Bonhomme Investment Partners, LLC et al v. Hayes et al

Filing 211

MEMORANDUM AND ORDER. (See Full Order.) IT IS HEREBY ORDERED that defendant Sherwyn Wayne's Motion to Have Facts Contained in His Motion for Summary Judgment Deemed Admitted [ECF # 193 ] is GRANTED. IT IS FURTHER ORDERED that defendant Sherwyn Wayne's Motion for Summary Judgment [ECF # 185 ] is GRANTED. Sherwyn Wayne is entitled to summary judgment against plaintiffs on Count I of their Second Amended Complaint. Signed by District Judge Catherine D. Perry on 11/2/2015. (CBL)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION
BONHOMME INVESTMENT
PARTNERS, LLC, et al.,
Plaintiffs,
v.
SHAUN HAYES, et al.,
Defendants.

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No. 4:13CV475 CDP

MEMORANDUM AND ORDER
Plaintiffs are investors who bring claims of securities and other fraud against
a failed bank and its officers and directors arising out of a complicated investment
transaction in which plaintiffs ultimately lost more than six million dollars. The
undisputed evidence before the Court shows defendant Sherwyn Wayne – a
director of the failed bank as well as its parent holding company – not to have
possessed the scienter required to be liable to plaintiffs for securities fraud.
Wayne’s motion for summary judgment will be granted.
Background
Plaintiffs are Bonhomme Investment Partners, LLC, and its two members,
Donald Davis and Richard Lehman. Defendant Federal Deposit Insurance
Corporation (FDIC) is a federal agency acting as Receiver for Truman Bank, a

failed Missouri bank that went into receivership in September 2012.1 Defendant
Truman Bancorp, Inc. (“Bancorp”), was the parent holding company of Truman
Bank.2 Defendant Shaun Hayes, who is one of the two people alleged to have
made numerous false representations, was a shareholder of Bancorp and a
consultant to Truman Bank. Richard Miller, who was Chief Executive Officer and
a director of both entities, as well as a shareholder of Bancorp, was the other
person alleged to have directly made false statements. He is now deceased.
Defendant Wayne was a director at both Truman Bank and Bancorp.
Plaintiffs allege that in early 2009, Miller and Hayes approached plaintiffs
and sought a $6 million loan from Bonhomme to Bancorp for Truman Bank’s
benefit (the “Truman Loan”). Bancorp secured the Truman Loan by pledging to
Bonhomme all its Truman Bank stock (the “Truman Stock”) and its stock in FFC
Financial Corporation (collectively, “the Bancorp collateral”). On June 19, 2009,
Bonhomme made the loan and Bancorp executed a promissory note (the “Bancorp
Note”) and security agreements. Hayes represented to plaintiffs that Sun Security
Bank (“Sun”) would lend Bonhomme the $6 million needed to fund the Truman
Loan and that Sun would accept the Bancorp collateral as collateral for the Sun
Loan.3 Hayes was an officer, director, and the principal shareholder of Sun.
1

FDIC-R was dismissed from this case on October 26, 2015.
Default judgment was entered against Bancorp on July 21, 2014.
3
Davis and Lehman also made personal guarantees or pledged personal assets to Sun as
additional security.
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Unknown to plaintiffs, at the time of the Truman Loan and Sun Loan, Bancorp had
already pledged the stock comprising the Bancorp collateral to secure a securities
placement in 2003 for over $7 million and a securities placement in 2007 for $5
million. Plaintiffs allege that the defendants, including Wayne, knew or should
have known at that time that Bancorp could not pledge the Bancorp collateral and
failed to disclose those facts.
In early 2010, Hayes and Miller falsely told plaintiffs that the FDIC and
Federal Reserve Bank had informed them that the Truman Stock could not be
pledged because Bonhomme could not legally own that stock in event of default by
Bancorp. Plaintiffs claim that Wayne and the other defendants again failed at this
time to disclose that the reason the Truman Stock could not be pledged was that it
had already been encumbered. The plaintiffs obtained permission from Sun,
arranged by Hayes, to substitute Bancorp convertible debentures for the Bancorp
Note. Truman Bank eventually went into receivership, and the FDIC notified
Bonhomme that its claim against Truman Bank was disallowed.
Plaintiffs filed this cause of action in March 2013 and named Bancorp, the
FDIC, Simmons First National Bank (Truman’s successor bank), Hayes, and
Miller (through the personal representative of his estate) as defendants in the cause.
Simmons was dismissed from this action in May 2013, and default judgment was
entered against Bancorp in July 2014. In a Second Amended Complaint filed in
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November 2014, plaintiffs named eight additional directors of Truman Bank and
Bancorp as defendants, including defendant Wayne. Of those eight added
defendants, only Wayne and Kenneth Kraus remain.4
A reading of the Second Amended Complaint shows plaintiffs to bring the
following claims: Count I, against all defendants for federal securities fraud under
the Securities Exchange Act and Rule 10b-5 implementing that Act; Count II,
against all defendants for securities fraud under Missouri law; Count III against
Bancorp for breach of implied covenant of good faith and fair dealing; Count IV,
against all defendants for common law fraud; Count V against all defendants for
negligent misrepresentation; and Count VI, against Bancorp and the FDIC (as
receiver for Truman Bank) for unjust enrichment. Defendant Wayne previously
moved to dismiss all counts of the Second Amended Complaint that were – or
construed to be – brought against him. I granted the motion on all counts except
for Count I. [ECF #182] Wayne now seeks summary judgment on that remaining
claim.
Discussion
Legal Standards
In determining whether a party is entitled to summary judgment, the Court
must view the facts and inferences from the facts in the light most favorable to the
4

As such, plaintiffs currently have live claims against only Hayes, Miller, Wayne, and Kraus.
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nonmoving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475
U.S. 574, 587 (1986). The moving party has the burden to establish both the
absence of a genuine issue of material fact and that he is entitled to judgment as a
matter of law. Fed. R. Civ. P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 247 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Once the
moving party has met this burden, the nonmoving party may not rest on the
allegations in its pleadings but by affidavit or other evidence must set forth specific
facts showing that genuine issue of material fact exists. Fed. R. Civ. P. 56(c).
“[A] complete failure of proof concerning an essential element of the nonmoving
party's case necessarily renders all other facts immaterial.” Celotex, 477 U.S. at
323.
As an initial matter, I note that plaintiffs did not respond to Wayne’s Motion
for Summary Judgment, which was filed on June 1, 2015. Under Local Rule
4.01(E), “[a]ll matters set forth in the statement of the movant shall be deemed
admitted for purposes of summary judgment unless specifically controverted by
the opposing party.” As a result of plaintiffs’ failure to respond, they are deemed
to have admitted the matters set forth in Wayne’s Statement of Uncontroverted
Facts. See Reasonover v. St. Louis County, Mo., 447 F.3d 569, 579 (8th Cir. 2006)
(district court did not abuse its discretion in deeming facts set forth in moving
party's summary judgment motion admitted under E.D. Mo. L.R. 4.01(E) where no
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timely response was filed); Ridpath v. Pederson, 407 F.3d 934, 936 (8th Cir. 2005)
(where plaintiff did not controvert defendant's statement of material facts, it was
deemed admitted under E.D. Mo. L.R. 4.01(E)).5
Undisputed Facts
The following facts are deemed admitted for purposes of this summary
judgment motion:
Wayne had no role in connection with the negotiation and execution of the
Truman Loan and the Sun Loan. Nor did he participate in any meetings or
discussions with Davis or Lehman concerning any of the allegations in the Second
Amended Complaint.
Wayne has no knowledge whether Bancorp was or was not able to pledge
the Truman Stock or the FCC Stock as collateral for the Truman Loan because the
stock had already been encumbered to secure other Bancorp obligations. Wayne
does not recall any discussions at meetings of Truman Bank’s board of directors
relating to whether Bancorp was or was not able to pledge the Truman Stock or the
FCC stock as collateral for the Truman Loan because the stock had already been
encumbered to secure other Bancorp obligations.
Wayne relied on officers, other professionals, and in-house and outside
counsel of Truman Bank and/or Truman Bancorp to ensure that the Truman Loan
5

Wayne filed a separate motion asking that I deem his Statement of Material Facts admitted
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and the Sun Loan were valid and enforceable. None of these professionals ever
brought to Wayne’s attention a concern about the legality of either the Truman
Loan or the Sun Loan.
Analysis
In Count I of their Second Amended Complaint, plaintiffs allege that the
defendants’ conduct in relation to the sale of the debentures to Bonhomme
constituted federal securities fraud under 15 U.S.C. §§ 78, et seq., and 20 C.F.R. §
240.10b-5 (“Rule 10b-5”). Specifically, plaintiffs allege that the defendants made
misleading and false statements of fact and omitted to state facts necessary to make
the statements not false and/or misleading; and either participated in the making of
the misrepresentations or failed in their duty to disclose facts. Other than pleading
that defendant Wayne was a director of Bancorp and Truman Bank, plaintiffs plead
only that Wayne knew or should have known that Bancorp could not pledge the
Bancorp collateral as security, and twice failed to inform plaintiffs of this inability.
To prevail against Wayne on their claim of federal securities fraud under 15
U.S.C. § 78 and Rule 10b-5, plaintiffs must show “(1) a material misrepresentation
or omission by the defendant; (2) scienter; (3) a connection between the
misrepresentation or omission and the purchase or sale of a security; (4) reliance
upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.”
under Local Rule 4.01(E). [ECF #193] That motion will be granted.
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Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179, 2184 (2011) (internal
quotation marks and citation omitted); Minneapolis Firefighters’ Relief Ass’n v.
MEMC Elec. Materials, Inc., 641 F.3d 1023, 1028 (8th Cir. 2011) (internal
quotation marks and citation omitted). Wayne argues that the undisputed facts
show him to lack the requisite scienter for a securities fraud claim. I agree.
Scienter “can be established in three ways: (1) from facts demonstrating a
mental state embracing an intent to deceive, manipulate, or defraud; (2) from
conduct which rises to the level of severe recklessness; or (3) from allegations of
motive and opportunity.” Detroit Gen. Ret. Sys. v. Medtronic, Inc., 621 F.3d 800,
808 (8th Cir. 2010) (quoting Cornelia I. Crowell GST Trust v. Possis Med., Inc.,
519 F.3d 778, 782 (8th Cir. 2008)). While issues of scienter are generally decided
by a jury, they can be resolved on summary judgment if there is no genuine issue
of material fact. In re Acceptance Ins. Cos. Sec. Litig., 423 F.3d 899, 905 (8th Cir.
2005).
As noted above, plaintiffs’ Second Amended Complaint alleges only that
Wayne was a director of Bancorp and Truman Bank and knew or should have
known that Bancorp could not pledge the Bancorp collateral as security but failed
to inform plaintiffs of this inability. Plaintiffs allege no facts in their complaint
demonstrating how or why Wayne “knew or should have known” that Bancorp
collateral could not be pledged as security. Plaintiffs make no claim of motive and
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opportunity nor do they allege facts demonstrating that Wayne’s mental state
embraced an intent to deceive, manipulate, or defraud. To the extent the
complaint’s bare bones plead a sufficient inference of recklessness to withstand a
motion to dismiss (see ECF #182, Memo. & Order at p. 10-11), the undisputed
evidence now before the Court on summary judgment shows Wayne not to have
engaged in recklessness that would establish scienter.
Recklessness is
limited to those highly unreasonable omissions or misrepresentations that
involve not merely simple or even inexcusable negligence, but an extreme
departure from the standards of ordinary care, and that present a danger of
misleading buyers or sellers which is either known to the defendant or is so
obvious that the defendant must have been aware of it.
Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 654 (8th Cir.
2001) (quoting Camp v. Dema, 948 F.2d 455, 461 (8th Cir. 1991)). Recklessness
may also be shown “where alleged facts demonstrate that the defendants failed to
review or check information that they had a duty to monitor, or ignored obvious
signs of fraud.” Kushner v. Beverly Enters., Inc., 317 F.3d 820, 828 (8th Cir.
2003).
Plaintiffs allege that the collateral at issue here had previously been pledged
in other, unrelated transactions totaling over $12 million, thus rendering it
unavailable to be pledged as collateral for the Truman Loan. Wayne has presented
undisputed evidence that he was not aware that the collateral could not be pledged
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to secure the Truman Loan because of previous encumbrances. Further, he was not
a part of any negotiation, meeting, or discussion with plaintiffs concerning the
collateral or loans at issue. Plaintiffs have submitted nothing demonstrating that
the alleged misrepresentations made by Hayes and Miller presented a danger of
misleading plaintiffs “so obvious that [Wayne] must have been aware of it” merely
because of his role as a director of the bank and nothing more. “It is insufficient to
show that a defendant should have known that a material statement or omission
was false or misleading. ‘That is a viable claim of negligence, but not of fraud.’”
SEC v. Shanahan, 646 F.3d 536, 544 (8th Cir. 2011) (quoting In re Ceridian Corp.
Secs. Litig., 542 F.3d 240, 249 (8th Cir. 2008)) (emphasis in Shanahan).
Nor have plaintiffs presented any evidence that Wayne’s duty as a director
included reviewing or checking information regarding the details of the Truman
and/or Sun Loans or the viability of Bancorp collateral in relation to the loans.
Indeed, in his uncontested declaration, Wayne states that, as director of Truman
Bank, he served for short periods of time on only the compensation committee and
Y2K committee and did not serve on any other of Truman Bank’s committees,
including its loan committee and audit committee.6
Finally, Wayne’s reliance on other professionals to ensure the validity and
enforceability of the loans without further personal examination was reasonable.
6

ECF #186-1, Wayne Decl. at paras. 4, 5.
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See Shanahan, 646 F.3d at 544. It is undisputed that none of these professionals
ever brought to Wayne’s attention a concern about the legality of either the
Truman Loan or the Sun Loan, and Wayne does not recall any discussions about
the validity of these loans at any directors’ meetings. “Depending on others to
ensure the accuracy of disclosures to purchasers and sellers of securities – even if
inexcusably negligent – is not severely reckless conduct that is the functional
equivalent of intentional securities fraud.” Id. (citing SEC v. Pasternak, 561 F.
Supp. 2d 459, 513-14 (D.N.J. 2008)).
Given Wayne’s lack of involvement in the conversations or negotiations
with plaintiffs regarding the transactions at issue, his reliance on other
professionals regarding the validity of the transactions with no concerns brought to
his attention regarding their legality, and the lack of discussion at directors’
meetings regarding the availability of stock to pledge as collateral for the loans,
there is no evidence that there were obvious signs of fraud relating to these
transactions that Wayne chose to ignore.
In light of the unrefuted evidence, plaintiffs have not, and cannot, show that
Wayne’s conduct was so unreasonable and constituted an extreme departure from
the standards of ordinary care such that scienter is demonstrated by severe
recklessness. Cf. In re Metris Cos., Inc. Sec. Litig., 428 F. Supp. 2d 1004, 1013
(D. Minn. 2006) (plaintiffs’ proffered broad statements were neither definite nor
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revealing enough to suggest recklessness). Plaintiffs’ complete failure of proof
concerning Wayne’s scienter, an essential element of securities fraud, entitles
Wayne to summary judgment on Count I of plaintiff’s Second Amended
Complaint. All other claims against him have been dismissed previously, so no
claims remain against this defendant.
Therefore,
IT IS HEREBY ORDERED that defendant Sherwyn Wayne’s Motion to
Have Facts Contained in His Motion for Summary Judgment Deemed Admitted
[ECF #193] is GRANTED.
IT IS FURTHER ORDERED that defendant Sherwyn Wayne’s Motion for
Summary Judgment [ECF #185] is GRANTED. Sherwyn Wayne is entitled to
summary judgment against plaintiffs on Count I of their Second Amended
Complaint.

CATHERINE D. PERRY
UNITED STATES DISTRICT JUDGE

Dated this 2nd day of November, 2015.

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