Bixler v. Foster

• Decision Date: 22 February 2010
• Docket Number: No. 09-2138.,09-2138.
• Citation: 596 F.3d 751
• Parties: Georganne BIXLER; Buddy Jack Kennemur; Carroll Sorelle; Dean Coleman, Plaintiffs-Counter-Defendants-Appellants, and Mineral Energy and Technology Corporation (METCO), Plaintiff, v. J. Douglas FOSTER; Michael R. Comeau; Uranium King, Ltd., (UKL), an Australian corporation; Paul Fish; Fred Pete Gibson, III; Jim Malone, Defendants-Appellees, and Michael Duncan; Sam Sapper, Defendants-Counter-Claimants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

596 F.3d 751

Georganne BIXLER; Buddy Jack Kennemur; Carroll Sorelle; Dean Coleman, Plaintiffs-Counter-Defendants-Appellants, and Mineral Energy and Technology Corporation (METCO), Plaintiff, v. J. Douglas FOSTER; Michael R. Comeau; Uranium King, Ltd., (UKL), an Australian corporation; Paul Fish; Fred Pete Gibson, III; Jim Malone, Defendants-Appellees, and Michael Duncan; Sam Sapper, Defendants-Counter-Claimants-Appellees.

No. 09-2138.

United States Court of Appeals, Tenth Circuit.

February 22, 2010.

Submitted on the briefs:^*

René Ostrochovsky, Albuquerque, NM, for Plaintiffs-Appellants.

Luis G. Stelzner, Juan L. Flores, Sheehan, Sheehan & Stelzner, P.A., Albuquerque, NM, Marc D. Flink, Baker & Hostetler, LLP, Denver, CO, for Defendant-Appellee Uranium King Ltd.

Michael W. Brennan, Brennan & Sullivan, Santa Fe, NM, for Defendant-Appellee Jim Malone.

Andrew G. Schultz, Bruce Hall, Rodey, Dickason, Sloan, Akin & Robb, P.A., Albuquerque, NM, for Defendants-Appellees Michael Duncan and Sam Sapper.

John B. Pound, Long, Pound & Komer, P.A., Santa Fe, NM, for Defendants-Appellees Paul Fish, Esquire and Fred Gibson, III, Esquire.

Jerry Wertheim, John Wentworth, Jerry V. Wertheim, Jones, Snead, Wertheim & Wentworth, P.A., Santa Fe, NM, for Defendant-Appellee Michael Comeau, Esquire.

Christopher M. Moody, Repps D. Stanford, Moody & Warner, P.C., Albuquerque, NM, for Defendant-Appellee J. Douglas Foster.

Before TYMKOVICH, ANDERSON, and BALDOCK, Circuit Judges.

TYMKOVICH, Circuit Judge.

This case was brought by minority shareholders of Mineral Energy and Technology Corp. (METCO), against its directors and lawyers. The complaint alleged that the defendants violated the civil Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-68, when they arranged to transfer METCO's assets to an Australian corporation. The district court dismissed plaintiffs' complaint for failure to state a claim, and they appeal.

We conclude that (1) the plaintiffs lacked standing under RICO to assert shareholder derivative claims; (2) allegations of securities fraud do not establish predicate acts under RICO; and (3) the "continuity" requirement of RICO is not satisfied by the allegations in the complaint.

Accordingly, exercising jurisdiction under 28 U.S.C. § 1291, we AFFIRM.

I. Background

According to the complaint, defendants Duncan, Sapper, and Malone were directors and majority shareholders of METCO, a New Mexico uranium mining company.¹ Together with Karl Meyers, another director who is not a party to these proceedings, they negotiated a trade of METCO's uranium mining claims to subsidiaries of defendant Uranium King, Ltd. (UKL), an Australian corporation. Defendants Duncan, Sapper, and Malone were also directors of UKL. UKL subsequently merged with another Australian corporation, Monaro Mining NL (Monaro).

Plaintiffs alleged that the transfer of mining claims provided for METCO to receive $6.5 million and for METCO to receive stock in UKL in exchange for METCO's uranium interests. The UKL stock was then to be distributed among the METCO shareholders on a pro rata basis. According to plaintiffs, after defendants Duncan, Sapper, and Malone transferred the METCO uranium claim deeds to UKL, UKL abandoned the agreement and paid neither the money nor the UKL stock to METCO. Consequently, plaintiffs lost the value of their investment in METCO. In addition, plaintiffs claimed that Duncan, Sapper, and Malone were highly compensated for arranging the transaction.

Based on this conduct, the minority shareholders contend the defendants defrauded them of their share of the UKL stock and rendered their METCO investment virtually worthless. Plaintiffs also aver that the UKL-Monaro merger was a fraudulent means of transferring the mining claims to a third entity. The remaining defendants, Foster, Comeau, Fish, and Gibson, were attorneys who allegedly represented the other defendants for the purpose of filing frivolous lawsuits against plaintiffs to keep them from pursuing claims to METCO's assets.

Plaintiffs claim defendants conspired to deprive them of the value of their METCO shares by a series of predicate acts based on the above-described conduct, in violation of RICO. The district court granted motions to dismiss filed by defendants UKL, Comeau, and Foster, ruling that plaintiffs' complaint failed to state a claim upon which relief may be granted, pursuant to Fed.R.Civ.P. 12(b)(6).² The district court held that plaintiffs did not have standing to bring RICO claims on METCO's behalf and that the Private Securities Litigation Reform Act (PSLRA) precluded RICO claims based on securities fraud. The court then ordered plaintiffs to show cause why their claims against the remaining defendants should not be dismissed for the same reasons. After reviewing plaintiffs' response to the show-cause order, the district court dismissed the remaining claims.³

Plaintiffs appeal, arguing that the district court (1) applied an incorrect standard to grant dismissal; (2) failed to grant a default judgment against defendant Malone even though evidence showed that he evaded service of process and had actual knowledge of the lawsuit; and (3) was biased in defendants' favor in applying an incorrect dispositive standard and construing the facts in defendants' favor, thus violating plaintiffs' due process rights.

Although the first argument is ostensibly a challenge to the standard of review applied by the district court, it is more fairly characterized as two distinct challenges: the first to the determination that plaintiffs' alleged injuries were due to their status as minority shareholders of METCO; the second to the court's application of the PSLRA. We start with the standard of review, and consider each contention in turn.

II. Standards of Review on Appeal

We review de novo the district court's Rule 12(b)(6) dismissal. See Christy Sports, LLC v. Deer Valley Resort Co., 555 F.3d 1188, 1191 (10th Cir.2009). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to `state a claim for relief that is plausible on its face.'" Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). "[W]e assume the factual allegations are true and ask whether it is plausible that the plaintiff is entitled to relief." Gallagher v. Shelton, 587 F.3d 1063, 1068 (10th Cir.2009). "[T]he tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal, 129 S.Ct. at 1949.

We also review de novo the legal issue of plaintiffs' standing to bring their claims. See Law Co. v. Mohawk Constr. & Supply Co., 577 F.3d 1164, 1173 (10th Cir. 2009).

III. Dismissal for Failure to State a Claim

A. RICO Standing

The district court held that plaintiffs, as METCO minority shareholders, lacked standing to bring a RICO claim based on the diminution of the value of their shares. We agree.

RICO provides a cause of action for those injured in business or property by reason of prohibited racketeering activities. 18 U.S.C. § 1964(c); see Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 495, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985) ("If the defendant engages in a pattern of racketeering activity in a manner forbidden by [18 U.S.C. § 1962(a)-(c)], and the racketeering activities injure the plaintiff in his business or property, the plaintiff has a claim under § 1964(c)."). A plaintiff has standing only if his injuries were proximately caused by the RICO violation. Gillmor v. Thomas, 490 F.3d 791, 797 n. 4 (10th Cir.2007); see also Holmes v. Sec. Investor Protection Corp., 503 U.S. 258, 268, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992) (holding plaintiff lacked standing to bring RICO claims because there was no "direct relation between the injury asserted and the injurious conduct alleged").

In general, the law is that conduct which harms a corporation confers standing on the corporation, not its shareholders.⁴ "[T]he [shareholder standing rule] is a longstanding equitable restriction that generally prohibits shareholders from initiating actions to enforce the rights of the corporation unless the corporation's management has refused to pursue the same action for reasons other than good-faith business judgment." Franchise Tax Bd. of Calif. v. Alcan Aluminium Ltd., 493 U.S. 331, 336, 110 S.Ct. 661, 107 L.Ed.2d 696 (1990). An exception to this rule "allow[s] a shareholder with a direct, personal interest in a cause of action to bring suit even if the corporation's rights are also implicated." Id.; accord Grubbs v. Bailes, 445 F.3d 1275, 1280 (10th Cir.2006). Plaintiffs claim to fall within this latter exception.

Plaintiffs' allegations, however, merely assert the minority shareholders suffered a diminution in value of their corporate shares without receiving the same monetary compensation the majority shareholders received. Such an injury is not direct and personal for RICO purposes but is, rather, an injury to the corporation. To avoid this fundamental problem, the minority shareholders assert that their claims are based on injury to them, rather than the corporation. Specifically, they contend that (1) defendants' actions caused their proportionate corporate ownership to be diluted, and (2) that defendants have pursued abusive litigation against them in an effort to coerce them into abandoning their interests in METCO.⁵

In support of this contention, plaintiffs point to a district court case, Lochhead v. Alacano, 697 F.Supp. 406 (D.Utah 1988), as supporting the proposition that defendants' conduct led to the dilution of their proportionate corporate ownership. In Lochhead, the court first noted the distinction between a claim of a "diminution in...