Damian v. Montgomery Cnty. Bankshares, Inc.

• Decision Date: 31 March 2015
• Docket Number: CIVIL ACTION FILE NUMBER 1:12-cv-4472-TCB.
• Citation: 255 F.Supp.3d 1265
• Parties: Melanie E. DAMIAN, as Receiver for the Estate of Aubrey Lee Price, PFG, LLC, Montgomery Asset Management, LLC f/k/a PFG Asset Management, LLC (a Florida limited liability company), Montgomery Asset Management, LLC f/k/a PFG Asset Management, LLC (a Georgia limited liability company), and PFGBI, LLC, Plaintiffs, v. MONTGOMERY COUNTY BANKSHARES, INC. and Trae D. Dorough, as President and Chief Executive Officer, Miller Peterson Robinson, as Director, and Dee Ann McDaniel, as Chief Financial Officer, Defendants.
• Court: U.S. District Court — Northern District of Georgia

255 F.Supp.3d 1265

Melanie E. DAMIAN, as Receiver for the Estate of Aubrey Lee Price, PFG, LLC, Montgomery Asset Management, LLC f/k/a PFG Asset Management, LLC (a Florida limited liability company), Montgomery Asset Management, LLC f/k/a PFG Asset Management, LLC (a Georgia limited liability company), and PFGBI, LLC, Plaintiffs,

v.MONTGOMERY COUNTY BANKSHARES, INC. and Trae D. Dorough, as President and Chief Executive Officer, Miller Peterson Robinson, as Director, and Dee Ann McDaniel, as Chief Financial Officer, Defendants.

CIVIL ACTION FILE NUMBER 1:12-cv-4472-TCB.

United States District Court, N.D. Georgia, Atlanta Division.

Signed March 31, 2015

Andrew E. Worrell, Petitt Worrell Craine Wolfe, LLC, Atlanta, GA, Guy F. Giberson, Kenneth Dante Murena, Pro Hac Vice, Peter F. Valori, Guy F. Giberson, Damian & Valori LLP, Miami, FL, for Plaintiffs.

Adam Scott Rubenfield, David J. Hungeling, Law Office of David J. Hungeling, P.C., Atlanta, GA, Andrew Townsend Sumner, Alston & Bird, LLP—Atl, Theodore Joseph Sawicki, Alston & Bird, LLP–GA, Atlanta, GA, for Defendants.

ORDER

Timothy C. Batten, Sr., United States District Judge

This case is before the Court on Defendants' motions to dismiss Plaintiff Melanie Damian's third amended complaint (the "complaint") for failure to state a claim [59; 60].¹

I. Background

A. Parties and Statement of Facts²

Damian filed this lawsuit in her capacity as Receiver of the Estate of Aubrey Lee Price, PFG, LLC, Montgomery Asset Management, LLC f/k/a PFG Asset Management, LLC (Florida limited liability company), Montgomery Asset Management, LLC f/k/a PFG Asset Management (Georgia limited liability company), and PFGBI, LLC (collectively, the "Receivership Entities").³ Defendant Montgomery County Bankshares, Inc. ("MCB") is a holding company for Montgomery Bank & Trust (the "Bank"), a federally licensed bank in Georgia. During the time period relevant to this lawsuit, Defendant Trae D. Dorough was the chief executive officer of MCB and the chief executive officer, president and chief lending officer of the Bank. He was also a member of MCB's board of directors and sat on the board's loan committee and coastal loan committee. Defendant Miller Peterson Robinson was a director of MCB and served on the executive committee and audit committee. Defendant Dee Ann McDaniel was the chief financial officer of MCB and was the chief financial officer of the Bank during 2010. Throughout this Order, Dorough, Robinson and McDaniel are referred to collectively as the "individual Defendants."

The allegations in the complaint stem from PFGBI's December 31, 2010 purchase of three-quarters of the common stock in MCB for a purchase price of over ten million dollars. Damian's central allegation is that Defendants misstated the value of MCB's loan portfolio, its most significant asset, by "vastly understating" the allowance for loan losses (referred to as "ALLL")⁴ in a private placement memorandum issued by MCB and in the Bank's "Consolidated Reports of Condition and Income for a Bank with Domestic Offices Only—FFIEC 041" (referred to as "call reports"), which were publicly filed on a quarterly basis. [58], ¶¶ 10–11. Damian also alleges that Defendants Dorough and Robinson made certain verbal misstatements to Lee Price, PFGBI's manager, and Dan McSwain, PFGBI's largest investor, regarding the loan portfolio and that Defendants concealed from PFGBI reports regarding the loan portfolio prepared by Steven H. Powell & Company (the "Powell Reports").

In an effort to address capital needs of the Bank, MCB issued a private placement memorandum (the "PPM"), dated April 9, 2010, for use in marketing MCB's stock to potential investors. The PPM, which was provided to PFGBI, provides background and financial information regarding MCB and the Bank and the offering of MCB's stock. Among other things, the PPM notes that the Bank was subject to an October 6, 2009 cease and desist order issued by the Federal Deposit Insurance Corporation ("FDIC"), which required the Bank to take a number of actions to increase its health, including steps to substantially reduce the amount of the Bank's debt classified as "doubtful" or "substandard." The PPM notes that MCB planned to use proceeds from the offering to supplement MCB's capital base and provide flexibility in addressing MCB's "nonperforming assets" and "the potential for continued deterioration in [MCB's] loan portfolio." [58–1] at 7. The PPM also includes certain information from MCB's 2009 financial statements, including a calculation of ALLL. According to the PPM, as of December 31, 2009, loans (less the allowance for loan losses) constituted approximately $154.5 million of the approximately $247.9 million of combined assets of MCB and the Bank, or 62.3 percent. The PPM indicates that the ALLL was $1,881,000 as of December 31, 2009.

In the late spring of 2010, PFGBI and MCB began discussing the possibility of a transaction. Representatives from PFGBI and MCB met with banking regulators in the course of this process. The Bank continued to publicly file call reports during 2010. These filings reported an ALLL of $1,743,000 as of March 31, 2010; $3,839,000 as of June 30, 2010; and $3,528,000 as of September 30, 2010. PFGBI and its representatives, including its counsel Nelson Mullins, also met with MCB representatives and engaged in due diligence during the spring and summer of 2010. During these meetings, MCB indicated that the Bank had written off unusually high loan losses because of foreclosures in 2009 and 2010.

During due diligence, PFGBI focused largely on the Bank's owned real estate. It did not review, and was not provided, copies of the Powell Reports during due diligence. The Powell Reports are quarterly reports that examine a sampling of past due loans of various sizes. Among other things, the reports analyze trends in asset quality; review violations and other issues identified regarding the loan portfolio and administration; and provide a review and classification of individual loans. During the review, loans are assigned individual numbers or "grades" that correspond to various levels of quality: special mention, substandard, doubtful, and loss.⁵ According to the Powell Reports, in December 2007, 4.16% of the Bank's loans were classified as adverse, and this percentage increased to 14.61% in December of 2008; 28.43% in September of 2009; and 33.83%, a historical high, in December 2009. In 2010, adversely rated loans remained high compared to 2007. They constituted 28.28% of the Bank's loans in April 2010, 33.6% of the loans in May 2010, 38.39% of the loans in July 2010, and 39.24% of the loans in October 2010.

PFGBI's purchase of MCB closed on December 31, 2010. In 2011, approximately six months after the purchase, the FDIC conducted an audit of the Bank, forcing the Bank to write down more loans. In the months after PFGBI purchased MCB, MCB wrote down several millions of dollars of loans, and in July 2012, the Bank was put into FDIC receivership⁶

B. Procedural History

The third amended complaint constitutes Damian's fourth iteration of her claims against Defendants. On December 28, 2012, Damian filed her initial complaint, alleging that Defendants were liable for violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b–5 of the regulations promulgated thereunder. On June 24, 2013, in lieu of filing an answer, the individual Defendants filed a motion to dismiss, identifying various pleading deficiencies in that complaint. On July 11, 2013, Damian filed her first amended complaint, re-asserting her 10b–5 claims with additional supporting allegations and also alleging common law fraud and negligent misrepresentation.

On July 29, 2013, Defendants filed motions to dismiss the first amended complaint. On November 8, 2013, the Court granted Defendants' motions to dismiss, concluding that Damian had failed to allege her federal law claims with sufficient particularity. The Court also declined to exercise supplemental jurisdiction over the state law claims because Damian failed to plead a basis of original jurisdiction over these claims.

In its November 8, 2013 Order, the Court granted Damian leave to file a second amended complaint to cure the deficiencies in the first amended complaint. On December 16, 2013, Damian filed her second amended complaint, and the Court subsequently granted her leave to file a third amended complaint, which she filed on March 7, 2014. On April 7, 2014, Defendants filed their motions to dismiss the third amended complaint (referred to for the remainder of this Order as the "Complaint"), and on March 6, 2015, the Court held a hearing on the motions.

In the Complaint, Damian alleges that MCB violated Section 10(b) of the Exchange Act and Rule 10b–5 and that the individual Defendants are liable pursuant to Section 20(a) of the Exchange Act. She also brings state-law claims of common law fraud, negligent misrepresentation, and aiding and abetting. For each claim she seeks damages in the amount of PFGBI's investment in MCB plus interest and, with respect to her federal law claims, attorneys' fees.

II. Legal Standard

As the Court explained in its November 8, 2013 order,⁷ to survive a 12(b)(6) motion, a plaintiff must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 547, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ; see also Chandler v. Sec'y of Fla. Dep't of Transp. , 695 F.3d 1194, 1199 (11th Cir. 2012). The Supreme Court has explained this standard as follows:

A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a "probability requirement," but it asks for more than a sheer possibility that a defendant has acted unlawfully.

Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (...