Badger v. Southern Farm Bureau Life Ins. Co.

• Decision Date: 30 July 2010
• Docket Number: No. 09-12999.,09-12999.
• Citation: 612 F.3d 1334
• Parties: Gene BADGER, John Love, Marvin Evans, Sid Banack, John Willis, all on behalf of themselves and all others similarly situated, Plaintiffs-Appellees,v.SOUTHERN FARM BUREAU LIFE INSURANCE COMPANY, a Mississippi Corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

612 F.3d 1334

Gene BADGER, John Love, Marvin Evans, Sid Banack, John Willis, all on behalf of themselves and all others similarly situated, Plaintiffs-Appellees,v.SOUTHERN FARM BUREAU LIFE INSURANCE COMPANY, a Mississippi Corporation, Defendant-Appellant.

No. 09-12999.

United States Court of Appeals Eleventh Circuit.

July 30, 2010.

COPYRIGHT MATERIAL OMITTED

Kevin Christopher Newsom, Bradley Arant Boult Cummings, LLP, Birmingham, AL, B. Lyle Robinson, James W. O'Mara, Phelps Dunbar, LLP, W. Wayne Drinkwater, Bradley Arant Boult Cummings, LLP, Jackson, MS, for Defendant-Appellant.

Robert W. Thielhelm, Jr., Jerry R. Linscott, Baker & Hostetler, LLP, Orlando, FL, for Plaintiffs-Appellees.

Carter G. Phillips, Sidley Austin LLP, Washington, DC, for Wash. Legal Foundation, Amicus Curiae.

Ed R. Haden, Balch & Bingham, LLP, Birmingham, AL, for Birdthistle, Bullard, Butler, Carney, DeBow, Amici Curiae.

Appeal from the United States District Court for the Middle District of Florida.

Before EDMONDSON, CARNES and ANDERSON, Circuit Judges.

ANDERSON, Circuit Judge:

Plaintiffs-Appellees Badger et al., some of the shareholders of Plaintiffs' Shareholders Corporation (“PSC”), brought this shareholders' derivative suit on behalf of PSC against Defendant-Appellant Southern Farm Bureau Life Insurance Company (“Southern Farm”). The charges involve federal securities fraud, in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Securities Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240.10b-5, and Florida common-law fraud. The charges stem from Southern Farm's purchase of a debenture held by PSC, which was PSC's primary asset. In the course of negotiations, Southern Farm gave to PSC an actuarial valuation it had commissioned of the debenture and stated that the valuation represented a “fair price.” After PSC and Southern Farm settled on a price higher than Southern Farm's valuation, PSC issued a meeting notice and proxy statement to its shareholders, who subsequently voted for the sale.

Plaintiffs were PSC shareholders who were opposed to the sale. They brought a shareholders' derivative suit against Southern Farm for federal securities fraud and Florida common-law fraud, alleging that Southern Farm's valuation was misleading because it did not take into account certain leverage that PSC had in the deal, and that Southern Farm was liable for failing to disclose the facts giving rise to PSC's leverage to PSC's shareholders. The jury found Southern Farm liable in the amount of $31.7 million. Southern Farm now appeals, claiming inter alia, that Jury Instruction 11 contained incorrect statements of law and that the proof underlying one basis of liability was legally insufficient. For the reasons set out below, the judgment of the district court must be reversed with regard to both the federal securities law claim and the Florida common-law fraud claim, and the verdict of the jury cannot stand.

I. FACTS AND PROCEDURAL HISTORY

Southern Farm is a privately-held life insurance company owned by ten investment corporations located in ten states, including Florida. The common stock of each investment corporation is held by the Farm Bureau Federation in each of those respective states. The corporate relations between these various entities are governed by a Charter Treaty that: (1) restricts the dividends that each investment corporation can retain in excess of $5,700; (2) limits the transfer of Southern Farm and investment corporation stock; and (3) requires unanimous approval of any amendment, including any extension of the Treaty beyond its expected expiration date.

PSC acquired the debenture at the center of this case as a result of prior litigation, the full details of which are not relevant here. The debenture was issued by Florida Farm Bureau Holding Corporation (“Florida Holding”). Pursuant to the terms of the debenture, its owner, PSC, was entitled to 27.7% of any dividends that Florida Holding received from Southern Farm, and upon termination of the Charter Treaty PSC would be entitled to receive 27.7% of Florida Holding's stock.

In 2000, Southern Farm began to explore extending the Charter Treaty, an action that would require unanimous approval of the ten state Farm Bureau Federations. In 2004, Southern Farm sought Florida Holding's consent to extend the Treaty. PSC's attorney, Bruce Brashear, formally objected to the extension of the Charter Treaty without the approval of PSC shareholders. PSC shareholders' right to approve the Charter Treaty extension arose in connection with its ownership of the debenture. Florida Holding's board resolved that it would consent to the Charter Treaty extension only if Southern Farm first purchased the debenture from PSC. In turn, Southern Farm's management decided to recommend purchasing PSC's debenture.

Brashear represented PSC in negotiations with Southern Farm's general counsel regarding the sale of the debenture. In the course of negotiations, Southern Farm offered $3.3 million for the debenture based on a valuation performed by the actuarial firm Towers Perrin Tillinghast (“the Valuation”). The Valuation was calculated by applying a discount rate of 14% to the likely value of the 27.7% payout of the debenture in 2033, when the Charter Treaty was set to expire. Southern Farm's counsel told Brashear that the Valuation reflected a “fair price.” PSC made a counteroffer of $4.4 million, and the companies agreed to the sale at that price.

Because Florida law requires a corporation to obtain shareholder approval in order to sell a principal asset, Fla Stat. § 607.1202, Brashear prepared and mailed to PSC shareholders a meeting notice and proxy statement detailing the proposed debenture sale. The proxy statement did not include the facts that Southern Farm wanted to extend the Charter Treaty or that Florida Holding had conditioned its consent to the extension on Southern Farm's purchase of the debenture. PSC shareholders met on October 15, 2004, and approved the sale by a 10-to-1 margin. Plaintiff Badger and several other PSC shareholders voiced their opposition both before and at the meeting.

Following the sale, Badger and other dissenters sued Southern Farm in this shareholders' derivative action, claiming that Southern Farm failed to disclose certain material facts about the debenture sale to the shareholders and that, as a result, PSC received too little consideration in exchange for the debenture. Specifically, the Plaintiffs alleged:

The Defendant represented to the Plaintiffs that the Tillinghast Valuation of the Convertible Debenture represented a fair price for the purchase of the Debenture, but the Defendant omitted the following information:

(a) that [Southern Farm] was attempting to extend the Charter Treaty and that it could not do so without the consent of the debenture holder;

(b) that Florida Holding and the Florida Federation would only consent to the extension of the Charter Treaty if [Southern Farm] first purchased the debenture;

(c) that the Tillinghast Valuation did not consider (i) the Defendant's attempts to extend the Charter Treaty, (ii) Plaintiffs' control of any such extension, and (iii) [Southern Farm]'s need to purchase the debenture because Florida Holding and Florida Federation would only consent to the extension of the Charter Treaty if [Southern Farm] first purchased the debenture;

(d) that contemporaneous with [Southern Farm]'s purchase of the debenture, it purchased a future income interest held by the Alabama Farm Bureau Federation using a discount rate of 4.9%; and

(e) that in order to obtain the consent of the Texas Farm Bureau to extend the Charter Treaty, [Southern Farm] agreed to increase payouts to all ten (10) farm bureau federations by $82 million.

Jury Instructions, Dkt. 208 at 11-12, 19-20.

Using these alleged omissions as the basis for their claims, Plaintiffs sued Southern Farm for violations of Rule 10b-5 and Florida common law. Jury Instructions 9 and 10 detailed the elements of these claims respectively. Jury Instruction 9 stated that, in order to prevail on the Rule 10b-5 claim, the Plaintiffs had to prove each of the following facts by a preponderance of the evidence:

First: That the Defendant's conduct in connection with the transaction violated Rule 10b-5(b) by making a false representation of a material fact, or omitting a material fact;

Second: That the Defendant acted “knowingly,” as defined herein;

Third: That the Plaintiffs “justifiably relied” upon the Defendant's conduct; and

Fourth: That the Plaintiffs suffered damages as a result of the Defendant's wrongful conduct.

Jury Instructions, Dkt. 208 at 10-11. Jury Instruction 10 stated that, in order to prevail on the common-law fraud claim, the Plaintiffs had to prove each of the following facts by a preponderance of the evidence:

First: That the Defendant made one or more of those alleged misrepresentations or omissions;

Second: That the misrepresentation or omission related to a material existing fact;

Third: That the Defendant knew at the time it made the misrepresentation that it was false or acted with reckless disregard for its truth or falsity or that the omission made other statements materially misleading;

Fourth: That the Defendant intended to induce the Plaintiffs to rely and act upon the misrepresentation or omission; and

Fifth: That the Plaintiffs “reasonably” and “justifiably” relied upon the misrepresentation or omission and the Plaintiffs suffered injury or damage as a result.

Jury Instructions, Dkt. 208 at 20-21.

The jury found Southern Farm liable for both a Rule 10b-5 violation and common-law fraud, and assessed compensatory damages of $31.7 million. The district court denied Southern Farm's renewed Motion for Judgment as a Matter of Law and Motion for New Trial. The district court then amended the judgment to add interest. This appeal followed.

II. STANDARD OF REVIEW

“Our role in reviewing a trial court's jury instructions is to assure...