Amos v. Franklin Fin. Servs. Corp.
| Decision Date | 22 November 2011 |
| Docket Number | CIVIL NO. 1:CV-10-1285 |
| Parties | MATTHEW P. AMOS, et al. Plaintiffs v. FRANKLIN FINANCIAL SERVICES CORPORATION, et. al, Defendants |
| Court | U.S. District Court — Middle District of Pennsylvania |
Matthew P. Amos and the other twenty-four plaintiffs are former shareholders in Community Financial, Inc. (CFI). Defendant, Franklin Financial Services Corp. (Franklin Financial), acquired CFI in a merger whereby CFI ceased to exist and its shareholders were paid cash for their shares. Plaintiffs filed this suit against Franklin Financial and seven individual defendants, mostly shareholders and officers of CFI. Plaintiffs alleged that in the years leading up to the merger, the individual defendants operated CFI in a way that diluted the value of Plaintiffs' shares upon the merger relative to the value of Defendants' shares. To accomplish this goal, Defendants "devised a scheme or artifice to defraud" and engaged in fraudulent conduct directed at Plaintiffs and other non-defendant shareholders.1
Plaintiffs made claims under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968, and under state law for conversion, unjust enrichment, breach of fiduciary duty, fraud and waste of corporate assets, conspiracy, and a violation of the Pennsylvania Uniform Commercial Code.
Two motions to dismiss were filed under Fed. R. Civ. P. 12(b)(6), one by Franklin Financial and the other by the individual defendants. In part, both motions argued that the RICO claims lacked merit because Plaintiffs were basing them on fraud in the sale of securities (by way of the merger) and RICO excludes from the reach of the statute claims that would be actionable as securities fraud.2 We agreed with this argument. See Amos v. Franklin Fin. Services Corp., 2011 WL 2111991, at *4 (M.D. Pa. May 26, 2011). Since the RICO claims were the only federal ones, and diversity jurisdiction did not exist, we declined to exercise supplemental jurisdiction over the state-law claims and dismissed the entire action on May 26, 2011. Id., at *6.
Plaintiffs have filed a motion for reconsideration. Franklin Financial has filed a brief in opposition and so have the individual defendants. Plaintiffs argue we erred in concluding that their RICO claims were actionable as a Rule 10b-5 securities-fraud claim. Plaintiffs contend that because the defendant shareholders controlled the majority of the shares in CFI, and a majority of the shares were all that was needed to accomplish the merger, the merger was a "freeze-out merger." As a freeze-out merger, it was immaterial whether other shareholders were fraudulently induced into voting for it because the defendants had no need for the votes of other shareholders. It follows that Plaintiffs have no actionable 10b-5 claim because as a matter of law they could not show the requisite element of causation.
For the reasons set forth below, we agree with Plaintiffs' argument concerning causation and that their motion should be granted. Thus, we will vacate our previous order. Nonetheless, for other reasons advanced by Defendants in support ofdismissal of the RICO claims we will enter another order which, once again, dismisses the RICO claims and declines to exercise jurisdiction over the state-law claims.3
The May 26, 2011, order dismissing the action was final because it left nothing more to be done by this court. See Dotzel v. Ashbridge, 438 F.3d 320, 323 (3d Cir. 2006). Plaintiffs' motion for reconsideration challenges the legal correctness of that order. The motion is therefore treated as one under Fed. R. Civ. P. 59(e) to alter or amend the judgment. Holland v. Holt, 409 F. App'x 494, 496 (3d Cir. 2010)(per curiam)(nonprecedential). A motion for reconsideration under Rule 59(e) is used "'to correct manifest errors of law or fact or to present newly discovered evidence.'" Lazaridis v. Wehmer, 591 F.3d 666, 669 (3d Cir. 2010)(quoting Max's Seafood Café ex rel. Lou-Ann, Inc. v. Quinteros, 176 F.3d 669, 677 (3d Cir. 1999)). "A proper Rule 59(e) motion therefore must rely on one of three grounds: (1) an intervening change in controlling law; (2) the availability of new evidence; or (3) the need to correct a clear error of law or fact or to prevent manifest injustice." Id.
"A motion for reconsideration may not be used as a means to argue new facts or issues that were not presented to the court in the context of the matter previously decided." Worbetz v. Ward North America, Inc., 54 F. App'x 526, 533 (3d Cir. 2002) (nonprecedential). It cannot be used to raise new legal issues. United States v. Metropolitan St. Louis Sewer Dist., 440 F.3d 930, 933 (8th Cir. 2006)(quoted case and internal quotation marks omitted). Nor can it be used to reargue issues that the court has already considered and disposed of. Blanchard v. Gallick, No. 09-1875, 2011 WL1878226, at *1 (M.D. Pa. May 17, 2011)(Caldwell, J.)(citing Ogden v. Keystone Residence, 226 F. Supp. 2d 588, 606 (M.D. Pa. 2002)).
In opposing the motion, Defendants first argue that it is untimely because Local Rule 7.10 requires that motions for reconsideration be "filed within fourteen (14) days after the entry of the order concerned" and Plaintiffs filed the motion on June 13, 2011, eighteen days after May 26, 2011, the date of the order. We reject this argument. Local Rule 7.10 specifically excludes from its scope a motion to alter or amend under Fed. R. Civ. P. 59, and as noted above, Plaintiffs' reconsideration motion is governed by Fed. R. Civ. P. 59(e).4 Rule 59(e) allows a party twenty-eight days from the entry of the order to file a motion to alter or amend. Plaintiffs' motion for reconsideration was therefore timely as the Rule 59(e) deadline expired on June 23, 2011, and Plaintiffs' motion was filed on June 13, 2011, ten days before.
Defendants next argue that the motion must be denied because the argument raised in the motion was not presented in opposing the motions to dismiss. As noted above, a reconsideration motion cannot be used to argue legal issues not presented in connection with the proceedings leading to the challenged order.
Defendants correctly point out that Plaintiffs' argument is new. In opposing dismissal, Plaintiffs never said that the merger was a freeze-out merger,5 nor did they citein support of the argument Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 111 S.Ct. 2749, 115 L.Ed.2d 929 (1991), and Scattergood v. Perelman, 945 F.2d 618 (3d Cir. 1991), the two cases they cite now in support of their no-causation argument.6 It is also true that, generally, new arguments cannot be considered on a motion for reconsideration under Rule 59(e). This general principle, however, does not apply to clear errors of law or fact. For example, in Max's Seafood Café ex rel. Lou-Ann, Inc., supra, while the Third Circuit recognized that courts take a "'dim view of issues raised for the first time in post-judgment motions,'" 176 F.2d at 678 (quoted case omitted), the court nonetheless decided that the district court had abused its discretion in refusing to consider a factual argument first raised by the corporate defendant on a motion to alter or amend. The district court had held the corporate defendant in contempt of a consent decree. The new argument was that the corporation had not come into existence until after the statements in violation of the consent decree at issue had been made. The court of appeals ruled that this factual issue was "so fundamental," id., that it should have been considered on reconsideration, noting that "reconsideration is the appropriate means of bringing to the court's attention manifest errors of fact or law." Id. (citing Harsco Corp. v. Zlotnicki, 779 F.2d 906, 909 (3d Cir. 1985)). See also In re: Linerboard Antitrust Litig., 361 F. App'x 392, 397 n.2 (3d Cir. 2010)(nonprecedential)(district court properly granted reconsideration to correct the court's error of law in vacating an injunction on the mistaken belief that the court would lose jurisdiction after the end of the underlying class action).
In light of Virginia Bankshares and Scattergood, we believe we made a clear error of law, even though that error resulted from Plaintiffs' failure to present us with the argument at the time Defendants moved to dismiss. In Virginia Bankshares, theSupreme Court held that shareholders whose votes were not needed either by law or by corporate bylaw to authorize a merger could not bring a section 14(a) securities-fraud claim for misrepresentations in a proxy statement issued in connection with the merger. The Court ruled that the shareholders could not show the necessary causation. 501 U.S. at 1087, 111 S.Ct. at 2755. In Scattergood, the Third Circuit followed Virginia Bankshares in ruling that, without more, shareholders whose votes were not needed for the freeze-out merger could not show causation for both a section 14(a) claim and a Rule 10b-5 claim. 945 F.2d at 625-26.
Application of Virginia Bankshares and Scattergood is clear and straightforward. Plaintiffs draw our attention to the allegations of their amended complaint. They allege that defendant Gates exercised warrants in December 2006 which had the effect of giving the defendant shareholders ownership or control of 50.36% shares, giving them "voting control of the company," (Am. Compl. ¶ 56), and, as of September 2007, "enabling them to control the direction of the company, including effectuating the merger with Franklin Financial and ensuring the demise of CFI." (Id. ¶ 57). As Plaintiffs argue, since these allegations mean that Defendants had no need for minority shareholders to vote for the merger, our conclusion that Plaintiffs had an actionable Rule 10b-5 securities-fraud claim was mistaken. Since our conclusion was also contrary to direct and controlling Supreme Court preced...
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