Gaff v. Federal Deposit Ins. Corp.

• Decision Date: 14 September 1987
• Docket Number: No. 86-1119,86-1119
• Citation: 828 F.2d 1145
• Parties: Joel R. GAFF, Plaintiff-Appellant, v. FEDERAL DEPOSIT INSURANCE CORPORATION, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1145

828 F.2d 1145

Joel R. GAFF, Plaintiff-Appellant, v. FEDERAL DEPOSIT INSURANCE CORPORATION, et al., Defendants-Appellees.

No. 86-1119.

United States Court of Appeals, Sixth Circuit.

Argued Jan. 20, 1987.

Decided Sept. 14, 1987.

Stuart D. Hubbell, Traverse City, Mich., J.B. Donaldson (argued), Dykema, Gossett, Spencer, Goodnow & Trigg, Bloomfield Hills, Mich., for plaintiff-appellant.

Larry C. Willey, Grand Rapids, Mich., Stephen Novack (argued), Novack & Macey, Chicago, Ill., Kenneth S. Schlesinger, Richard A. Rossman (argued), Mark W Yonkman, Detroit, Mich., for defendants-appellees.

Lawrence G. Campbell, Dickinson, Wright, Moon, Van Dusen & Freeman, Detroit, Mich., R.A. Wilhelm, for Pearce.

Before ENGEL and BOGGS, Circuit Judges, and CONTIE, Senior Circuit Judge.

On Petition for Rehearing.

CONTIE, Senior Circuit Judge.

Plaintiff Joel R. Gaff, a shareholder of a now insolvent banking institution, brought suit against the institution and two of its officers. In amended Count V of his complaint, Gaff sought to assert three sets of claims in his individual capacity as a shareholder: (1) federal claims arising under the federal banking laws; (2) federal claims arising under the federal securities laws; and (3) pendent state law claims. The district court dismissed amended Count V in its entirety and Gaff appealed to this court. In an opinion reported at 814 F.2d 311 (6th Cir.1987), we affirmed in part and reversed in part the judgment of the district court. In Parts II and III of our opinion, we upheld the district court's dismissal of Gaff's federal claims on the ground that Gaff lacked standing to maintain direct causes of action under the federal banking and securities provisions. In Part IV, we reversed the dismissal of the state law claims on the ground that the court should not have exercised pendent jurisdiction over those claims. We premised this latter holding on the general principle set forth in United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966), that district courts should ordinarily refrain from exercising jurisdiction over pendent state law claims when the federal claims to which the state claims are pendent are dismissed before trial. Accordingly, we ordered that the state claims be remanded to the district court for the purpose of remanding them to the state court from which they had been removed. The defendants have petitioned for rehearing as to Part IV of our opinion. That petition is granted and, for the reasons which follow, we conclude that the district court properly retained jurisdiction over the state law claims but improperly dismissed them. We therefore find it necessary to remand those claims for further consideration on their merits.

I.

Because the petition for rehearing is limited to Part IV of our opinion, we will focus primarily on the factual background pertinent to Part IV, namely, the circumstances surrounding the state law claims asserted by Gaff. Gaff and another plaintiff ¹ filed a consolidated complaint in state court setting forth five counts. Counts I-IV contained shareholder derivative actions while Count V purported to be a shareholders' class action brought directly by Gaff as representative of a class of persons owning stock in the National Bank and Trust Company of Traverse City (NBT). In Count V, Gaff alleged that two of NBT's officers, David Pearce and Bruce Mann, had breached their fiduciary duty owed to NBT's shareholders when they engineered several stock transactions intended to insulate their positions in and control over NBT. Gaff alleged that false and misleading materials were distributed to shareholders as part of those transactions and that the transactions resulted in violation of the shareholders' suffrage rights. For relief, Gaff sought: (1) a declaratory judgment that Pearce and Mann breached their fiduciary duty; (2) a declaratory judgment that the preemptive rights of the shareholders were violated; (3) an award of damages "in such amount as the court shall deem appropriate"; (4) an accounting to determine the amount of damages sustained by the shareholders in the value of their stock; and (5) other relief deemed appropriate.

After NBT was declared insolvent, the Federal Deposit Insurance Corporation (FDIC) was appointed receiver and removed the consolidated action to federal district court. The FDIC in its corporate capacity then moved to intervene in the case, dismiss Gaff as a party plaintiff, and stay the proceedings. Defendants Pearce and Mann subsequently moved to dismiss Count V of Gaff's complaint on the ground that it was merely a derivative action for injuries sustained by NBT, as opposed to a direct shareholder action for injuries sustained personally by the individual shareholders.

The district court granted the FDIC's motion to intervene but denied the motions to dismiss. Instead, the court stayed the derivative counts of Gaff's action, Counts I-IV, thus enabling the FDIC to pursue without interference the actions on behalf of NBT while still retaining Gaff as a party pending resolution of the claims. Instead of dismissing Count V, the court granted Gaff leave to amend that count.

Gaff subsequently filed his amended Count V, in which he raised for the first time allegations that Pearce and Mann violated federal banking and securities laws. Gaff also reasserted his state law claims, alleging that certain conduct of Pearce and Mann: "(i) constituted a breach of their fiduciary duty to the stockholders (ii) constituted fraud, deceit and misrepresentation [and] (iii) constituted a violation of the corporate suffrage rights of the stockholders." For relief, Gaff sought essentially the same declaratory and monetary awards requested previously.

Defendants Pearce and Mann again moved to dismiss Gaff's amended Count V for failure to state a claim upon which relief could be granted. Defendants argued, as they had before, that the claims asserted in Count V were merely derivative in nature and were not maintainable by a shareholder as a direct cause of action. Defendants premised their argument on the lack of allegations of personal injury to Gaff, as distinguished from harm to the corporate entity.

The district court initially denied the motion to dismiss but upon reconsideration granted the motion on the ground that Gaff lacked standing to assert the claims in a direct cause of action. The court primarily focused on the claims arising under the federal banking acts and the standing provisions of those acts, particularly Sec. 53 of the National Bank Act, 12 U.S.C. Sec. 93. Applying Sixth Circuit precedent, the court concluded that shareholders may bring direct causes of action under Sec. 93 but only if they have sustained a personal, direct injury separate and distinct from injuries occurring to the corporate entity as a whole. The court found that the only injury alleged by Gaff with respect to the alleged violations of the banking laws was the diminution in the value of his stock and that such injury represented direct harm only to the corporation itself; consequently, the harm to Gaff was derivative in nature. Since Gaff had failed to allege sufficient direct injury, the court held that he had no standing to bring his federal banking claims under Sec. 93.

The court also found that Gaff lacked standing to pursue his federal securities claims because he had not alleged sufficient personal injury. The court observed that a violation of the securities laws causes personal injury to an individual only if that individual purchases or sells stock in connection with the violation. Since Gaff had done neither, he lacked the requisite standing to bring a personal action for violation of the federal securities laws.

The court did not expressly address Gaff's pendent state law claims. However, since the court dismissed amended Count V in its entirety, it necessarily exercised jurisdiction over the state claims and dismissed them, along with the federal claims, with prejudice.

Gaff pursued a timely appeal to this court which we initially resolved by our decision filed on March 20, 1987. We first addressed the district court's rejection of Gaff's federal banking law claims and, upon concluding that Gaff had alleged insufficient personal injury to provide him with standing under 12 U.S.C. Sec. 93, we upheld the dismissal of those claims. 814 F.2d at 315-18. We recognized that Sec. 93 enables a shareholder of a national bank to bring a direct cause of action against the bank's directors "under proper circumstances." Id. at 316. We interpreted those circumstances to arise only when the violation of the federal banking laws causes direct or personal injury to the shareholder. Thus, even when a director violates the federal banking laws, a shareholder lacks standing to maintain a direct action to redress that violation unless the shareholder has suffered some direct injury distinct from injuries suffered by the corporation. Upon examination of Gaff's complaint, we agreed with the district court that he had not alleged sufficient personal injury to sustain his direct cause of action under Sec. 93. Gaff primarily claimed that defendants' conduct caused his stock in NBT to become worthless, which is the equivalent of claiming that their conduct resulted in a diminution in the value of the corporation's assets. We held "that damages resulting from directors' misconduct which merely consist of the diminishment or destruction of the value of corporate stock do not qualify as a direct or personal injury to a shareholder and therefore will not support a direct cause of action under Sec. 93." Id. at 318.

We also upheld the district court's dismissal of Gaff's federal securities law claims for lack of standing. We held that a plaintiff asserting a damages claim based on a violation of the federal securities laws must be either a purchaser or seller of securities in connection with the alleged violation and,...