LR Trust ex rel. SunTrust Banks, Inc. v. Rogers

• Decision Date: 18 September 2017
• Docket Number: CIVIL ACTION NO. 1:16–cv–4132–SCJ
• Parties: LR TRUST, derivatively ON BEHALF OF SUNTRUST BANKS, INC., Plaintiff, v. William H. ROGERS, Jr., Paul R. Garcia, M. Douglas Ivester, Kyle Prechtl Legg, Donna S. Morea, David M. Ratcliffe, Frank P. Scruggs, Jr., Thomas R. Watjen, Dr. Phail Wynn, Jr., Robert M. Beall, II, David H. Hughes, William Linnenbringer, Jerome T. Lienhard II, Defendants, and SunTrust Banks, Inc., a Georgia corporation.
• Court: U.S. District Court — Northern District of Georgia

270 F.Supp.3d 1364

LR TRUST, derivatively ON BEHALF OF SUNTRUST BANKS, INC., Plaintiff,

v.William H. ROGERS, Jr., Paul R. Garcia, M. Douglas Ivester, Kyle Prechtl Legg, Donna S. Morea, David M. Ratcliffe, Frank P. Scruggs, Jr., Thomas R. Watjen, Dr. Phail Wynn, Jr., Robert M. Beall, II, David H. Hughes, William Linnenbringer, Jerome T. Lienhard II, Defendants,andSunTrust Banks, Inc., a Georgia corporation.

CIVIL ACTION NO. 1:16–cv–4132–SCJ

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

Signed September 18, 2017

David Andrew Bain, Law Offices of David A. Bain, LLC, Michael A. Rogovin, WeissLaw LLP, Atlanta, GA, David C. Katz, Joseph H. Weiss, WeissLaw LLP, New York, NY, for Plaintiff.

J. Timothy Mast, Mary M. Weeks, Troutman Sanders, LLP, Benjamin Wayne Cheesbro, James William Cobb, Caplan Cobb LLP, Atlanta, GA, Annette Lanning Kinderman, Crawford S. McGivaren, Jr., Cabaniss, Johnston, Gardner, Dumas & O'Neal, Birmingham, AL, for Defendants.

ORDER

HONORABLE STEVE C. JONES, UNITED STATES DISTRICT JUDGE

This matter appears before the Court on Defendants' Motions to Dismiss (Doc. Nos. [36], [39] ).

I. BACKGROUND

On November 3, 2016, Plaintiff, LR Trust, filed a Verified Stockholder Derivative Complaint¹ on behalf of nominal defendant SunTrust Banks, Inc. ("SunTrust" or the "Company")² against certain SunTrust directors and officers (the "Individual Defendants," and collectively with SunTrust, the "Defendants"). Doc. No. [1].

Plaintiff asserts claims for breach of fiduciary duties (Counts I); gross mismanagement (Count II); and unjust enrichment against (Count III) against Defendants relating to conduct of SunTrust's wholly owned subsidiary, SunTrust Mortgages, Inc. ("STM").³ Id. ¶ 1. Plaintiff alleges that:

SunTrust was caused to engage in mortgage modification fraud and to violate the Consumer Financial Protection Act of 2010, the False Claims Act, the Financial Institutions Reform Recovery and Enforcement Act of 1989, the Bankruptcy Code, regulations promulgated by the Department of Housing and Urban Development ("HUD"), requirements for originating Federal Housing Administration ("FHA") mortgage loans, the requirements of the Home Affordable Modification Program ("HAMP"), contractual obligations regarding the sale of mortgage loans, and the unfair and deceptive practices acts of the individual States.

Doc. No. [1], ¶ 1. Plaintiff alleges that said conduct has been to the detriment of SunTrust, its stockholders, its customers, and its business practices. Id. Plaintiff states that "SunTrust has suffered enormous financial,⁴ regulatory, and reputation damage" as a result of Defendants' failure to fulfill their fiduciary duties by taking no action to ensure that enterprise threatening activities (such as ineffective internal controls, insufficient staff training, lack of sufficient documentation to evidence compliance with HUD quality control requirements, unacceptably high error rates for the origination of FHA insured-mortgages, and violations of legal obligations) were remedied. Id. ¶¶ 2–5.

Plaintiff further alleges that it "demanded that SunTrust's Board take action to recover its damages from those who caused this material harm, and that it cure the internal control and corporate governance deficiencies." Id. ¶ 7; Doc. No. [36–3]. However, Plaintiff's demand was rejected after formation of a Demand Review Committee (the "DRC").⁵ Doc. No. [1], ¶ 7. More specifically, the DRC concluded in a 176–page report⁶ that

Based on the comprehensive investigation covered in this Report, the DRC has concluded that, under the applicable standards, no actionable misconduct occurred on the part of any current or former STI⁷ Director, officer, or employee with respect to the matters raised by the shareholder's demands that have been resolved by settlement. We have determined that the actions of the Directors and officers were reasonable and undertaken in the best interests of SunTrust and its shareholders. We found no facts or circumstances indicating that any Director, officer, or employee knowingly or intentionally violated any law or caused harm or damage to SunTrust. To the contrary, the evidence establishes that the Directors and officers undertook and performed their duties in accordance with applicable standards under Georgia and Virginia law and SunTrust's articles of incorporation and by-laws. Therefore, any such claim would be without basis in fact, legally insufficient, and not actionable by STI.

Moreover, contingent liabilities related to pending, unresolved matters mentioned by the shareholder cannot, as a matter of law, support a claim at this time ....Thus, additional shareholder- or court-monitored corrective action is neither warranted nor appropriate as a matter of law.

Finally, we find that, in light of the expense, disruption, burden, and distraction that pursuing such claims would cause SunTrust, its management and shareholders and, in light of our determination that the shareholder has failed to show or allege any act or omission for which there is reasonable grounds to find that any SunTrust Director, officer, or employee should be held liable to SunTrust, it is not in the best interests of SunTrust to bring or pursue any litigation or other action based on the shareholder's demands that are the subject of this Report.

Doc. No. [46–4], pp. 96–97.

Plaintiff asserts that it was neither rational nor the product of independent and disinterested directors to reject its demand. Doc. No. [1], ¶ 8. Plaintiff states that it "brings this action for the benefit of SunTrust to recover the Company's damages, and [to] cause the implementation of the demanded internal control and governance practice reforms." Id.

As stated above, on November 3, 2016, Plaintiff filed its Verified Stockholder Derivative Complaint. Id. In its Complaint, Plaintiff alleges that it acquired SunTrust stock on or about October 7, 2008, has continuously owned SunTrust Common stock at all relevant times, and is a current shareholder of SunTrust. Id. ¶¶ 12, 87.

On February 15, 2017, SunTrust (at the direction of the DRC) and the Individual Defendants filed motions to dismiss. Doc. Nos. [36], [39].⁸ Plaintiff filed a response (Doc. Nos. [47], [54] )⁹ and Defendants filed reply briefs (Doc. Nos. [52], [53] ). The Court also permitted Plaintiff to file a sur-reply. Doc. Nos. [61], [62]. This matter is now ripe for review.

II. LEGAL STANDARD

Shareholder derivative suits are governed by Federal Rule of Civil Procedure 23.1, and the district court reviews a motion to dismiss under this rule. Peller v. S. Co., 911 F.2d 1532, 1536 (11th Cir. 1990). Rule 23.1 provides in relevant part:

(a) Prerequisites. This rule applies when one or more shareholders or members of a corporation ... bring a derivative action to enforce a right that the corporation ... may properly assert but has failed to enforce. The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of shareholders or members who are similarly situated in enforcing the right of the corporation ....

(b) Pleading Requirements. The complaint must be verified and must:

(1) allege that the plaintiff was a shareholder or member at the time of the transaction complained of, or that the plaintiff's share or membership later devolved on it by operation of law;

(2) allege that the action is not a collusive one to confer jurisdiction that the court would otherwise lack; and

(3) state with particularity:

(A) any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and

(B) the reasons for not obtaining the action or not making the effort.

Fed. R. Civ. P. 23.1.¹⁰

In addition, a motion to dismiss a shareholder's derivative suit under Georgia law, O.C.G.A. § 14–2–744, "does not technically fit into a category of [a 12(b)(6) motion to dismiss] nor does it reach the actual merits of the stockholder's claims as would be at issue in the usual summary judgment motion ...." Thompson v. Sci. Atlanta, Inc., 275 Ga.App. 680, 683, 621 S.E.2d 796, 799 (2005). The "motion to dismiss a shareholder's derivative action pursuant to O.C.G.A. § 14–2–744(a) is essentially a hybrid summary judgment motion for dismissal. Accordingly, [the court] may look beyond the pleadings to the evidence in the record to resolve the [case]." Benfield v. Wells, 324 Ga.App. 85, 85, 749 S.E.2d 384, 385 (2013).¹¹ In addition, "all non-conclusory factual allegations asserted in the Verified Shareholder Derivative [Complaint] are accepted as true, and all reasonable inferences are drawn in favor of the plaintiff [shareholder] as the non-movant." Sciabacucchi v. Burns, No. 15-CV-7506 (PKC), 2016 WL 4074446, at *1 (S.D. N.Y. July 29, 2016) (citations omitted).

III. ANALYSIS

A. Rule 23.1

Defendants argue that the Complaint should be dismissed for failure to satisfy Federal Rule of Civil Procedure 23.1. Specifically, Defendants argue that Plaintiff has not satisfied the two heightened pleading requirements found in Rule 23.1 : (1) establishing that Plaintiff was a shareholder at the time of the wrongful conduct (that is alleged to have began in 2006); and (2) stating with particularity the reasons why the DRC's refusal of the demand was wrongful. Doc. No. [36–1], p. 16.

1. Standing

Federal Rule of Civil Procedure 23.1(b)(1) provides in relevant part that a shareholder derivative action complaint must "allege that the plaintiff was a shareholder ... at the time of the transaction complained of ...." "This rule is intended to prevent prospective plaintiffs from purchasing shares in a corporation with an eye to filing a derivative suit." In re Zoran Corp. Derivative Litig., 511 F.Supp.2d 986, 1009 (N.D. Cal. 2007).¹²

In their motion, Defendants argue that the Complaint challenges wrongful conduct dating back to the beginning of 2006;¹³ however, "Plaintiff first purchased its SunTrust shares on October 7,...