Damian v. Montgomery Cnty. Bankshares, Inc.

• Decision Date: 08 November 2013
• Docket Number: Civil Action No. 1:12–cv–4472–TCB.
• Citation: 981 F.Supp.2d 1368
• 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 (a Georgia limited liability company) f/k/a PFG Asset Management, LLC, and PFGBI, LLC, Plaintiffs, v. MONTGOMERY COUNTY BANKSHARES, INC. and Trae D. Dorough, Charles T. Clements, Larry D. Coleman, Mary Jeanne Fulmer, Gregory A. Morris, Lloyd Moses, Thomas A. Peterson, William J. Peterson, Thomas A. Peterson III, Miller Peterson Robinson, John L. Robison, Jr., Dee Ann McDaniel, and Blanche Carswell, in their individual corporate capacities, Defendants.
• Court: U.S. District Court — Northern District of Georgia

981 F.Supp.2d 1368

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 (a Georgia limited liability company) f/k/a PFG Asset Management, LLC, and PFGBI, LLC, Plaintiffs,

v.MONTGOMERY COUNTY BANKSHARES, INC. and Trae D. Dorough, Charles T. Clements, Larry D. Coleman, Mary Jeanne Fulmer, Gregory A. Morris, Lloyd Moses, Thomas A. Peterson, William J. Peterson, Thomas A. Peterson III, Miller Peterson Robinson, John L. Robison, Jr., Dee Ann McDaniel, and Blanche Carswell, in their individual corporate capacities, Defendants.

Civil Action No. 1:12–cv–4472–TCB.

United States District Court,

N.D. Georgia,

Atlanta Division.

Nov. 8, 2013.

Guy F. Giberson, Kenneth Dante Murena, Damian & Valori LLP, Miami, FL, John Michael Hamrick, Paul E. Vranicar, Holland & Knight, Atlanta, GA, for Plaintiffs.

Adam Scott Rubenfield, David J. Hungeling, Law Office of David J. Hungeling, P.C., Alex Benjamin Kaufman, Robert J. Kaufman, Kaufman Miller & Forman, P.C., Atlanta, GA, Theodore Joseph Sawicki, Alston & Bird, LLP–GA, Andrew Townsend Sumner, Alston & Bird, LLP–ATL, Atlanta, GA, for Defendant.

ORDER

TIMOTHY C. BATTEN, SR., District Judge.

This securities-fraud case comes before the Court on the individual Defendants' ¹ and Montgomery County Bankshares, Inc.'s motions to dismiss the amended complaint for failure to state a claim [26, 28].

I. BackgroundA. Statement of Facts²

Defendant Montgomery is a holding company for Montgomery Bank & Trust, a federally licensed bank in Georgia. The individual Defendants are directors (and in some cases senior officials) of Montgomery and the bank. In early 2010, Montgomery wanted to sell controlling interest in the company, so it marketed the sale of common stock principally through a confidential private placement offering memorandum (PPM) dated April 9, 2010. Among other things, the PPM included an unaudited consolidated balance sheet as of December 31, 2009. “Loans, less allowance for loan losses” constituted the lion's share of Montgomery and the bank's combined assets—$154.5 million of $247.9 million, or 62.3 percent. According to the PPM, “allowance for loan losses” meant “an estimated allowance that we believe will be adequate to absorb losses inherent in the loan portfolio based on evaluations of its collectability” in light of several factors, including the “overall portfolio quality, specific problem loans and commitments and current anticipated economic conditions that may affect the borrower's ability to pay.” This allowance was $1.88 million as of December 31, 2009.

In late spring or early summer 2010, Montgomery began negotiating with Aubrey Price, a financial advisor who managed the investment fund PFG, LLC and offered investment advice through PFG Asset Management, LLC (later Montgomery Asset Management, LLC). Price became interested in purchasing controlling interest of Montgomery and formed PFGBI, LLC to pool funds from his clients that would be invested in Montgomery.

On September 28, 2010, PFGBI executed a subscription agreement with Montgomery whereby it committed to pay $5.1 million and to raise $5.1 million from a private placement to purchase the bulk of Montgomery's common stock. To gain approval for the sale, representatives from Montgomery and PFGBI met several times with banking regulators. At an October 2010 meeting, Montgomery represented that its loan portfolio value had dropped $17.5 million to $137 million, an 11.3 percent decline in just ten months.

Two months later PFGBI revised the subscription agreement and agreed to pay the entire purchase price of $10.2 million for approximately 75 percent of Montgomery's common stock. The transaction closed December 31, 2010.

On May 31, 2012, just weeks before the FDIC's takeover, the loan portfolio's value totaled $100 million.

B. Procedural History

On July 11, 2013, in lieu of a response to the individual Defendants' June 24 motion to dismiss, Plaintiff Melanie Damian, who serves as the receiver for the estate of Aubrey Price and several legal entities,³ filed an amended complaint alleging that the value of the bank's loan portfolio was significantly overstated “in the PPM and elsewhere ... by more than $50 million.” She claims that Montgomery violated § 10(b) of the Securities Exchange Act of 1934 and Rule 10b–5 promulgated thereunder and that the individual Defendants violated § 20(a) of the Exchange Act. She also claims that Montgomery and the individual Defendants committed common-law fraud and negligent misrepresentation. For each claim she seeks damages of $10.2 million (the amount of PFGBI's investment) plus interest and attorneys' fees.

The individual Defendants have moved to dismiss the amended complaint for failing to state a claim. They make four arguments. First, the Court lacks subject-matter jurisdiction because the amended complaint does not set forth well-pleaded facts establishing a nexus with interstate commerce. Second, the amended complaint fails to meet the heightened-pleading standards of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 (PSLRA). Third, without a well-pleaded securities claim against Montgomery, the alleged primary violator, the securities claim against the individual Defendants necessarily fails. And fourth, absent a well-pleaded federal claim, the state-law claims should be dismissed.

Montgomery has also moved to dismiss the amended complaint for failure to state a claim. Montgomery adopted the individual Defendants' arguments and added another: no party that Damian represents could have reasonably relied on loan-portfolio-valuation numbers in the PPM that were “unaudited, out of date, and subject to numerous disclaimers and exceptions.”

The crux of Damian's response is that the amended complaint meets the heightened-pleading requirements under Rule 9(b) and the PSLRA. And insofar as the Court identifies defects in the amended complaint, she “respectfully requests leave to amend to correct any deficiency.”

II. Jurisdiction

The individual Defendants contend that Damian has failed to plead facts sufficient to establish this Court's subject-matter jurisdiction. Federal Rule of Civil Procedure 8(a)(1) governs whether federal jurisdiction is well pleaded; that is, the complaint must include “a short and plain statement of the grounds for the court's jurisdiction.” The amended complaint does.

In a securities-fraud case under § 10(b) and Rule 10b–5, federal-question jurisdiction exists where the defendant accomplished the alleged violation “directly or indirectly, by use of any means or instrumentalityof interstate commerce or of the mails, or of any facility of any national securities exchange.” 15 U.S.C. § 78j; see also Woodward v. Metro Bank of Dall., 522 F.2d 84, 93 n. 19 (5th Cir.1975).

This is an exceedingly low threshold. For instance, to satisfy this requirement the defendant need only make use of an instrumentality of interstate commerce—such as telephone or email service—or the mails in connection with the alleged fraud. See, e.g., Gower v. Cohn, 643 F.2d 1146, 1152 (5th Cir. Unit B 1981) (holding use of a telephone sufficient); Bunnell v. Netsch, No. 3:12–cv–3740–L, 2013 WL 2494987, at *7 (N.D.Tex. June 11, 2013) (holding that “it is beyond debate that the Internet and email are facilities or means of interstate commerce” (quoting United States v. Barlow, 568 F.3d 215, 220 (5th Cir.2009)) (alterations omitted) (internal quotation marks omitted)).

Damian alleges that Montgomery engaged in interstate commerce by selling and marketing its securities (shares of common stock) to residents of other states and that it used the mails and email while doing so. Nothing else is required. Thus, the Court denies the individual Defendants' request to dismiss the amended complaint on the basis that Damian fails to allege a sufficient connection to interstate commerce.

III. Legal Standard

A claim will be dismissed under Federal Rule of Civil Procedure 12(b)(6) if the plaintiff does not 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); 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) (internal citation omitted); Resnick v. AvMed, Inc., 693 F.3d 1317, 1325 (11th Cir.2012). Thus, a claim will survive a motion to dismiss only if the factual allegations in the complaint are “enough to raise a right to relief above the speculative level,” and “a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555, 127 S.Ct. 1955. And while all well-pleaded facts must be accepted as true and construed in the light most favorable to the plaintiff, Powell v. Thomas, 643 F.3d 1300, 1302 (11th Cir.2011), the court need not accept as true plaintiff's legal conclusions, including those couched as factual allegations, Iqbal, 556 U.S. at 678, 129 S.Ct. 1937.

Additionally, because this case involves federal securities fraud, Damian's amended complaint must satisfy the special-pleading standard of Rule 9(b) and the heightened-pleading standard of the PSLRA to survive Montgomery's and the individual Defendants' motions to dismiss. FindWhat Investor Grp. v. FindWhat.com, 658 F.3d 1282, 1296 (11th Cir.2011).

IV. Discussion

Section 10(b) and Rule 10b–5 make...