Haggard et al v. Burrey

Filing 83

ORDER granting 80 Motion for Leave to File Instanter a First Amended Complaint. Signed by Magistrate Judge Terence P Kemp on 5/16/2011. (er1)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
Kenneth Haggard, et al.,
Plaintiffs,
v.

Case No. 2:09-cv-44

Thomas J. Ossege, et al.,

JUDGE JAMES L. GRAHAM
Magistrate Judge Kemp

Defendants.
ORDER
This case is before the Court on the motion for leave to
file instanter a first amended complaint filed by plaintiffs
Kenneth Haggard, Maryann Tomczyk and MVB Mortgage Corporation.
The motion has been fully briefed.

For the following reasons,

the motion will be granted.
I.

Background

The factual background of this case has been set forth in
previous orders of this Court and will not be repeated in great
detail here.

For purposes of the present motion, however, the

original complaint alleges the following.

Defendants Thomas J.

Ossege, Jean E. Huffer, Emma Erb, and Tina Burrey, former
officers and directors of Miami Valley Bank (“the Bank”), failed
to segregate the available collateral on the Bank’s books with
respect to loans originated by Investaid Corporation and
participated in by the Bank and MVB Mortgage.

MVB’s

participation included loaning money to the Bank for the
Investaid loans from March, 2006 through March, 2007.

MVB, in

turn, had borrowed the money to lend to the Bank on its line of
credit with National City Bank.
In March, 2007, Mr. Haggard became aware that Investaid
would need to file for bankruptcy.

He informed National City and

National City demanded that MVB make sure that the line of credit

was not secured by any Investaid loans.

As a result, MVB asked

the Bank to pay back the Investaid loans.
to repay the full loan amount in cash.

The Bank was not able

However, on March 20,

2007, the Bank’s board of directors approved the repayment of the
full amount, in an effort to prevent National City from demanding
repayment of MVB’s entire line of credit balance.

On March 27,

2007, MVB transferred some cash to National City and assigned
other mortgage loans as collateral to replace the Investaid
loans.
The Bank’s board of directors approved the March 27, 2007
transaction on the condition of the Bank’s transfer of its first
quarter earnings to its loan loss reserve.

In reviewing the

March 27 transaction, the Federal Deposit Insurance Corporation
(“FDIC”) concluded that the transaction constituted a sale of
assets between the Bank and its affiliate.

Based on this

conclusion, the FDIC alleges that the MVB plaintiffs and the Bank
committed an unlawful “covered” transaction under Sections 23A
and 23B of the Federal Reserve Act 12 U.S.C. §§371c & 371c-1.
As this Court has previously noted, the Bank became
insolvent and was closed on October 4, 2007.

The FDIC became the

receiver of the Bank.
II.

Legal Standard

Fed.R.Civ.P. 15(a)(2) states that when a party is required
to seek leave of court in order to file an amended pleading,
"[t]he court should freely give leave when justice so requires."
The United States Court of Appeals for the Sixth Circuit has
spoken extensively on this standard, relying upon the decisions
of the United States Supreme Court in Foman v. Davis, 371 U.S.
178 (1962) and Zenith Radio Corp. v. Hazeltine Research, Inc.,
401 U.S. 321 (1971), decisions which give substantial meaning to
the "when justice so requires."

In Foman, the Court indicated

that the rule is to be interpreted liberally, and that in the
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absence of undue delay, bad faith, or dilatory motive on the part
of the party proposing an amendment, leave should be granted.

In

Zenith Radio Corp., the Court indicated that mere delay, of
itself, is not a reason to deny leave to amend, but delay coupled
with demonstrable prejudice either to the interests of the
opposing party or of the Court can justify such denial.
Expanding upon these decisions, the Court of Appeals has
noted that:
[i]n determining what constitutes prejudice, the
court considers whether the assertion of the new
claim or defense would: require the opponent to
expend significant additional resources to conduct
discovery and prepare for trial; significantly
delay the resolution of the dispute; or prevent
the plaintiff from bringing a timely action in
another jurisdiction.
Phelps v. McClellan, 30 F.3d 658, 662-63 (6th Cir. 1994) (citing
Tokio Marine & Fire Insurance Co. v. Employers Insurance of
Wausau, 786 F.2d 101, 103 (2d Cir. 1986)).

See also Moore v.

City of Paducah, 790 F.2d 557 (6th Cir. 1986); Tefft v. Seward,
689 F.2d 637 (6th Cir. 1982).

Stated differently, deciding if

any prejudice to the opposing party is "undue" requires the Court
to focus on, among other things, whether an amendment at any
stage of the litigation would make the case unduly complex and
confusing, see Duchon v. Cajon Co., 791 F.2d 43 (6th Cir. 1986)
(per curiam), and to ask if the defending party would have
conducted the defense in a substantially different manner had the
amendment been tendered previously.

General Electric Co. v.

Sargent and Lundy, 916 F.2d 1119, 1130 (6th Cir. 1990); see also
Davis v. Therm-O-Disc, Inc., 791 F. Supp. 693 (N.D. Ohio 1992).
The Court of Appeals has also identified a number of
additional factors which the District Court must take into
account in determining whether to grant a motion for leave to
file an amended pleading.

They include whether there has been a
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repeated failure to cure deficiencies in the pleading, and
whether the amendment itself would be an exercise in futility.
Robinson v. Michigan Consolidated Gas Co., 918 F.2d 579 (6th
Cir.1990); Head v. Jellico Housing Authority, 870 F.2d 1117 (6th
Cir.1989).

The Court may also consider whether the matters

contained in the amended complaint could have been advanced
previously so that the disposition of the case would not have
been disrupted by a later, untimely amendment.

Id.

It is with

these standards in mind that the instant motion to amend will be
decided.
III.

The Motion for Leave to Amend

Through their motion, the MVB plaintiffs seek leave for Mr.
Haggard, the sole shareholder of the Bank as well as a former
director, to assert an alternative claim for breach of fiduciary
duty against two of the defendants - Thomas Ossege and Jean
Huffer.

As noted above, these defendants are former directors

and senior officers of the Bank.

The MVB plaintiffs contend that

they obtained the information supporting such a claim through
discovery.
As the MVB plaintiffs explain, these specific defendants’
positions as officers and directors required that they identify
and advise Mr. Haggard, as a shareholder, that the March 2007
transaction at issue here violated Section 23A of 12 U.S.C. §371c
to the extent that they believed the transaction constituted a
“sale.”

They have submitted excerpts of deposition testimony in

which they contend these defendants’ assert the belief that the
transaction was a sale and that the issue of a violation of
Section 23A was not disclosed to Mr. Haggard.

Further, they rely

on Davis v. DCB Financial Corp., 259 F.Supp.2d 664 (S.D. Ohio
2003) to support their position that, because Mr. Haggard has
been harmed individually, he has a direct cause of action against
these defendants.

According to the MVB plaintiffs, Davis
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recognizes that under Ohio law corporate officers and directors
owe fiduciary duties to a corporation’s shareholders in addition
to the corporation itself and a shareholder may bring a direct
action for breach of that duty if he has suffered an injury
separate and distinct from the corporation.
In response, the Ossege defendants assert that the motion
should be denied as untimely because Mr. Haggard has been aware
of the information for some time - not only recently as a result
of discovery.

Further, they contend that the MVB plaintiffs’

“novel” theory of liability simply is not viable.

According to

the Ossege defendants, Davis does not hold that, under Ohio law,
“a director or officer owes a fiduciary duty to provide legal
advice to a fellow director and controlling shareholder at a
board meeting.”

See Memorandum in Opposition, at p.4 (Doc. #81).

Further, they claim that, because they were not licensed in Ohio
to provide legal advice, their failure to do so or any alleged
legal malpractice cannot form the basis of the MVB plaintiffs’
claims.

Additionally, they contend that the proposed amended

complaint’s factual allegations do not support a finding that
they are liable to Mr. Haggard as a shareholder because they
relate solely to actions taken by him in his role as a director.
Finally, the Ossege defendants contend that, to the extent
any cause of action exists against them as officers and
directors, the claim belongs to the FDIC.

As they explain,

because the Bank has been closed and the FDIC has been appointed
receiver, 12 U.S.C. §1821(k) governs.

They cite to two cases

from other circuits which they contend support the position that,
under this statute, claims for wrongdoing against officers and
directors of failed banks are owned by the FDIC, Pareto v. FDIC,
139 F.3d 696 (9th Cir. 1998) and Bauer v. Sweeney, 964 F.2d 305
(4th Cir. 1992).

They also contend, apparently in reliance on

Village of Oakwood v. State Bank and Trust Co., 539 F.3d 373 (6th
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Cir. 2008), that, to the extent Mr. Haggard’s claims are not
derivative in nature, the Bank would be liable for any damages
caused by its officers and directors and the Federal Deposit
Insurance Act provides the exclusive remedy.
In reply, the MVB plaintiffs contend that their motion is
timely because they learned of the Ossege defendants’ belief that
the March 2007 transaction constituted a sale through the
depositions.

Further, they note that the Ossege defendants will

not be prejudiced by an amendment because the case is at an early
stage with the issue of this Court’s subject matter jurisdiction
currently pending.

Additionally, by way of footnotes, they

dismiss as “red herrings” the Ossege defendants’ arguments that
Mr. Haggard is suing in his capacity as a director or that he is
attempting to assert a claim for legal malpractice.
Further, the MVB plaintiffs argue that Davis correctly
states Ohio law.

Again, relying on Davis, they contend that the

Ossege defendants owed a fiduciary duty to the Bank and Mr.
Haggard as its sole shareholder.

Because, as they allege, Mr.

Haggard has been harmed individually by various regulatory and
enforcement actions instituted against him individually by the
FDIC, they assert that he has standing to assert a direct claim
against these defendants.
Finally, the MVB plaintiffs assert that Ohio law is
applicable despite the FDIC receivership.

They contend that the

cases relied upon by the Ossege defendants do not support the
assertion that the FDIC as receiver has the sole authority to
pursue a direct shareholder claim.

Specifically, they claim

that, to the extent the Ossege defendants rely on Village of
Oakwood, that case has no applicability here because Mr.
Haggard’s proposed claim is directed to defendants Ossege and
Huffer and relates specifically to their conduct - not that of
the FDIC as receiver.
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IV. Analysis
Briefly, the Court notes that the Ossege defendants have not
presented anything beyond brief argument to suggest that the
information forming the basis of the proposed amendment was
available to Mr. Haggard prior to the depositions.

Further,

although the depositions on which the MVB plaintiffs rely were
taken in April and June of 2010, these defendants have not argued
that the MVB plaintiffs are seeking to delay this action or are
acting in bad faith.

Additionally, they have not asserted any

prejudice they will suffer if the proposed amendment is allowed.
Consequently, the Court views the focus of their opposition to be
the futility of the proposed amendment.

It is to this issue that

the Court will now turn.
There is some conceptual difficulty presented when the
primary basis for a party’s opposition to the filing of an
amended pleading is that the pleading is futile, i.e. that it
fails to state a claim upon which relief can be granted.

A

Magistrate Judge cannot ordinarily rule on a motion to dismiss,
see 28 U.S.C. §636(b)(1)(A), and denying a motion for leave to
amend on grounds that the proposed new claim is legally
insufficient is, at least indirectly, a ruling on the merits of
that claim.
At least where the claim is arguably sufficient, it is
usually a sound exercise of discretion to permit the claim to be
pleaded and to allow the merits of the claim to be tested before
the District Judge by way of a motion to dismiss.

Even a

District Judge may choose to adopt this approach: “The trial
court has the discretion to grant a party leave to amend a
complaint, even where the amended pleading might ultimately be
dismissed.” Morse/Diesel, Inc. v. Fidelity and Deposit Co. of
Md., 715 F.Supp. 578, 581 (S.D.N.Y. 1989).

Consequently, rather

than determining the actual legal sufficiency of the new claim,
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in many cases it will suffice to determine if there is a
substantial argument to be made on that question and, if so, to
allow the amended pleading to be filed with the understanding
that a motion to dismiss for failure to state a claim may follow.
The MVB plaintiff’s proposed amendment relies heavily on
this Court’s decision in Davis.

In that case, this Court noted

that, under Ohio law,
Corporations and their officers and directors occupy a
fiduciary relationship with corporate shareholders.
See Thomas v. Matthews, 94 Ohio St. 32, 113 N.E. 669
(1916); Thompson v. Central Ohio Cellular, Inc., 93
Ohio App.3d 530, 540, 639 N.E.2d 462 (1994). However,
actions for breach of fiduciary duties are generally
brought in derivative suits. Owens, 86 Ohio App.3d at
220, 620 N.E.2d 234. This is because the right to
maintain an action to recover for the alleged
negligence, fraud, or misconduct of directors and
officers, resulting in the depletion of the corporation
property, belongs to the corporation itself. Id. A
complaining shareholder has a direct action only if he
is injured in a way that is separate and distinct from
an injury to the corporation. Weston, 74 Ohio St.3d at
379, 658 N.E.2d 1058.
Id. at 673.
Here, Mr. Haggard has alleged that the Ossege defendants
breached the fiduciary owed to him as a shareholder when they
failed to “identify [a] Section 23A problem” or failed to advise
him of the potential problem prior to the board approval of the
March 2007 transaction.

Mr. Haggard claims that, as a result, he

suffered damages individually due to the FDIC’s pursuit of
“repeated and intrusive regulatory and enforcement actions
against him ... in his individual capacity.”
Amended Complaint, at ¶75 (Doc. #80-1).

See Proposed

He asserts that these

damages are “distinct from the value of his ownership interest in
Miami Valley Bank.”

Id.

In addition to relying on Davis, the MVB plaintiffs have

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discussed and distinguished the cases relied on by the Ossege
defendants in asserting that, to the extent any claim exists, it
belongs to the FDIC as receiver.

For example, the MVB plaintiffs

contend that the language quoted by the Ossege defendants from
Gaff v. Federal Deposit Ins. Corp., 828 F.2d 1145, 1148 (6th Cir.
1987), actually supports their position that Mr. Haggard has
standing to bring a direct claim.

Further, they contend that

Pareto and Bauer are inapplicable because Mr. Haggard’s proposed
claim is not a derivative claim arising from an injury to the
corporation.

Finally, they argue that Village of Oakwood

involved claims relating to the conduct of the FDIC as the
receiver and Mr. Haggard’s proposed claim relates to the conduct
of officers and directors.
In light of the above, the MVB plaintiffs have made a
substantial argument with respect to their proposed claim.
Further, as noted above, the Ossege defendants have not
demonstrated any undue prejudice they will suffer if the motion
is granted.

Nor is there any indication in the record that the

current motion is designed to delay these proceedings or that the
MVB plaintiffs are acting in bad faith.

Further, as the MVB

plaintiffs have noted, threshold issues are currently pending.
Under these circumstances, the Court believes that it is a better
exercise of discretion to permit the proposed amended complaint
to be filed.

Certainly, the Ossege defendants are free to

challenge the amended complaint by way of a motion to dismiss
should they so choose.

Consequently, the motion to amend will be

granted.
V.

Conclusion

For the reasons stated above, the motion for leave to file
instanter a first amended complaint (#80) is granted.

The Clerk

shall detach and file the first amended complaint attached to the
motion as Exhibit A.
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VI.

Procedure for Reconsideration

Any party may, within fourteen days after this Order is
filed, file and serve on the opposing party a motion for
reconsideration by a District Judge.

28 U.S.C. §636(b)(1)(A),

Rule 72(a), Fed. R. Civ. P.; Eastern Division Order No. 91-3, pt.
I., F., 5.

The motion must specifically designate the order or

part in question and the basis for any objection.

Responses to

objections are due fourteen days after objections are filed and
replies by the objecting party are due seven days thereafter.
The District Judge, upon consideration of the motion, shall set
aside any part of this Order found to be clearly erroneous or
contrary to law.
This order is in full force and effect, notwithstanding the
filing of any objections, unless stayed by the Magistrate Judge
or District Judge.

S.D. Ohio L.R. 72.4.
/s/ Terence P. Kemp
United States Magistrate Judge

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