City of Hollywood Firefighters' Pension System v. Wells Fargo & Company

Background

This shareholder derivative action alleges that Wells Fargo’s directors and officers breached fiduciary duties by failing to comply with federal law and regulatory requirements established in consent orders. City of Hollywood Firefighters’ Pension System was selected as lead plaintiff and filed a consolidated complaint asserting one breach-of-fiduciary-duty claim against the individual defendants.

Timothy Himstreet and Montini Family Trust were plaintiffs in an earlier-filed shareholder derivative action pending in San Francisco Superior Court. That state action asserts claims for breach of fiduciary duty, unjust enrichment, and waste of corporate assets. The state court had overruled Wells Fargo’s demurrer, and the California Court of Appeal had affirmed that ruling. The proposed intervenors moved under Federal Rule of Civil Procedure 24 to intervene and asked the court to stay or dismiss the federal action under the Colorado River doctrine, which can permit a federal court to pause a case because a substantially similar state proceeding is pending.

Intervention

The court denied intervention as of right. Rule 24(a)(2) requires a timely motion, a significantly protectable interest related to the action, a risk that the action may impair the applicant’s ability to protect that interest, and inadequate representation by the existing parties. The court held that the proposed intervenors had not shown a significantly protectable interest that would allow them to seek a stay or dismissal of the federal action on their own behalf. The court therefore denied intervention as of right and did not reach the remaining requirements.

The court granted permissive intervention. Permissive intervention allows a person or entity to join when its claim or defense shares a common legal or factual question with the main action, so long as intervention will not unduly delay or prejudice the existing parties. City of Hollywood conceded that the claims shared common legal and factual questions. Because the federal action was still in its early stages and the proposed intervenors had shown no undue delay or prejudice, the court allowed permissive intervention.

Colorado River Stay

The court found the state and federal cases substantially similar for purposes of the Colorado River doctrine. Both proceedings arose from the same operative facts, involved similar relevant parties, and sought to hold Wells Fargo’s officers and directors accountable for alleged compliance failures and breaches of fiduciary duty. The court also found that allowing both cases to proceed would likely duplicate discovery, risk conflicting results, and waste judicial resources.

The court concluded that the relevant factors supported a stay. The state action was filed first, had already advanced through rulings on pleadings, and was conducting discovery. The state court could adequately protect the federal litigants’ rights. Delaware law governed the claims in both actions, but the court treated that factor as neutral because neither court was better suited to apply Delaware law. Although the federal action was filed later and substantially overlapped with the state action, the court found no evidence that City of Hollywood had engaged in improper forum shopping.

The court determined that four of the six applicable factors favored the proposed intervenors, one was neutral, and one favored City of Hollywood. It therefore found the exceptional circumstances required for a Colorado River stay. Under Ninth Circuit precedent, the court stayed rather than dismissed the federal case so that the federal forum would remain available if the state court later proved inadequate.

Disposition

The court granted the proposed intervenors’ motion to stay. The federal action was stayed until the state action is resolved. The pending motions to dismiss and motion for joinder were terminated without prejudice to refiling, if appropriate. The parties must file a status report within 10 days after the state action is resolved and identify any issues that remain for the federal court.