harm to shareholders

18   which resulted from the [allegations] was separate and

19   independent from the harm allegedly resulting to the Fund

20   itself."    Halebian, 631 F. Supp. 2d at 303.

21               One aspect of both Counts Two and Three is undoubtedly

22   derivative -- that the Board violated its fiduciary duties by


          8
            Halebian does not contest that, assuming the claims are in
     fact derivative, they fail to comply with section 7.42. Nor does
     he contest the district court's conclusion that "[t]he nature or
     character of a claim against a corporation is determined
     according to the law of the state of the corporation, and not
     dictated by the form the plaintiff chooses to plead in his or her
     complaint." Halebian, 631 F. Supp. 2d at 301.
                                     22
1    failing to disclose "the diversion of CitiTrust assets for the

2    benefit of others."    Compl. ¶¶ 60, 65.   This is plainly an

3    attempt to restate a classic derivative claim -- that the

4    corporation was harmed because its assets were diverted, thereby

5    harming the corporation's shareholders.     See, e.g., Demoulas v.

6    Demoulas Super Mkts., Inc., 424 Mass. 501, 517, 677 N.E.2d 159,

7    172 (1997); P'ship Equities, Inc. v. Marten, 15 Mass. App. Ct.

8    42, 50, 443 N.E.2d 134, 138 (1982).    The district court did not

9    err in rejecting Counts Two and Three insofar as they contain

10   such allegations.

11              The counts, insofar as they relate to the "propriety of

12   the[] voting procedures," Compl. ¶ 65; see also id. ¶ 60, are

13   more difficult to classify.    Halebian contends that the proxy

14   statement was "materially false and misleading because it

15   fail[ed] to advise beneficial holders that the use of echo voting

16   to approve an investment advisory agreement violate[ed] both the

17   ICA and Massachusetts law."    Halebian Br. 36.   He describes these

18   claims as "paradigmatic direct claims because they involve a

19   beneficial holder's right to cast an informed vote."     Id. at 35.

20   He insists that "the harm caused by a violation of a holder's

21   right to cast an informed vote is inherently 'separate and

22   independent' from any harm caused [to] CitiTrust simply because

23   CitiTrust has no right to cast any vote, much less an informed

24   vote."   Because CitiTrust issued the allegedly improper proxy

25   statement, he says, it could not be harmed by a misrepresentation

26   in that statement.    Id. at 43-44.

                                      23
1                Indeed, Massachusetts's highest court has long

2    recognized corporations' shareholders' "right to vote" their

3    shares.    See Seibert v. Milton Bradley Co., 380 Mass. 656, 662,

4    405 N.E.2d 131, 135 (1980); Ky. Package Store, Inc v. Checani,

5    331 Mass. 125, 129, 117 N.E.2d 139, 142 (1954).     By statute,

6    Massachusetts law provides, as a general default rule, that "each

7    outstanding share, regardless of class, is entitled to 1 vote on

8    each matter voted on at a shareholders' meeting, . . . each

9    fractional share is entitled to a proportional vote," and "[o]nly

10   shares are entitled to vote."     Mass. Gen. Law ch. 156D,

11   § 7.21(a).    Therefore, shareholders of a corporation, not the

12   corporation itself, are entitled to vote.     Relatedly, shares that

13   are "owned . . . by another entity of which the corporation

14   owns . . . a majority of the voting interests" are not entitled

15   to vote.    Id. § 7.21(b).   In effect, voting those shares would

16   constitute voting by the corporate entity itself, which is

17   forbidden.9

18               Federal courts interpreting Massachusetts law have

19   observed that although injuries that are not distinct to each

20   affected shareholder generally give rise to derivative claims,

21   not all indistinct injuries do so.     As the Ninth Circuit has

22   pointed out, to assert a direct claim, "it is unnecessary to

23   allege an injury distinct from that suffered by shareholders

24   generally if the alleged injury is predicated upon a violation of


          9
            A corporation is, however, entitled to "vote any shares,
     including its own shares, held by it, directly or indirectly, in
     a fiduciary capacity." Mass. Gen. Laws ch. 156D, § 7.21(c).
                                     24
1    a shareholder's voting rights."   Lapidus, 232 F.3d at 683.   A

2    district court in the District of Massachusetts has explained:

 3             [W]hat differentiates a direct from a
 4             derivative suit is neither the nature of the
 5             damages that result from the defendant's
 6             alleged conduct, nor the identity of the
 7             party who sustained the brunt of the damages,
 8             but rather the source of the claim of right
 9             itself. If the right flows from the breach
10             of a duty owed by the defendants to the
11             corporation, the harm to the investor flows
12             through the corporation, and a suit brought
13             by the shareholder to redress the harm is one
14             "derivative" of the right retained by the
15             corporation. If the right flows from the
16             breach of a duty owed directly to the
17             plaintiff independent of the plaintiff's
18             status as a shareholder, investor, or
19             creditor of the corporation, the suit is
20             "direct."

21   Stegall v. Ladner, 394 F. Supp. 2d 358, 364 (D. Mass. 2005)

22   (internal quotation marks omitted); accord Blasberg v. Oxbow

23   Power Corp., 934 F. Supp. 21, 26 (D. Mass. 1996); Weber v. King,

24   110 F. Supp. 2d 124, 132 (E.D.N.Y. 2000); cf. Strougo, 282 F.3d

25   at 171 ("To sue directly under Maryland law, a shareholder must

26   allege an injury distinct from an injury to the corporation, not

27   from that of other shareholders.").   For these reasons, the fact

28   "[t]hat many investors might have been misled . . . or that the

29   plaintiff might only be minimally injured[] does not [alone]

30   convert the claim to a derivative one."    Blasberg, 934 F. Supp.

31   at 26.

32             Based on these principles, Halebian asserts that any

33   claim of the use of improper voting procedures necessarily states

34   a direct rather than a derivative claim.   Relying on Delaware

35   law, see Sarin v. Ochsner, 48 Mass. App. Ct. 421, 423, 721 N.E.2d
                                     25
1    932, 934-35 (2000) (applying Delaware law to determine whether

2    claims were direct or derivative), he also insists that

3    Massachusetts shareholders have not only the right to vote, but

4    the "right to cast an informed vote."   In re J.P. Morgan Chase &

5    Co. S'holder Litig., 906 A.2d 766, 772 (Del. 2006); accord In re

6    Tyson Foods, Inc., 919 A.2d 563, 601 (Del. Ch. 2007) ("Where a

7    shareholder has been denied one of the most critical rights he or

8    she possesses [as a shareholder] -- the right to a fully informed

9    vote -- the harm suffered is almost always an individual, not

10   corporate, harm.").10

11             Halebian points us to no appellate court in

12   Massachusetts that has specifically embraced Delaware law in this

13   regard, and our research has revealed none.   Cf. Weitman v.

14   Tutor, 24 Mass. L. Rptr. 343 (Mass. Super. Ct. 2008) (noting that

15   "a shareholder's right to make an informed vote may, in some

16   circumstances, provide a basis for injunctive relief" (citing

17   Eisenberg v. Chicago Milwaukee Corp., 537 A.2d 1051, 1062 (Del.

18   Ch. 1987))); Sealy Mattress Co. of N.J., Inc. v. Sealy, Inc., 532

19   A.2d 1324, 1342 (Del. Ch. 1987).   Even were we to conclude that

20   Massachusetts law tracks Delaware law in this regard, however, we

21   would remain unpersuaded that Counts Two and Three can stand as

22   individual claims.   We do not think that Halebian has alleged an



          10
            Delaware courts have also recognized, as a corollary,
     that shareholders have the "right not to attend a meeting" and
     the "right not to vote on any matter," i.e., the "right to
     withhold [the shareholder's] vote on any particular proposal."
     Berlin v. Emerald Partners, 552 A.2d 482, 493 (Del. 1988)
     (emphasis added) (internal quotation marks omitted).
                                     26
1    actionable non-disclosure claim under either Massachusetts or

2    federal law.

3              The essence of Halebian's claim is not that the

4    defendants failed to inform him and others similarly situated

5    that the voting procedures incorporated echo voting, but that

6    echo voting is unlawful.   Many courts have expressed reluctance

7    to conclude that a proxy statement is misleading "when it fail[s]

8    to disclose a legal theory with which the corporation did not

9    agree and which was never called to its attention."    Ash v. LFE

10   Corp., 525 F.2d 215, 220 (3d Cir. 1975); see also Bolger v. First

11   State Fin. Servs., 759 F. Supp. 182, 194 (D. N.J. 1991)

12   ("[C]ompanies have no duty to disclose legal theories as to how a

13   given transaction violated the law."); Freedman v. Barrow, 427 F.

14   Supp. 1129, 1144 (S.D.N.Y. 1976) ("Failure to disclose a legal

15   theory with which those soliciting do not agree and which was not

16   called to their attention at the proper time does not violate"

17   federal rules prohibiting untrue statements of material fact);

18   Goldberger v. Baker, 442 F. Supp. 659, 667 (S.D.N.Y. 1977)

19   (noting that "the allegation that the [proxy] statement failed to

20   disclose the 'legal significance' of the [proposed] option plan"

21   at issue was "so vague as to defy analysis"); Voege v. Magnavox

22   Co., 439 F. Supp. 935, 941 (D. Del. 1977) ("A proxy statement,

23   based upon the opinion of properly qualified outside

24   counsel . . ., even if the opinion is wrong, cannot be deemed to

25   be a misrepresentation or concealment of a material

26   fact . . . ."); cf. Maldonado v. Flynn, 597 F.2d 789, 796, 798

                                     27
1    (2d Cir. 1979) (citing Ash and Goldberger with approval, but

2    concluding that the proxy statements at issue were misleading

3    based on nondisclosure of "factual information 'impugning the

4    honesty, loyalty or competency of directors' in their dealings

5    with the corporation to which they owe a fiduciary duty" -- that

6    "senior officers [were able] to avoid the adverse personal tax

7    effect of the [transaction at issue], known to them through

8    inside information, while depriving the Corporation of a

9    corresponding tax benefit").

10             There is no indication that the alleged unlawfulness of

11   echo voting under section 15(a) of the ICA or Massachusetts law

12   was called to the attention of the Board by Halebian or anyone

13   else prior to the institution of this lawsuit.   And the Board has

14   consistently and strenuously denied that echo voting violates

15   these laws.11   Since the Board was apparently not of the view,

16   nor had it been told, that using a Citigroup-affiliated service

17   agent other than a broker-dealer to echo vote shares violated the

18   ICA or Massachusetts law, or indeed any law, its failure to



          11
              In connection with the demand-review process, the
     corporation found "no authority for the proposition that the 1940
     Act or Massachusetts law forbids the use of echo voting by a
     record holder of shares in a vote to approve an advisory contract
     with a mutual fund" and noted that "[e]cho voting is a common
     practice in the financial industry whose utility has been
     recognized both by the Securities and Exchange Commission and the
     New York Stock Exchange." See Res. of the Bd. of Trs. of
     CitiFunds Trust III 25 (July 12, 2006). Although Halebian
     vehemently insists that echo voting, in this context, is
     unlawful, we note that he has failed to cite any court decision
     that has so suggested or held. We do not address the merits of
     Halebian's claim that echo voting violates section 15 of the ICA
     and Massachusetts law.
                                     28
1    inform shareholders to the contrary does not appear to us to have

2    been potentially false and misleading so as to be cognizable

3    under Massachusetts or federal law.12

4               V.   Count One

5               The parties agree that Count One asserts a derivative

6    claim under Massachusetts law, and that the complaint was filed

7    in accordance with section 7.42's universal demand requirement.

8    We therefore must decide whether dismissal of the claim pursuant

9    to section 7.44 was proper.    We conclude that dismissal was not

10   required because of Halebian's failure to meet federal procedural

11   requirements.   We decline to resolve in the first instance, at

12   least at this time, however, whether dismissal was required under

13   Massachusetts law.   Instead, we certify that question of

14   Massachusetts law, which is critical to the resolution of this

15   appeal, to the Supreme Judicial Court of Massachusetts.

16   A.   Federal Procedural Law

17              The district court decided that the complaint required

18   dismissal because it did not comply with Rule 23.1 of the Federal

19   Rules of Civil Procedure.     Were this conclusion correct, we would

20   have no need to address the court's alternate conclusion that



           12
              We note that Halebian's contention that the proxy
     statement should also have disclosed that the Securities Exchange
     Commission and the New York Stock Exchange ("NYSE") have ruled
     that NYSE member broker-dealers may not echo vote shares to
     obtain shareholder approval of an investment company's investment
     advisory contract with a new investment advisor is utterly
     without merit, as the proxy statement explicitly contains this
     information. See Finn Declaration Exhibit D ("Schedule 14A"), at
     8, Halebian v. Berv, No. 06 Civ. 4099 (S.D.N.Y. filed May 30,
     2006) (Doc. No. 22).
                                     29
1    dismissal of Count One was also required under Massachusetts law.

2    We conclude, however, that the district court erred with respect

3    to Rule 23.1.

4              Rule 23.1 is a "rule of pleading that creates a federal

5    standard as to the specificity of facts alleged with regard to

6    efforts made to urge a corporation's directors to bring the

7    action in question."   RCM Secs. Fund, 928 F.2d at 1330.   It "is

8    not the source of any such requirement."   Daily Income Fund, 464

9    U.S. at 543 (Stevens, J., concurring in judgment).   State law is

10   the source.   The federal rule "merely requires that the complaint

11   in such a case allege the facts that will enable a federal court

12   to decide whether such a demand requirement has been satisfied,"

13   concerning itself "solely with the adequacy of the pleadings."

14   Id. at 543-44.

15             The district court dismissed Count One for failure to

16   state "the reasons for not obtaining the [desired] action" from

17   the Board as required by Rule 23.1.   Fed. R. Civ. P.

18   23.1(b)(3)(B); see also Halebian, 631 F. Supp. 2d at 295-98.

19   Halebian's demand allegations, however, set forth all the

20   information needed to determine whether, as a matter of

21   Massachusetts law, the complaint was filed in accordance with

22   Massachusetts's universal demand rule.   See Mass. Gen. Laws Ch.

23   156D, § 7.42.

24             For a derivative proceeding to have been properly filed

25   pursuant to section 7.42, Halebian had to have made "written

26   demand . . . upon the corporation to take suitable action" and

                                     30
1    waited "90 days . . . from the date the demand was made" to file

2    suit.        Id.   Halebian's complaint alleges both.   And Halebian's

3    complaint specifically alleges the reason that the corporation

4    declined to accede to his demands -- that the members of the

5    board were motivated by self-interest to reject his demand.

6    Nothing else was required to allow the court to determine

7    whether, as a matter of Massachusetts law, Halebian's complaint

8    was properly filed.         Halebian's complaint satisfies the

9    heightened pleading requirements of Rule 23.1 on this score.

10                   Count One therefore stands or falls on whether it was

11   properly dismissed pursuant to Massachusetts substantive law.

12   B.   State Substantive Law

13                   Halebian contends that the district court erred in

14   concluding that section 7.44 and its protection for a board of

15   directors' good faith decision that litigation is not in the

16   defendant corporation's best interests applied in this case.13

17   He initiated this action following the expiration of the post-

18   demand statutory waiting period set forth in section 7.42, but

19   before the corporation rejected his demand.         And section 7.44, by

20   its terms, applies to "derivative proceeding[s] commenced after

21   rejection of a demand."         Mass. Gen. Laws Ch. 156D, § 7.44(a)

22   (emphasis added).         The district court nonetheless held that



             13
            He also argues in the alternative that even if section
     7.44 applied the district court erred by barring him from seeking
     discovery and by failing to convert the corporation's motion to
     dismiss to a motion for summary judgment. At this stage of the
     proceedings, however, we need only address Halebian's first
     argument.
                                     31
1    section 7.44 applies, concluding that the section is applicable

2    to derivative proceedings commenced before rejection of a demand

3    "as long as [the corporation's board] rejected the demand after a

4    good faith review."   Halebian, 631 F. Supp. 2d at 294.

5              Relying on statutory commentaries, the district court

6    concluded that the state legislature contemplated "that section

7    7.44 could be applicable to cases . . . where a plaintiff has

8    waited the requisite ninety days after the written demand to file

9    a complaint, but the corporation did not reject the demand until

10   after the filing of the complaint" because in some situations "a

11   board would need more than ninety days to evaluate a

12   shareholder's demand before determining whether to pursue the

13   litigation."   Id. at 295.14

14             The district court also explained that reading section

15   7.44 as written, and thereby preventing corporations that "had



          14
            The decision by a corporation to reject a demand,
     according to the commentary to section 7.44, "'can be made prior
     to the commencement of the suit in response to a demand or after
     commencement upon examination of the allegations of the
     complaint.'" Halebian, 631 F. Supp. 2d at 295 (quoting Mass.
     Gen. Law Ann. ch. 156D, § 7.44, cmt. background (emphasis added
     by the district court)). A related commentary to the neighboring
     universal-demand-requirement provision in section 7.42 notes that
     although the statutory waiting provisions set forth in that
     section had been "'chosen as a reasonable minimum time[] within
     which the board of directors [or] the shareholders can meet,
     direct the necessary inquiry into the charges, receive the
     results of the inquiry, and make its or their decision,'"
     nonetheless "'[i]n some instances a longer period may be
     required,'" and that in those instances the corporation "'may
     request counsel for the shareholder to delay filing suit until
     the inquiry is completed or, if [the] suit is commenced, the
     corporation can apply to the court for a stay under § 7.43.'"
     Halebian, 631 F. Supp. 2d at 295 (quoting Mass. Gen. Law Ann. ch.
     156D, § 7.42, cmt. 3).
                                     32
1    not completed a good faith, reasonable inquiry into the efficacy

2    of the maintenance of the derivative proceeding after ninety

3    days" from being "able to avail themselves of Massachusetts'

4    codification of the business judgment rule," would "render[]

5    meaningless" section 7.43, the stay provision.     Id.   The court

6    considered this to be a "curious result" that would encourage "a

7    race to the courthouse for shareholder plaintiffs, as filing on

8    the ninety-first day after a written demand would automatically

9    foreclose corporate boards that otherwise were proceeding

10   appropriately in response to the demand from availing themselves

11   of section 7.44."    Id.

12             We have doubts about the district court's reasoning in

13   this regard.    Assuming arguendo that relevant statutory

14   commentary and policy arguments suggest otherwise, it is a well-

15   established principle of Massachusetts law that when "the

16   language of the statute is clear, we must enforce it according to

17   its terms."    Town of Milford v. Boyd, 434 Mass. 754, 757-58, 752

18   N.E.2d 732, 735 (2001) (internal quotation marks omitted).      Here,

19   the relevant provision of section 7.44 is clear enough -- it

20   applies to "derivative proceeding[s] commenced after rejection of

21   a demand."    Mass. Gen. Laws Ch. 156D, § 7.44.   By negative

22   implication, the section would appear not to apply to derivative

23   proceedings commenced before rejection of a demand.      The district

24   court's reading in effect excised the statutory phrase:

25   "commenced after rejection of a demand."



                                      33
1              We recognize, of course, that under Massachusetts law,

2    as elsewhere, context matters.   "[S]tatutes . . . enacted

3    together . . . as part of a carefully-crafted statutory

4    plan . . . must be construed together so as to constitute a

5    harmonious whole consistent with the legislative purpose."

6    Commonwealth v. Renderos, 440 Mass. 422, 432-33, 799 N.E.2d 97,

7    106 (2003) (internal quotation marks omitted).   But we remain

8    unconvinced that the statutory context required the district

9    court to take the path that it did.

10             To be sure, and as the district court noted, the

11   commentary to section 7.44 clearly anticipates that in some

12   instances, a corporation might require more than ninety days to

13   investigate and respond to the shareholder's demand.    And, as the

14   district court explained, section 7.43 might be rendered

15   meaningless if section 7.44 were categorically inapplicable to

16   corporations that did not complete their investigations prior to

17   institution of the derivative proceeding.   To this extent, the

18   terms of section 7.44 may need to bend to accommodate contrary

19   statutory provisions.

20             But here, no stay was sought or obtained.    And the

21   district court's reading of section 7.44, ignoring its language

22   appearing to limit its application to suits commenced after

23   rejection of a demand by a board directors, seems to leave

24   section 7.43 with little purpose, if any.   If a corporation can

25   invoke section 7.44 at any time based on a good-faith rejection

26   of the demand even after the litigation is under way and without

                                      34
1    a stay in place, then there would appear to be little need for

2    the stay provision of section 7.43.

3              If, by contrast, section 7.43 operates to extend the

4    time period within which a corporation is able to invoke section

5    7.44, then the stay provision would play a critical role in the

6    statutory scheme.   Construing these two sections together, it may

7    well be that 7.44 applies to timely derivative actions filed

8    before the rejection of the demand that serves as the basis for

9    the action not in all circumstances, as the district court's

10   ruling suggests, but only when such an action was actually stayed

11   in accordance with section 7.43.

12             This reading, although not without its difficulties,15

13   appears to be consistent with other statutory commentary,

14   including commentary that the district court itself identified.

15   According to the commentary to section 7.42, where a corporation

16   needs more time than the provisions of section 7.42 give it to

17   investigate, and perhaps reject, the shareholder demand, it "'may

18   request counsel for the shareholder to delay filing suit until

19   the inquiry is completed or, if [the] suit is commenced, . . .

20   apply to the court for a stay under § 7.43.'"   Halebian, 631 F.

21   Supp. 2d at 295 (citing Mass. Gen. Law Ann. ch. 156D, § 7.42,

22   cmt. 3 (alteration in original)).   Similarly, commentary to

23   section 7.43 notes that the "court may in its discretion stay the



          15
            For example, this reading leaves unresolved the issue of
     whether a stay must be sought or entered within a certain period
     of time following the filing of the original complaint in order
     to toll the provisions of section 7.44.
                                     35
1    proceeding for such period as the court deems appropriate" where

2    "the complaint is filed 90 days after demand but the inquiry into

3    the matters raised by the demand has not been completed or where

4    a demand has not been investigated but the corporation commences

5    the inquiry after the complaint has been filed."   See Mass. Gen.

6    Law Ann. ch. 156D, § 7.43, cmt. (West 2009).

7               Both passages suggest that the Massachusetts

8    Legislature anticipated that a corporation that had not completed

9    its investigation following the expiration of the period set

10   forth in section 7.42 and which was unwilling or unable to

11   convince the shareholder to refrain from filing suit would seek

12   court approval for further delays to permit further

13   investigation.   And as a result of court supervision as a

14   condition of extending the time within which a demand can be

15   investigated, the legislature seems to have anticipated that the

16   court would "monitor the course of the [corporation's] inquiry to

17   ensure that it is proceeding expeditiously and in good faith."

18   Id.   Reading section 7.44 as written except insofar as it is

19   modified by the operation of section 7.43 seems to us to be

20   consistent with this commentary.

21              Moreover, such a reading does not, we think, pose an

22   unfair hardship on Massachusetts corporations.   Rather it would

23   appear to facilitate the Massachusetts Legislature's goal, as

24   stated in the statutory commentary, to ensure that derivative

25   actions are dismissed so long as the corporation "promptly



                                     36
1    determine[s]" to reject the demand.     Mass. Gen. Law Ann. ch.

2    156D, § 7.44, cmt. (West 2009).

3               VI.    Certification

4               We have endeavored to identify relevant issues raised

5    with respect to the Massachusetts Business Corporation Act and to

6    proffer our best reading of section 7.44.     We think it

7    appropriate, however, to reserve judgment and certify a question

8    necessary to the resolution of this appeal to the Supreme

9    Judicial Court pursuant to Massachusetts Supreme Judicial Court

10   Rule 1:03.16     We do so because the appeal presents "unsettled and

11   significant questions of state law [that] will control the

12   outcome of [the] case."     Colavito v. N.Y. Organ Donor Network,

13   Inc., 438 F.3d 214, 229 (2d Cir. 2006) (internal quotation marks

14   omitted); accord Boston Gas Co. v. Century Indem. Co., 529 F.3d

15   8, 15 (1st Cir. 2008); Nieves v. Univ. of P.R., 7 F.3d 270, 274

16   (1st Cir. 1993).     A proper reading of the Massachusetts Business



          16
               The Rule provides in part:
                § 1. Authority to Answer Certain Questions of
                Law. This court may answer questions of law
                certified to it by the Supreme Court of the
                United States, a Court of Appeals of the
                United States, or of the District of
                Columbia, or a United States District Court,
                or the highest appellate court of any other
                state when requested by the certifying court
                if there are involved in any proceeding
                before it questions of law of this state
                which may be determinative of the cause then
                pending in the certifying court and as to
                which it appears to the certifying court
                there is no controlling precedent in the
                decisions of this court.
     Mass. S.J.C. R. 1:03.
                                        37
1    Corporation Act is, it seems to us, important to the effective

2    regulation by the Commonwealth of Massachusetts of corporations,

3    and, in this case, business trusts, incorporated under its laws,

4    and to our knowledge, no appellate court has ever discussed

5    section 7.44 or section 7.43, let alone at any length or as they

6    apply to the situation presented in this appeal.   The First

7    Circuit, more intimately familiar than are we with the workings

8    of the Supreme Judicial Court, has observed that the court "has

9    indicated a willingness, under such circumstances, to answer

10   certified questions."   Foxworth v. St. Amand, 570 F.3d 414, 437

11   (1st Cir. 2009).

12             We therefore certify the following question to the

13   Supreme Judicial Court of Massachusetts for its consideration:

14             Under Massachusetts law, can the business
15             judgment rule, established under Mass. Gen.
16             Laws ch. 156D, § 7.44, be applied to dismiss
17             a derivative complaint filed timely under
18             section 7.42 but prior to a corporation's
19             rejection of the demand that serves as the
20             basis for the suit?

21             We certify that this question is to the best of our

22   understanding determinative of a claim in this case and that it

23   appears to us that there is no controlling precedent in either

24   the decisions or rules of practice of the Supreme Judicial Court.

25             We respectfully invite any additional guidance about

26   relevant Massachusetts law or practice that the Supreme Judicial

27   Court may wish to offer in responding to the certified question.

28   The certified question may be deemed to cover any pertinent

29   further issues of Massachusetts law that the Supreme Judicial

                                     38
1    Court thinks is appropriate and advisable to address, including

2    those issues addressed in the portion of our opinion discussing

3    the propriety of the district court's dismissal of Counts Two and

4    Three.   For this reason, although we have stated our conclusions

5    with respect to Counts Two and Three as though they were

6    definitive, we reserve decision on all issues on appeal pending

7    the Supreme Judicial Court's response to our certification.

8              This Court will issue a Certification Order pursuant to

9    Massachusetts Supreme Judicial Court Rule 1:03.   The Clerk of

10   this Court is directed to forward to the Supreme Judicial Court

11   of Massachusetts, under the official seal of this Court, the

12   Certification Order, this opinion, and the briefs and appendices

13   filed by the parties.   Pending the receipt of a response, this

14   Court and this panel shall retain appellate jurisdiction.

15                               CONCLUSION

16             For the foregoing reasons, we reserve judgment and

17   certify the stated question to the Supreme Judicial Court of

18   Massachusetts.




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