Barnes v. Harris et al
Filing
52
MEMORANDUM DECISION AND ORDER denying 24 Motion to Dismiss for Failure to State a Claim ; granting 30 Motion for Judgment on the Pleadings and the 32 Motion to Dismiss the First Amended Complaint. Plaintiff shall have twenty-one (21) days to file a Second Amended Complaint in accordance with the terms of this Order. Failure to file a Second Amended Complaint will result in dismissal of this case. Signed by Judge Ted Stewart on 5/13/13. (ss)
IN THE UNITED STATES COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION
J. CANUTE BARNES, W. KING BARNES,
and ROBERT V. JONES, derivatively on
behalf of all similarly situated shareholders of
BARNES BANCORPORATION,
Plaintiffs,
MEMORANDUM DECISION AND
ORDER DENYING PLAINTIFFS’
MOTION TO DISMISS, GRANTING
DEFENDANTS’ MOTION FOR
JUDGMENT ON THE PLEADINGS,
AND GRANTING THE FDIC’S
MOTION TO DISMISS
vs.
CURTIS H. HARRIS, NED H. GILES,
DAVID N. BARNES, ROBERT L.
THURGOOD, JERRY W. STEVENSON,
MICHAEL D. PAVICH, GARY M.
WRIGHT, DOUGLAS STANGER, and
BARNES BANCORPORATION, a nominal
defendant,
Case No. 2:12-CV-1010 TS
Defendants.
This matter is before the Court on named Plaintiffs J. Canute Barnes, W. King Barnes,
and Robert V. Jones’ (“Plaintiffs”) Motion to Dismiss the FDIC; Defendants Curtis H. Harris,
Ned H. Giles, David N. Barnes, Robert L. Thurgood, Jerry W. Stevenson, Michael D. Pavich,
1
Gary M. Wright, Douglas Stanger, and Barnes Bancorporation’s (“Defendants”) Rule 12(c)
Motion for Judgment on the Pleadings Based on Plaintiff’s Lack of Standing; and Intervenor
FDIC-Receiver’s (“FDIC”) Motion to Dismiss the First Amended Complaint. For the reasons
explained more fully below, the Court will deny Plaintiffs’ Motion, grant Defendants’ Motion,
and grant the FDIC’s Motion.
I. BACKGROUND
Plaintiffs brought this action as a shareholder derivative suit against certain officers and
members of the board of directors of Barnes Bancorporation, alleging a breach of fiduciary duty.
Nominal Defendant Barnes Bancorporation (the “Holding Company”) is a registered bank
holding company whose primary asset is its subsidiary, Barnes Banking Company (the “Bank”).
The officers and directors of the Holding Company who are named as Defendants are also
officers and directors of the Bank (the “Individual Defendants”).
On January 15, 2010, the Bank was closed by the Utah Department of Financial
Institutions and the FDIC was appointed as receiver for the Bank. Plaintiffs originally filed their
Complaint on January 12, 2012, in Utah state court. On April 3, 2012, the FDIC filed a motion
to intervene as a Plaintiff, claiming that: “(a) Plaintiff asserts derivative claims which belong
exclusively to FDIC-Receiver; (b) numerous factual and legal determinations that must be made
in this case are potentially binding in any ensuing case filed by FDIC-Receiver against
Defendants; and (c) this case imperils the interests of others holding valid claims against Barnes
Banking Company, on whose behalf FDIC-Receiver is empowered to act.”1
1
Docket No. 2-16, at 1-2.
2
On October 29, 2012, the state court granted the FDIC-Receiver’s motion to intervene,2
and on October 30, 2012, the FDIC-Receiver removed the case to this Court.3 The next week,
Plantiffs filed a motion to remand, arguing that the FDIC was not properly a party to this case as
it had not filed a complaint or answer.4 In its January 15, 2013 order, the Court rejected these
arguments and found that it had proper jurisdiction over this case.5
II. LEGAL STANDARD
“A motion for judgment on the pleadings under Rule 12(c) is treated as a motion to
dismiss under Rule 12(b)(6).”6 The same standard is used when evaluating 12(b)(6) and 12(c)
motions.7
In considering a motion to dismiss for failure to state a claim upon which relief can be
granted under Rule 12(b)(6), all well-pleaded factual allegations, as distinguished from
conclusory allegations, are accepted as true and viewed in the light most favorable to the
nonmoving party.8 Plaintiffs must provide “enough facts to state a claim to relief that is plausible
2
Docket No. 2-35, at 2.
3
Docket No. 2.
4
Docket No. 7, at 2.
5
Docket No. 23, at 4.
Atl. Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1160 (10th Cir. 2000).
6
Jacobsen v. Deseret Book Co., 287 F.3d 936, 941 n.2 (10th Cir. 2002).
7
8
GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir. 1997).
3
on its face,”9 which requires “more than an unadorned, the-defendant-unlawfully-harmed-me
accusation.”10 “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.’”11
“The court’s function on a Rule 12(b)(6) motion is not to weigh potential evidence that
the parties might present at trial, but to assess whether the plaintiff’s complaint alone is legally
sufficient to state a claim for which relief may be granted.”12 As the Court in Iqbal stated,
only a complaint that states a plausible claim for relief survives a motion to
dismiss. Determining whether a complaint states a plausible claim for relief
will . . . be a context-specific task that requires the reviewing court to draw on its
judicial experience and common sense. But 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.13
In considering the adequacy of a plaintiff’s allegations in a complaint subject to a motion
to dismiss, a district court not only considers the complaint, but also “documents incorporated
into the complaint by reference, and matters of which a court may take judicial notice.”14 Thus,
notwithstanding the usual rule that a court should consider no evidence beyond
the pleadings on a Rule 12(b)(6) motion to dismiss, “[a] district court may
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 547 (2007).
9
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
10
Id. (quoting Twombly, 550 U.S. at 557) (alteration in original).
11
Miller v. Glanz, 948 F.2d 1562, 1565 (10th Cir. 1991).
12
Iqbal, 556 U.S. at 678-79 (alteration in original) (internal quotation marks and citations
omitted).
13
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007) (citing 5B
WRIGHT & MILLER § 1357 (3d ed. 2004 & Supp. 2007)).
14
4
consider documents referred to in the complaint if the documents are central to the
plaintiff’s claim and the parties do not dispute the documents’ authenticity.”15
III. DISCUSSION
A.
PLAINTIFFS’ MOTION TO DISMISS
Plaintiffs’ argue that the Court should dismiss the FDIC because the FDIC has not filed a
complaint or answer, and because the FDIC has indicated that it no longer intends to pursue any
claims in this matter. However, subsequent to the filing of Plaintiffs’ Motion, the FDIC filed its
own Motion to Dismiss Plaintiffs’ Complaint, alleging that Plaintiffs’ claims belong exclusively
to the FDIC.16
It may be true that at one point the FDIC simply intended to withdraw from this matter.
However, the FDIC has not done so. In fact, the FDIC’s continued participation in scheduling
conferences, briefing motions before the Court, and filing of its own Motion to Dismiss show
that the FDIC is an active participant. In addition, the FDIC has shown that it intends to protect
its interests in the claims it alleges belong solely to it, and to pursue them only as it deems
appropriate.
As the FDIC has filed its own Motion to Dismiss, and is otherwise a fully participating
party to this litigation, the Court will deny Plaintiffs’ Motion.
Alvarado v. KOB-TV, LLC, 493 F.3d 1210, 1215 (10th Cir. 2007) (quoting Jacobsen v.
Deseret Book Co., 287 F.3d 936, 941 (10th Cir. 2002)).
15
16
Docket No. 32.
5
B.
REMAINING MOTIONS
The FDIC’s Motion to Dismiss and the Defendants’ Motion for Judgment on the
Pleadings are largely based on the same legal arguments, and they will be considered together.
The Federal Institution Reform, Recovery and Enforcement Act (“FIRREA”) provides
that the FDIC “shall, as conservator or receiver, and by operation of law, succeed to . . . all rights,
titles, powers, and privileges of the insured depository institution, and of any stockholder,
member, accountholder, depositor, officer, or director of such institution with respect to the
institution and the assets of the institution . . . .”17 Defendants and the FDIC argue that FIRREA
gives the FDIC the exclusive right to pursue, or not pursue, Plaintiffs’ claims. Therefore,
Plaintiffs’ claims must be dismissed because they lack standing to bring them.
The question of whether a claim is a derivative claim belonging to the business entity
itself or a direct claim belonging to a shareholder is a question of state law.18 Under Utah law,
“[a]ctions alleging mismanagement, breach of fiduciary duties, and appropriation or waste of
corporate opportunities and assets generally belong to the corporation, and therefore, a
shareholder must bring such actions on its behalf.”19 In a direct action, on the other hand, “the
plaintiff can prevail without showing an injury to the corporation—the shareholder need show
only an injury to him or herself that is distinct from that suffered by the corporation.”20
12 U.S.C.A. § 1821(d)(2)(A).
17
See Combs v. PriceWaterhouse Coopers LLP, 382 F.3d 1196, 1200 (10th Cir. 2004)
(analyzing whether or not a Plaintiff had alleged a derivative claim under state law).
18
Aurora Credit Servs., Inc. v. Liberty W. Dev., Inc., 970 P.2d 1273, 1280 (Utah 1998).
19
Id.
20
6
Plaintiffs agree that FIRREA operates to prevent them from bringing claims against the
officers and directors of the Bank. However, Plaintiffs have brought their Complaint against the
officers and directors of the Holding Company, a separate entity from the Bank, and FIRREA
does not prevent such suits. This matter is complicated by the fact that all of the Individual
Defendants serve in dual roles as officers and directors of both the Bank and the Holding
Company. Plaintiffs argue that regardless of the fact that the Individual Defendants are officers
and directors of the Bank, they owe separate duties to the shareholders of the Holding Company,
and that those duties were breached.
Although the Tenth Circuit has not considered the impact that FIRREA has on claims
brought against a bank holding company when the officers and directors of the holding company
and the bank are the same, several other courts have undergone this analysis. In Lubin v. Skow,21
the trustee in bankruptcy of a bank holding company filed a complaint against the former officers
of both a failed bank and its holding company. The bankruptcy trustee did not specify whether
his claims were against the officers in their roles with the bank or the holding company, so the
Eleventh Circuit analyzed the claims from both perspectives.22 The court recognized three
different avenues under which the trustee might be bringing its claims: 1) as a derivative suit
against the bank’s officers brought on behalf of the bank by the holding company as the bank’s
sole shareholder; 2) as a direct suit against the bank’s officers brought on behalf of the holding
382 F. App’x 866, 869 (11th Cir. 2010).
21
Id. at 870.
22
7
company; and 3) as a derivative suit against the officers of the holding company brought on
behalf of the holding company.23
The court held that, under FIRREA, only the FDIC could bring derivative claims against
the bank’s officers, and dismissed all claims brought under the first avenue.24 The court
recognized that FIRREA did not prevent a direct claim against the bank’s officers. Nevertheless,
the court indicated that the trustee had
only alleged a derivative claim disguised as a direct claim. The alleged harm to
the Holding Company stems from the Bank officers’ management of Bank assets.
This harm is inseparable from the harm done to the Bank. That the Bank officers’
poor business choices reduced the value of the Holding Company’s investment
does not alter the fact that the harm is decidedly a derivative one.25
Finally, the court recognized that the defendants owed separate duties in their roles as
officers of the holding company, and that FIRREA did not apply to any duties they may have
breached in that role.26 However, the court found that “the Complaint still only alleges a breach
of duty in their roles as officers of the Bank.”27 Implicit in the court’s analysis is a recognition
that, although the defendants owed separate duties to the holding company, they operated in a
different role with the holding company than they did as officers and directors of the bank. In
their roles as officers and directors of the holding company, the defendants simply did not have
Id. at 870-72.
23
Id. at 871.
24
Id. at 871-72.
25
26
Id. at 872.
Id. at 873.
27
8
direct control over the operations and management of the bank, as they were limited to the
powers the holding company had as a shareholder of the bank. Thus, the court expressly found
that its opinion did not extend to potential allegations of misconduct in their holding company
role, such as “failing to inform the Holding Company board about bank mismanagement or by
failing to influence the Holding Company . . . to respond to this mismanagement . . . . Neither of
these allegations, nor any other allegations regarding these defendant’s conduct as Holding
Company officers, appear in the Complaint.”28
Shortly thereafter, in In re Bank United Financial Corp.,29 a bankruptcy court examined
claims brought against officers of a bank holding company in light of the Lubin precedent. In
Bank United, the court rejected the FDIC’s argument that “in every case where a bank holding
company has suffered injuries due to a bank failure, any claims by the holding company caused
by that failure can only be derivative claims, at least where the boards have the same, or almost
the same, constituency.”30
On review, the district court agreed that a plaintiff could avoid “the pitfalls of Lubin by
drafting a proposed claim that not only targets officers of the holding company, but also that is
based upon actions they took at the holding company level.”31 This was true “even if [the breach
Id.
28
442 B.R. 49, 52 (Bankr. S.D. Fla. 2010).
29
Id. at 56-57.
30
Official Comm. of Unsecured Creditors of Bankunited Fin. Corp. v. Fed. Deposit Ins.
Corp., No. 1:11-CV-20305, Docket No. 18, at 11 (Sep. 28, 2011 S.D. Fla).
31
9
was] also a breach of their duties to the Bank.”32 However, when the claim “stems from acts at
the Bank level and from harm the Bank suffered” and does not allege “a unique or distinct action
harm to the Holding Company,” the claim is a derivative bank level claim that may only be
brought by the FDIC.33 “[I]n a case of overlapping officers, the ‘focus must be on the nature of
the act, or failure to act, as well as the injury caused, and not solely on who is the actor.’”34
Under this standard, the court found that claims that the holding company officers failed
to “exercise vigilant control and attention to the financial accounting and reporting of the
Holding Company and . . . the Bank, and [failed] to make sure the Bank was properly managed”
were derivative claims that must be dismissed as claims that stemmed from mismanagement at
the bank level.35 However, claims that the holding company’s officers failed to provide adequate
information to the holding company’s board, resulting in damages from a $34 million repurchase
of holding company stock, the payment of over $2 million in dividends, and an $80 million
capital infusion were determined not to be derivative claims, as they were claims based on
conduct at the holding company level and alleged damages unique to the holding company.36
Id.
32
Id. at 5.
33
Id. at 11 (quoting Bank United, 442 B.R. at 58).
34
Id. at 5.
35
36
Id. at 7 (citing Bank United, 442 B.R. at 59-60).
10
In the most recent case to consider these arguments, In re Beach First National
Bancshares, Inc.,37 the Fourth Circuit reached a similar result. Although the complaint included
claims against the defendants only in their roles as officers and directors of the holding company,
the court found that the claims were actually derivative claims belonging exclusively to the FDIC
under FIRREA.38 The court reasoned that, “[w]hile the Directors could, conceptually, have
undertaken actions uniquely and separately harmful to [the holding company] (as opposed to the
Bank), the Trustee has pled primarily causes of action for liability derivative of the alleged
failures at the Bank level.”39
The court went on to analyze specific claims, finding that the trustee lacked standing
whenever the act or harm occurred primarily at the bank level.40 The dismissed claims included
claims based on the directors’ responsibilities for oversight over the operations and management
of the bank, including a failure to cause proper controls to be implemented, a failure to
implement and enforce prudent lending and underwriting standards, and a failure to appoint
qualified directors to the bank’s board.41 The court found that the injury at the holding company
702 F.3d 772 (4th Cir. 2012).
37
Id. at 779.
38
Id. at 777.
39
Id. at 779-80.
40
Id. at 778-79.
41
11
level was a result “of direct injury to the Bank when the Bank-level fiduciaries failed to properly
operate the Bank.”42
In the case presently before the Court, Plaintiffs assert that the Individual Defendants are
being sued “as officers and directors of the [Holding] Company and not as officers and directors
of the Bank.”43 As reasoned in Lubin, Bank United, and Beach First, the Individual Defendants
owed separate duties to the shareholders of the respective entities for which they were officers or
directors. Therefore, even though FIRREA gives the FDIC ownership of all derivative claims
against the Bank’s officers and directors, it does not prevent claims against the officers and
directors of the Holding Company, despite the Individual Defendants’ dual roles. Similarly, the
fact that the Individual Defendants are officers and directors of the Holding Company does not
give Plaintiffs the ability to bring claims based on wrongdoing that occurred at the Bank level,
regardless of how Plaintiffs word their claims.
Plaintiffs’ allege that the Individual Defendants breached fiduciary duties they owed to
the Holding Company. Plaintiffs describe the alleged violations of the Individual Defendants in
paragraph 22 of the Amended Complaint and its subparagraphs. The Individual Defendants
argue that Plaintiffs lack standing to bring all claims except for those contained in paragraphs
22(h)-(l) of the Amended Complaint.
Id. at 779-80.
42
43
Docket No. 21, at 2.
12
1.
BANK LEVEL ALLEGATIONS
In Paragraphs 22(a)-(g), Plaintiffs allege that the Individual Defendants violated their
fiduciary duties to the Holding Company by (a) permitting the Bank to extend credit in violation
of laws, regulations, and policies, and failing to employ sound internal controls over
underwriting policies; (b) permitting unsafe and unsound concentrations of credit, resulting in
substantial losses to the Bank; (c) failing to heed the warnings and directives of the Bank’s
regulators, resulting in the closing of the Bank; (d) allowing the Bank to engage in risky CRE and
ADC loans; (e) allowing the Bank to hire persons who lacked competence and experience into
managerial positions; (f) failing to control the actions of Mr. Curtis H. Harris, or to question his
decision regarding the number and size of high-risk loans; and (g) allowing the Bank to continue
to pay excessive annual compensation to Mr. Harris.
Although Plaintiffs present these allegations as violations that occurred at the Holding
Company (shareholder) level, it is clear that all of these alleged violations were committed by the
officers and directors of the Bank. Had the officers and directors of the Bank been separate from
the officers and directors of the Holding Company, Plaintiffs’ allegations would have consisted
of claims for failing to manage the operations of the Bank from the Holding Company level.
However, the officers and directors at the Holding Company level simply do not have the ability
to perform the actions alleged in the Complaint. It is telling that Plaintiffs must phrase these
allegations in terms of “allowing” or “permitting” the Bank to make certain decisions or take
certain actions, or for “failing to control” the actions of Bank officers.
13
It is the Bank’s board of directors that has direct oversight over internal controls,
management decisions, loan policies, hiring policies, and the other allegations in paragraphs
22(a)-(g). The officers and directors of the Holding Company are limited by the powers of the
Holding Company, and those powers include only those of a shareholder of the Bank. The
shareholder may have some authority to remove or replace bank directors if necessary, or to sell
the shareholder’s investment, but it does not have the authority to direct management decisions
or perform the actions alleged in 22(a)-(g).
Not only did the underlying actions supporting these claims all occur at the Bank level,
the harm did as well. The ultimate harm resulting from these allegations was the Bank’s failure.
Certainly, this hurt the Holding Company, but only as a flow-through from the losses incurred by
the failure of the Bank. In short, the Holding Company’s investment went sour. Plaintiffs have
failed to allege any distinct or unique damages that were suffered by the Holding Company that
were the result of actions taken at the Holding Company level. Therefore, the Court will dismiss
Plaintiffs’ claims with prejudice insofar as they relate to the allegations contained in paragraphs
22(a)-(g) of Plaintiffs’ Amended Complaint.
2.
HOLDING COMPANY LEVEL ALLEGATIONS
In paragraphs 22(h)-(l), Plaintiffs’ allegations concern conduct that, on its face, appears to
have occurred at the Holding Company level. However the nature of the damages suffered as a
result of the conduct alleged is not clear from the pleadings.
In paragraphs 22(h) and 22(i), Plaintiffs allege that the Individual Defendants
misappropriated a $9 million tax refund and an additional $265,000 from an unspecified source.
14
It is not clear if the $9 million tax refund and the $265,000 were assets of the Bank or the
Holding Company, how the Individual Defendants misappropriated this money, or whether the
damages were suffered only as a result of the Bank’s failure or as a result of other specific
conduct of the Individual Defendants.
In paragraphs 22(j)-(l), Plaintiffs allege that the Individual Defendants (1) retained and
paid for a law firm to represent the Bank’s officers and directors using company funds; (2) issued
or acquired shares of Company stock for inadequate consideration between 2006 and 2010, with
no details of these alleged transactions or why the consideration was inadequate; and (3) failed to
convene regular shareholders meetings and advise Holding Company shareholders of important
information during 2011 and 2012. However, the damages alleged by Plaintiffs appear to be
results of the Bank’s failure rather than results of any of the conduct described in paragraphs
22(j)-(l). Likewise, Plaintiffs have not described how this conduct was a breach of the Individual
Defendants’ fiduciary duties.
Without further factual development or explanation of how this conduct constitutes a
breach of fiduciary duty or is related to the damages alleged, these claims do not meet the
pleading standards set forth in Iqbal. Therefore, the Court will dismiss these claims. However,
as paragraphs 22(h)-(l) appear to be alleging conduct that occurred at the Holding Company
level, the Court will allow the Plaintiffs to re-plead the claims in paragraphs 22(h)-(l) in a Second
Amended Complaint.
15
IV. CONCLUSION
It is therefore
ORDERED that Plaintiffs’ Motion to Dismiss the FDIC (Docket No. 24) is DENIED. It
is further
ORDERED that Defendants’ Rule 12(c) Motion for Judgment on the Pleadings Based on
Plaintiffs’ Lack of Standing (Docket No. 30) and FDIC-Receiver’s Motion to Dismiss the First
Amended Complaint (Docket No. 32) are GRANTED. Plaintiffs claims based on the allegations
contained in paragraphs 22(h)-(l) of Plaintiffs’ Amended Complaint are DISMISSED WITHOUT
PREJUDICE. Plaintiffs’ claims based on the remaining allegations in the Amended Complaint
are DISMISSED WITH PREJUDICE. Plaintiff shall have twenty-one (21) days to file a Second
Amended Complaint in accordance with the terms of this Order. Failure to file a Second
Amended Complaint will result in dismissal of this case.
DATED May 13, 2013.
BY THE COURT:
_____________________________________
TED STEWART
United States District Judge
16
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