Crocker v. Federal Deposit Ins. Corp.

• Decision Date: 02 September 1987
• Docket Number: No. 86-4546,86-4546
• Citation: 826 F.2d 347
• Parties: , RICO Bus.Disp.Guide 6728 Ottis B. CROCKER, Jr., et al., Plaintiffs-Appellees, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Intervenor-Appellant, v. W.P. McMULLAN, et al., Defendants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 347

826 F.2d 347

56 USLW 2157, RICO Bus.Disp.Guide 6728

Ottis B. CROCKER, Jr., et al., Plaintiffs-Appellees, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Intervenor-Appellant, v. W.P. McMULLAN, et al., Defendants.

No. 86-4546.

United States Court of Appeals,

Fifth Circuit.

Sept. 2, 1987.

William F. Goodman, Jr., Paul J. Stephens, Jackson, Miss., for intervenor-appellant.

Luke Dove, Jackson, Miss., Grady F. Tollison, Oxford, Miss., for plaintiffs-appellees.

Appeal from the United States District Court for the Southern District of Mississippi.

Before JOLLY, HIGGINBOTHAM and DAVIS, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

In an attempt to bypass the general principles of standing in deriviative actions that usually bar individual shareholder suits, a class described as "minority shareholders" filed this nonderivative action against a bank's "controlling shareholders," on the theory that the minority had suffered individual harm not suffered by the corporation. Their theory has failed, and the derivative blockade has prevailed over the minority's hard-fought efforts to break through.

I

On May 11, 1984, the Mississippi State Commissioner of Banking closed the Mississippi Bank ("the Bank") pursuant to Miss.Code Ann. Sec. 81-9-5 (1972). The Bank was adjudicated insolvent in state court, and FDIC was appointed receiver.

FDIC and Grenada Bank ("Grenada") entered a purchase assumption agreement in which Grenada assumed certain of the Bank's liabilities and purchased part of the Bank's assets. FDIC, in its corporate capacity, purchased all the Bank's remaining assets. ¹

On August 13, 1984, certain shareholders ("the Crockers") filed a nonderivative lawsuit on behalf of a class of minority shareholders, in which the Crockers were included, seeking damages from the former directors and/or officers of the Bank, who were also the controlling or majority shareholders. The complaint alleged (1) violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Secs. 1961-68; (2) common law misrepresentation to the minority shareholders regarding the Bank's financial condition; and (3) common law breach of a fiduciary duty to the minority shareholders on the part of the directors, officers and controlling shareholders. Federal jurisdiction was based on the RICO claim.

The district court granted FDIC's motion to intervene, and FDIC moved to dismiss the Crockers' complaint under Fed.R.Civ.P. 12(b)(6). FDIC argued that the Crockers lacked standing because their claims were derivative and belonged to the corporation, not to the minority shareholders in their individual capacities. Alternatively, FDIC moved to stay the complaint under the "absolute priority rule." The district court denied FDIC's motions, holding that the Crockers, as minority shareholders, had alleged an individual injury that was sufficient to create a nonderivative cause of action. Following certification of the district court's order pursuant to Fed.R.Civ.P. 54(b), FDIC appealed.

II

Because federal jurisdiction in this case is predicated on the Crockers' RICO claim, we begin by examining the alleged RICO violation in Count I of the complaint. In Count I, the Crockers primarily allege that the defendants pursued a scheme to defraud the minority shareholders by mailing false, inaccurate and misleading financial statements and reports in order to lull "the minority shareholders of [the Bank] into a false sense of security and to postpone inquiries or complaints concerning the operation of the Bank." More specifically, the complaint alleges that the defendants' actions are indictable as two or more acts of mail fraud, 18 U.S.C. Sec. 1341, within a period of ten years constituting a pattern of racketeering activity within the meaning of 18 U.S.C. Sec. 1961(5). ² Count I further states that the Bank is an enterprise engaged in interstate commerce within the meaning of 18 U.S.C. Sec. 1961(4); the defendants were employed by or associated with the Bank as required by 18 U.S.C. Sec. 1962(c); and the defendants conspired to violate 18 U.S.C. Secs. 1962(b) and (d). Finally, the Crockers contend in Count I: "Plaintiffs and the Plaintiff class have been injured in their property by reason of the aforesaid RICO violations by Defendants."

To withstand FDIC's motion to dismiss, the Crockers must allege in their complaint the "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985). In addition, a standing requirement must be met: "the plaintiff only has standing if, and can only recover to the extent that, he has been injured in his business or property by the conduct constituting the violation." Id. at 3285-86. Thus, the issue in this case is whether the Crockers and the class of minority shareholders that they represent have suffered any individual injury to their property that is distinct from an injury to the corporation and therefore have standing to maintain a nonderivative RICO action. We hold that the Crockers lack standing and reverse the district court's denial of the motion to dismiss.

A.

State law determines whether a shareholder may maintain a nonderivative action. We must therefore review Mississippi law to determine whether the Crockers have standing to bring this action individually.

Mississippi adheres to the general rule that an action to redress injuries to a corporation cannot be maintained by a shareholder individually but must be brought as a derivative action in the name of the corporation. Vickers v. First Mississippi National Bank, 458 So.2d 1055 (Miss.1984); Bruno v. Southeastern Services, Inc., 385 So.2d 620 (Miss.1980). ³ Mississippi courts have also recognized that injury to shareholders in the form of a diminution in the value of stock is a loss that is recoverable only by the corporation in a direct action or by the shareholders in a derivative action. Bruno, 385 So.2d at 621; see also Stevens v. Lowder, 643 F.2d 1078, 1080 (5th Cir.1981).

Acknowledging Mississippi's adoption of the general rule articulated in Vickers and Bruno, the district court held, however, that the Crockers' claim fit within the widely recognized exception to this rule; that is, a shareholder may maintain a nonderivative action for the violation of a duty owed directly to the shareholder as an individual. Empire Life Ins. Co. v. Valdak Corp., 468 F.2d 330, 335 (5th Cir.1972); Vickers, 458 So.2d at 1063. The district court reasoned that because the Crockers alleged "that the controlling majority shareholders injured the ... minority shareholders, by their mismanagement and false and misleading financial statements," the Crockers' complaint stated an individual cause of action. Crocker v. McMullan, 623 F.Supp. 963, 968 (D.C.Miss.1985).

FDIC argues that the district court erred because the minority shareholders suffered only a diminution in the value of their shares, a loss that, under Mississippi law, is recoverable only by the corporation in a direct action or by the shareholders in a derivative action. Bruno, 385 So.2d at 621; Stevens, 643 F.2d at 1080. FDIC further contends that in a RICO claim, or any other federal statutory action, a plaintiff has no standing if the alleged injury is based on a diminution in the value of the stock. Gaff v. FDIC, 814 F.2d 311 (6th Cir.1987); Rand v. Anaconda-Ericsson, Inc., 794 F.2d 843 (2d Cir.1986); Warren v. Manufacturers National Bank of Detroit, 759 F.2d 542 (6th Cir.1985).

The parties do not dispute that under Mississippi law a shareholder does not have standing to bring a direct cause of action when the only damage alleged is a diminution in the value of corporate shares. The Crockers contend, rather, that the injury they incurred is not solely the diminished value of their stock. They argue that the controlling shareholders pursued a scheme to defraud the minority shareholders by misrepresenting as sound the financial condition of the Bank. The misrepresentations artificially inflated the price per share of the Bank stock and, at the same time, lulled the minority shareholders into not selling their stock. The controlling shareholders were then able to sell their personal shares for an undeserved profit, while effectively denying the minority shareholders such an opportunity to sell their stock. For want of a better term, the Crockers' alleged injury is best described as a "lost profit opportunity." ⁴

B.

Despite the Crockers' attempt to distinguish their injury from the classic model of diminution in the value of corporate stock, the end result was that all shareholders, as well as the Bank, lost the entire value of the stock. Essentially, the Crockers argue that the class of minority shareholders would have sold their stock on an indefinite date, at an artificially inflated (yet, unspecified) price, thereby realizing a profit (or at least minimizing their loss), if only they had known the true financial condition of the Bank. ⁵ They do not contend that the class or any member thereof desired specifically to sell their stock at a given point, but were deterred from effectuating a sale because of the misrepresentations. The claim is only that if they had known that the Bank was failing, they would have made every effort to rid themselves of the stock. We find this claim too speculative to state any injury to the shareholders, apart from a diminution in the value of their stock. It is our view that the alleged "lost profit opportunity" was, in reality, no profit opportunity at all.

The flaw in the Crockers' argument is that it assumes a market for the stock existed at an artificially high price. This inflated price, and hence the particular market for the stock, was maintained only because of the wrongdoing of the Bank's controlling shareholders, who concealed material financial information from the shareholders and the public that would have demonstrated the...