Beatty et al v. JRMB II Inc et al

Filing 22

ORDER denying 13 defendants' Motion to Dismiss (as more fully set out in order). Signed by Honorable Vicki Miles-LaGrange on 6/6/2013. (ks)

IN THE UNITED STATES DISTRICT COURT FOR THE
WESTERN DISTRICT OF OKLAHOMA
BARBARA BOYD BEATTY, et al.,
Plaintiffs,
v.
JRMB II, INC., et al.,
Defendants.

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Case No. CIV-12-1021-M

ORDER
Before the Court is defendants’ Motion to Dismiss, filed October 19, 2012. On November
27, 2012, plaintiffs filed their response, and on December 11, 2012, defendants filed their reply.
Based upon the parties’ submissions, the Court makes its determination.
I.

Introduction
Plaintiffs are three former minority shareholders in J.R. Montgomery Bancorporation

(“JRMB”), FSNB, and CNB (collectively, “the Companies”). Plaintiffs allege that, on December
28, 2010, they were cashed out of their ownership by certain transactions of defendants Zelda M.
Davis, John R. Davis, Roma Lee Porter, George L. Porter, and Tresea M. Moses (collectively, “the
Individuals”) during a merger and reorganization. The Office of Comptroller of the Currency
(“OCC”) approved defendants’ merger and reorganization.1

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The Comptroller’s Licensing Manual: Business Combinations, December 2006 notes
that “approval”: (1) “[r]eflects only its view that the transaction does not contravene applicable
competitive standards imposed by law and is consistent with regulatory policies relating to safety
and soundness”; (2) “[i]s not an OCC opinion that the proposed combination is financially favorable
to the stockholders or that the OCC has considered the adequacy of the terms of the transaction”; and
(3) “[i]s not an endorsement of, or recommendation for the combination.” The Comptroller’s
Licensing Manual: Business Combinations, December 2006, attached as Exhibit 1 to Plaintiff’s
Response and Objections to Defendants’ Motion to Dismiss.

The Individuals collectively controlled the Companies, comprising a majority ownership and
a majority of the directors and executive officers. According to plaintiffs, each of the Individuals
have a familial relationship to the others. Plaintiffs allege that they conspired and orchestrated a
scheme to squeeze out minority shareholders of the Companies for the purpose of consolidating
familial ownership and control of the Companies. Plaintiffs further allege that the Individuals, acting
without any Board of Director approval and without observing corporate formalities, selected the
shareholders who would be allowed to continue and the shareholders who would be eliminated.
According to plaintiffs, defendants mailed three information statements to minority
shareholders, with each statement containing misleading statements and omissions of material facts.
Plaintiffs allege that if the material facts were properly disclosed, plaintiffs would have exercised
their appraisal rights and had their stock valued in an appraisal proceeding.
On September 13, 2012, plaintiffs filed their Complaint, alleging, inter alia, violations of
Section 10(b) of the Exchange Act and Rule 10b-5. Defendants move to dismiss this matter on the
following grounds: (1) preemption; (2) plaintiffs have failed to state a claim under Section 10(b) or
Rule 10b-5; and (3) plaintiffs have failed to state their allegations with the requisite particularity.
II.

Standard
A.

Federal Rule of Civil Procedure 12(b)(6)

Regarding the standard for determining whether to dismiss a claim pursuant to Rule 12(b)(6),
the United States Supreme Court has held:
To survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to state a claim to relief that is
plausible on its face. A claim has facial plausibility when the plaintiff
pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged. The
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plausibility standard is not akin to a “probability requirement,” but it
asks for more than a sheer possibility that a defendant has acted
unlawfully. Where a complaint pleads facts that are merely consistent
with a defendant’s liability, it stops short of the line between
possibility and plausibility of entitlement to relief.
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (internal quotations and citations omitted). Further,
“where the well-pleaded facts do not permit the court to infer more than the mere possibility of
misconduct, the complaint has alleged - but it has not shown - that the pleader is entitled to relief.”
Id. (internal quotations and citations omitted). Additionally, “[a] pleading that offers labels and
conclusions or a formulaic recitation of the elements of a cause of action will not do. Nor does a
complaint suffice if it tenders naked assertion[s] devoid of further factual enhancement.” Id. at 1949
(internal quotations and citations omitted).
B.

Fraud

Federal Rule of Civil Procedure 9(b) provides, in pertinent part: “In alleging fraud or mistake,
a party must state with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ.
P. 9(b). “At a minimum, Rule 9(b) requires that a plaintiff set forth the ‘who, what, when, where,
and how’ of the alleged fraud . . . and must set forth the time, place, and contents of the false
representation, the identity of the party making the false statements and the consequences thereof.”
United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 726-27 (10th
Cir. 2006) (internal quotations and citations omitted).
Additionally, in the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C.
§ 78u-4(b), Congress has set forth further pleading requirements for private securities fraud actions.
See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007). Specifically, “[t]he
PSLRA requires plaintiffs to state with particularity both the facts constituting the alleged violation,
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and the facts evidencing scienter, i.e., the defendant’s intention ‘to deceive, manipulate, or defraud.’”
Id. (citing 15 U.S.C. § 78u-4(b)(1), (2); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194, and n. 12).
“As set out in § 21D(b)(2) of the PSLRA, plaintiffs must ‘state with particularity facts giving rise
to a strong inference that the defendant acted with the required state of mind.’” Id. at 314 (quoting
15 U.S.C. § 78u-4(b)(2)).
[T]o determine whether a complaint’s scienter allegations can survive
threshold inspection for sufficiency, a court governed by § 21D(b)(2)
must engage in a comparative evaluation; it must consider, not only
inferences urged by the plaintiff . . . , but also competing inferences
rationally drawn from the facts alleged. An inference of fraudulent
intent may be plausible, yet less cogent than other, nonculpable
explanations for the defendant’s conduct. To qualify as “strong”
within the intendment of § 21D(b)(2), we hold, an inference of
scienter must be more than merely plausible or reasonable—it must
be cogent and at least as compelling as any opposing inference of
nonfraudulent intent.
Id.
III.

Discussion
A.

Preemption

When addressing questions of preemption, a court must begin its analysis “with the
assumption that the historic police powers of the States [are] not to be superseded by the Federal Act
unless that was the clear and manifest purpose of Congress.” Altria Grp., Inc. v. Good, 555 U.S. 70,
77 (2008) (internal quotation and citation omitted). In determining whether a federal statute
preempts state law, the United States Supreme Court has opined that a court must answer a question
of congressional intent. Barnett Bank of Marion Cnty., N.A. v. Nelson, 517 U.S. 25, 30 (1996)
(citations omitted). Specifically, “[d]id Congress, in enacting the Federal Statute, intend to exercise
its constitutionally delegated authority to set aside the laws of a State? If so, the Supremacy Clause

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requires courts to follow federal, not state, law.” Id. The Supreme Court further opined that:
Sometimes courts, when facing the pre-emption question, find
language in the federal statute that reveals an explicit congressional
intent to pre-empt state law. More often, explicit pre-emption
language does not appear, or does not directly answer the question.
In that event, courts must consider whether the federal statute’s
“structure and purpose,” or nonspecific statutory language,
nonetheless reveal a clear, but implicit, pre-emptive intent. A federal
statute, for example, may create a scheme of federal regulation “so
pervasive as to make reasonable the inference that Congress left no
room for the States to supplement it.” Alternatively, federal law may
be in “irreconcilable conflict” with state law. Compliance with both
statutes, for example, may be a “physical impossibility,” or, the state
law may “stan[d] as an obstacle to the accomplishment and execution
of the full purposes and objectives of Congress.”
Id. at 31 (internal citations omitted).
The National Bank Act, 12 U.S.C. § 215a, provides, in pertinent part: “One or more national
banking associations or one or more State banks, with the approval of the Comptroller, under an
agreement not inconsistent with this subchapter, may merge into a national banking association
located within the same State, under the charter of the receiving association.” 12 U.S.C. § 215a(a).
Thus, the Act “governs the merger of national banks with state or other national banks.” State of
Colo. ex rel. Colo. State Banking Bd. v. Resolution Trust Corp., 926 F.2d 931, 938 n.14 (10th Cir.
1991).
Congress originally enacted § 215a’s sections governing bank mergers and consolidations
with the goal of simplifying the merger of national bank associations. Comty. Bank of Ariz. v.
G.V.M. Trust, 366 F.3d 982, 986 (9th Cir. 2004); NoDak Bancorporation v. Clarke, 998 F.2d 1416,
1422 (8th Cir. 1993). “When 12 U.S.C. § 215a(b) was amended in 1952, Congress’ motivation was
to bring the National Bank Act into parity with state statutes.” NoDak Bancorporation, 998 F.2d

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at 1422. Congress final procedural amendments to § 215a sought to further simplify and expedite
the merger and consolidation process. Id.
Having carefully reviewed the parties’ submissions, the Court finds that § 215a does not
preempt plaintiffs’ Oklahoma tort and securities claims. Here, the crux of defendants’ argument is
that “Section 215a’s purpose . . . would be defeated if [d]efendants are subjected to a collateral
attack arising from a merger procedure and appraisal methods that are governed by federal banking
law.” Defendant’s Motion to Dismiss [docket 13] at 27. However, absent further argument as to
a specific “irreconcilable conflict” between § 215a and the Oklahoma tort and securities laws at bar,
the Court finds that said state laws do not stand as an obstacle to the accomplishment and execution
of § 215a’s purposes. Moreover, given that one of § 215a’s amendments was enacted to bring §
215a into parity with state statutes, the Court finds that § 215a is not so pervasive as to reasonably
infer that Congress left no room for states to supplement it. Therefore, the Court finds that Congress
did not intend to set aside Oklahoma’s tort and securities laws when it enacted § 215a.
Accordingly, the Court finds that plaintiffs’ Oklahoma tort and securities claims are not
preempted by § 215a.
B.

Section 10(b) of the Exchange Act and Rule 10b-5

Section 10(b) of the Exchange Act provides:
It shall be unlawful for any person, directly or indirectly, by the use
of any means or instrumentality of interstate commerce or of the
mails, or of any facility of any national securities exchange–
*
*
*
To use or employ, in connection with the purchase or sale of any
security registered on a national securities exchange or any security
not so registered, or any securities-based swap agreement any
manipulative or deceptive device or contrivance in contravention of
such rules and regulations as the Commission may prescribe as
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necessary or appropriate in the public interest or for the protection of
investors.
15 U.S.C. § 78j(b). Rule 10b-5 provides, in pertinent part:
It shall be unlawful for any person, directly or indirectly, by the use
of any means or instrumentality of interstate commerce, or of the
mails or of any facility of any national securities exchange,
*
*
*
To make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not
misleading . . . .
17 C.F.R. § 240.10b-5(b). Furthermore, the Tenth Circuit has held that “to state a claim under
Section 10(b) of the Act and Rule 10b-5 a plaintiff must allege: ‘(1) a misleading statement or
omissions of a material fact; (2) made in connection with the purchase or sale of securities; (3) with
intent to defraud or recklessness; (4) reliance; and (5) damages.’” City of Phila. v. Fleming Cos.,
Inc., 264 F.3d 1245, 1257-58 (10th Cir. 2001) (citing Grossman v. Novell, Inc., 120 F.3d 1112, 1118
(10th Cir. 1997)).
1.

Misleading Statement or Omission of Material Facts

Defendants assert that plaintiffs have not alleged that defendants made misleading statements
or omissions of material facts regarding the merger. Plaintiffs contend that they have alleged false
statements and omissions of material facts against defendants and that they have satisfied the
pleading requirements for private securities fraud actions.
A statement or omission is only material “‘if a reasonable investor would consider it
important in determining whether to buy or sell stock,’ and if it would have ‘significantly altered the
total mix of information available’ to current and potential investors.” City of Phila, 264 F.3d at
1265 (quoting Grossman v. Novell, Inc., 120 F.3d 1112, 1119 (10th Cir. 1997)).
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Having carefully reviewed plaintiffs’ Complaint, the Court finds that plaintiffs have alleged
with sufficient particularity that defendants made misleading statements or omissions of material
facts in regards to the merger in this matter. Particularly, plaintiffs alleged, inter alia,2 that the
information statements: (1) failed to disclose that the appraisal obtained to evaluate the Companies’
shares employed discount rates; (2) omitted the dividend history, the current and historical book
value, and current and historical financial data of the Companies; and (3) failed to disclose the
factors the Companies used in determining which shareholders would be extended the opportunity
to participate in the exchange offers. Based upon plaintiffs’ allegations, plaintiffs would have
exercised their appraisal rights and had their stock valued in an appraisal proceeding. The Court
further finds that a reasonable investor would consider the statements and omissions referenced in
plaintiffs’ Complaint important in determining whether to sell stock. Finally, the Court finds that
the referenced statements or omissions would have significantly altered the total mix of information
available to plaintiffs and other investors.
Accordingly, the Court finds that plaintiffs have pled with particularity that defendants
provided misleading statements or omissions of material facts made in connection with the purchase
or sale of securities.
2.

Intent to Defraud or Recklessness

As set forth in Part II.B, “plaintiffs must ‘state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind.’” Tellabs, Inc. v. Makor Issues
& Rights, Ltd., 551 U.S. 314 (quoting 15 U.S.C. § 78u-4(b)(2)). “[C]ourts must consider the

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Plaintiffs have alleged approximately thirteen misleading statements or omissions of
material fact related to the information statements. See Complaint [docket no. 1] 18-29.
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complaint in its entirety . . . . The inquiry is whether all of the facts alleged, taken collectively, give
rise to a strong inference of scienter.” Id. at 310 (emphasis in original). “[I]n determining whether
the pleaded facts give rise to a ‘strong’ inference of scienter, the court must take into account
plausible opposing inferences.” Id. “A complaint will survive only if a reasonable person would
deem the inference of scienter cogent and at least as compelling as any plausible opposing inference
one could draw from the facts alleged.” Id.
Further, to establish scienter in a securities fraud case alleging non-disclosure of potentially
material facts, the plaintiff must demonstrate that (1) the defendant knew of the potentially material
fact, and (2) the defendant knew that failure to reveal the potentially material fact would likely
mislead investors. See id. at 1261. In pleading scienter, “the important issue [ ] is not whether
Defendants knew the underlying facts, but whether Defendants knew that not disclosing the
[underlying facts] posed substantial likelihood of misleading a reasonable investor.” Id. at 1264.
“The requirement of knowledge in this context may be satisfied under a recklessness standard by the
defendant’s knowledge of a fact that was so obviously material that the defendant must have been
aware both of its materiality and that its non-disclosure would likely mislead investors.” Id. at 1261.
Here, viewing the Complaint in its entirety, and taking all facts collectively, the Court finds
that plaintiffs have sufficiently alleged scienter. Plaintiffs specifically allege that the Individuals
shared a familial relationship and collectively devised a scheme to eliminate non-familial minority
shareholders from ownership. The Court finds that, based upon the alleged familial relationship
shared by the Individuals, coupled with misleading statements and omissions set forth in Part III.B.1,
a reasonable person would deem the inference of scienter cogent and at least as compelling as any
plausible opposing inference one could draw from the facts alleged.
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Accordingly, the Court finds that plaintiffs have sufficiently pled that the Individuals had the
requisite intent to defraud or recklessness.
3.

Reliance

In order to state a claim under section 10(b), a plaintiff must establish
that, “in connection with the purchase or sale of a security, ‘the
defendant, with scienter, made a false representation of a material fact
upon which the plaintiff justifiably relied to his or her detriment.’”
Reliance is an element of the section 10(b) cause of action because it
“provides the requisite causal connection between a defendant’s
misrepresentation and a plaintiff's injury.”
Joseph v. Wiles, 223 F.3d 1155, 1161 (10th Cir. 2000) (internal citations omitted).
Further, the United States Supreme Court has “generally rejected theories of causation
presented by shareholders whose participation was not needed for corporate action, and held that in
most instances where the votes of majority shareholders were sufficient to effect a merger without
minority approval, a minority shareholder could not prove causation under § 14(a), despite the
receipt of a misleading proxy statement.” Boone v. Carlsbad Bancorporation, Inc., 972 F.2d 1545,
1557 (10th Cir. 1992) (citing Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991) (internal
citations omitted)). The Tenth Circuit has noted that said reasoning also applies to § 10(b) claims.
See id. To that end,
in the context of short-form or “squeeze out” mergers, it has been
held that in order to state a claim under section 10b or Rule 10b-5,
“forced sellers,” . . . must allege that they had a means to prevent the
forced sale which they could and would have pursued had they known
of the omissions and misrepresentations, to establish materiality
and/or reliance.
Eastwood v. Nat’l Bank of Commerce, Atlus, Okla., 673 F. Supp. 1068, 1072 (W.D. Okla. 1987)
(citations omitted).

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In the case at bar, the Court finds that plaintiffs have sufficiently satisfied the reliance
element. Specifically, accepting plaintiff’s allegations as true,3 plaintiffs would have exercised their
appraisal rights and “would have taken additional steps . . . [,] such as instituting an action for
injunctive relief.” Complaint [docket no. 1] at ¶ 66. Although plaintiffs’ participation, as minority
shareholders, may not have been needed for the alleged squeeze-out sale, the Court finds that
plaintiffs’ lost state remedy of injunctive relief satisfies the reliance requirement.4
Accordingly, the Court finds that plaintiffs have sufficiently pled the reliance element.5
C.

Fiduciary Duty and State Security Claims
Defendants move to dismiss plaintiffs’ claims for breach of fiduciary duty and violation of

Oklahoma Uniform Securities Act of 2004 because (1) the Court does not have supplemental
jurisdiction if it dismisses plaintiffs’ § 10(b) and Rule 10b-5 claims; and (2) identical claims have
been dismissed in a previous fiduciary action. Plaintiffs contend that their claims should not be
dismissed because their § 10(b) and Rule 10b-5 claims are not dismissed and because the previous
case involved different parties.
Having carefully reviewed the parties’ submissions, the Court finds that plaintiffs’ claims for
breach of fiduciary duty and violation of Oklahoma Uniform Securities Act of 2004 should not be
dismissed. See 28 U.S.C. § 1367(c). Here, the Court retains supplemental jurisdiction over

3

When ruling on a motion to dismiss, a court must accept as true all of the factual
allegations contained in the complaint. Erickson v. Pardus, 551 U.S. 89, 93-94 (2007).
4

In Boone, the Tenth Circuit noted that it had not reached the question of whether a cause
of action for lost state remedies, such as an injunction, satisfies the causation element. Boone, at
972 F.2d at 1558 n. 12.
5

Defendants have not asserted argument as to the second and fifth elements set forth in
City of Phila, 264 F.3d 1257-58.
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plaintiffs’ state law claims because, as discussed above, the Court has not dismissed plaintiffs’ §
10(b) and Rule 10b-5 claims. Moreover, the Court finds that the previous fiduciary action has no
preclusive effect because defendants have failed to established that plaintiffs were parties or privies
to the previous fiduciary action case. See Brady v. UBS Fin. Servs., Inc., 538 F.3d 1319, 1327 (10th
Cir. 2008) (requiring the same identity of parties or the privies in order to have preclusive effect).
Defendants also moved to dismiss plaintiffs’ § 10(b) and Rule 10b-5 claims based upon
Melnyk v. Consonus, Inc., No. 2:03–CV–00528 DB, 2005 WL 2263950 (D. Utah Sept. 12, 2005) and
Boone, 972 F.2d at 1557. However, the Court finds that Menlyk, 2005 WL 2263950, is inapplicable
as said case analyzed Utah securities claims in regards to a short form merger, whereas the case at
bar involves Oklahoma securities claims. Additionally, Boone rejected theories of causation based
solely on allegations of breach of fiduciary duty under state law, but does not impact whether a
plaintiff can bring a state fiduciary claim based upon the “entire fairness” of the merger. Boone, 972
F.2d at 1557.
IV.

Conclusion
For the reasons set forth above, the Court DENIES defendants’ Motion to Dismiss [docket

no. 13].
IT IS SO ORDERED this 6th day of June, 2013.

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