Massey v. Merrill Lynch & Co., Inc.

• Citation: 464 F.3d 642
• Decision Date: 14 September 2006
• Docket Number: No. 05-3459.,05-3459.
• Parties: James D. MASSEY and Dennis E. Murray, Sr. Plaintiffs-Appellants, v. MERRILL LYNCH & CO., INC., Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 642

464 F.3d 642

James D. MASSEY and Dennis E. Murray, Sr. Plaintiffs-Appellants, v. MERRILL LYNCH & CO., INC., Defendant-Appellee.

No. 05-3459.

United States Court of Appeals, Seventh Circuit.

Argued April 5, 2006.

Decided September 14, 2006.

Henry J. Price (argued), Ronald J. Waicukauski, Price, Waicukauski Riley & Debrota, Indianapolis, IN, for Plaintiffs-Appellants.

Anne N. DePrez, Barnes & Thornburg, Indianapolis, IN, Gregory A. Markel, Cadwalader, Wickersham & Taft, New York, NY, for Defendant-Appellee.

Before EVANS, WILLIAMS, and SYKES, Circuit Judges.

WILLIAMS, Circuit Judge.

Plaintiffs-appellants James Massey and Dennis Murray, former directors of Conseco, Inc., sued appellee Merrill Lynch, claiming that Merrill Lynch committed fraud and breached its fiduciary duty by providing an intentionally misleading opinion to Conseco's Board of Directors (the "Board") pertaining to the financial soundness of Conseco's proposed acquisition of Green Tree Financial Corporation ("Green Tree"). Because the plaintiffs' claims are solely derivative claims and can only be brought on behalf of the corporation (Conseco), we affirm the district court's dismissal of the plaintiffs' claims.

I. BACKGROUND

During the time period pertinent to this lawsuit, Conseco was a large-scale Indiana corporation that sold, among other things, insurance, annuities, and other financial services. From 1994 through 2000, Massey and Murray served as outside directors on Conseco's Board and also served on Conseco's audit committee. The present lawsuit revolves around Conseco's ill-fated purchase of Green Tree, a company whose main business focused on purchasing and servicing trailer home mortgages. In April 1998, Conseco retained defendant Merrill Lynch to provide an opinion pertaining to Conseco's proposed valuation of the Green Tree acquisition. The parties hotly dispute the scope and nature of Merrill Lynch's opinion, but at the motion to dismiss stage we must credit the plaintiffs' version of the events.

According to the plaintiffs, Merrill Lynch knew that its so-called fairness opinion pertaining to Conseco's proposed valuation of Green Tree was "essential" to the Green Tree purchase, and that Conseco's Board would rely upon it. On April 6, 1998, Merrill Lynch provided an opinion letter in which it stated that Conseco's proposed exchange ratio of stock (which implicitly valued Green Tree in the approximate range of $7 billion) was "fair from a financial point of view." The plaintiffs allege that on that same day, Merrill Lynch made an oral presentation to Conseco's Board to "induce Conseco to complete" the Green Tree acquisition. Significantly, "Merrill Lynch purported to completely and expertly examine the operations of Green Tree to determine: the viability of its business model; the value of its assets; the availability of financial wherewithal to operate the business of Green Tree" and other in-depth financial analyses. (None of these purported analyses were included in the opinion letter provided by Merrill Lynch.) The plaintiffs also allege, on information and belief, that there was an "internal debate" and "serious doubts" among Merrill Lynch personnel as to whether it could issue such a fairness opinion in light of the "dismal underlying facts concerning the proposed Green Tree Acquisition." According to the plaintiffs, these well-founded doubts were disregarded by Merrill Lynch in favor of securing a $22 million fee, as well as ensuring future underwriting and investment banking opportunities.

The Green Tree acquisition turned out to be an unmitigated disaster for Conseco. Within two years of Conseco's purchase, Green Tree (now renamed "Conseco Finance") had suffered catastrophic losses, losing over 90% of its original $7 billion-plus valuation. In 2002, Conseco entered bankruptcy proceedings. According to the plaintiffs, the Green Tree acquisition was the pivotal event that precipitated Conseco's bankruptcy.

The plaintiffs claim they suffered damages because they purchased and/or retained large amounts of Conseco stock (which has since become worthless) based upon Merrill Lynch's alleged misrepresentations. Specifically, the plaintiffs purchased large amounts of stock through Conseco's stock purchase program (the "D & O Program"), which allowed directors and officers of Conseco to purchase large stock through personal loans provided by a bank. The bank loans were collateralized by the purchased Conseco stock. But the banks were not financially foolish: they required Conseco to guarantee the loans (and Conseco generously did so, although it retained recourse to recover funds from the employee participants if it incurred a loss under the guarantee). In addition, Conseco fronted the interest payments for the loans. Thus, through the D & O Program, participants were able to purchase huge amounts of Conseco stock with apparently no money upfront.

Perhaps not surprisingly, Conseco's D & O Program was a financial disaster, at least for the company and the shareholders who participated in the D & O Program. See generally Mitchell Pacelle and Joseph T. Hallinan, Dispute Breaks Out Over Conseco Loans, Wall St. J., Oct. 22, 2002, at C1. In total, Conseco guaranteed approximately $557.6 million in bank loans for 170 Conseco executives and directors to buy shares. But these numbers are deceiving: although 170 individuals participated in the program, the vast majority of the shares (approximately 17.3 million of the 19 million shares acquired under the D & O Program) were purchased by only fifteen individuals, the majority of whom were either directors or high-ranking executives. As of 2002, Murray's outstanding loan balance was approximately $100 million and Massey's balance was approximately $15 million. Very little of the $500 million-plus outstanding amount was repaid by directors and officers and, due to Conseco's guarantee, banks turned directly to Conseco for repayment. During the bankruptcy reorganization, the "new" (post-bankruptcy) Conseco acquired (or subrogated) the rights to collect on the outstanding loans provided to the plaintiffs, and now seeks repayment from the plaintiffs.

The present complaint is the plaintiffs' third attempt to draft a viable complaint. The first two complaints were dismissed because the plaintiffs included either a party in bankruptcy (Conseco), which would have converted this case to an adversary proceeding in bankruptcy court, or non-diverse parties (certain partners from PricewaterhouseCoopers),¹ which defeated federal jurisdiction. The district court dismissed the present amended complaint with prejudice, holding that the plaintiffs' claims were based solely on the diminution of Conseco's stock value and, as a result, their claims were derivative in nature — i.e., could be brought only on behalf of Conseco itself and therefore could not support a direct action brought individually by the plaintiffs. They now appeal this decision.

II. ANALYSIS

We review the district court's grant of a Rule 12(b)(6) motion to dismiss de novo, examining only the pleadings, taking all the facts pled as true, and construing all inferences in favor of the plaintiffs. Thompson v. Illinois Dep't of Prof'l Regulation, 300 F.3d 750, 753 (7th Cir.2002). A complaint should only be dismissed if there is no set of facts, even hypothesized, that could entitle a plaintiff to relief. See generally Xechem, Inc. v. Bristol-Myers Squibb Co., 372 F.3d 899, 901-02 (7th Cir. 2004). In addition, we will consider the exhibits attached to a complaint, but, where an exhibit conflicts with the allegations of the complaint, the exhibit typically controls. Centers v. Centennial Mortg., Inc., 398 F.3d 930, 933 (7th Cir.2005). Thus, a plaintiff "may plead himself out of court by attaching documents to the complaint that indicate that he or she is not entitled to judgment." Id.

The central issue in this appeal is whether the plaintiffs have standing to bring these claims as a direct action, or, put another way, whether their claims are solely derivative in nature and therefore belong (or belonged) to Conseco or the bankruptcy trustee. We look to the state law of Conseco's incorporation (Indiana, in this case) to determine whether the plaintiffs' claims are derivative or direct. See Boland v. Engle, 113 F.3d 706, 715 (7th Cir.1997). Indiana law adheres to the well-established corporate law principle "that shareholders of a corporation may not maintain actions at law in their own names to redress an injury to the corporation even if the value of their stock is impaired as a result of the injury." Barth v. Barth, 659 N.E.2d 559, 560 (Ind.1995) (citing Moll v. S. Cent. Solar Systems, Inc., 419 N.E.2d 154, 161 (Ind.1981)); Knauf Fiber Glass, GMBh v. Stein, 622 N.E.2d 163, 165 (Ind.1993); Mid-State Fertilizer Co. v. Exchange Nat'l Bank of Chicago, 877 F.2d 1333, 1335-37 (7th Cir. 1989); Twohy v. First Nat'l Bank of Chicago, 758 F.2d 1185, 1194 (7th Cir.1985); see generally A.L.I., Principles of Corporate Governance: Analysis and Recommendations § 7.01 (1992); 12 B.W. Fletcher Cyclopedia of the Law of Private Corporations, § 5911 (rev.perm. ed.1984). That is, "[g]enerally speaking, the stockholders of a corporation for the purposes of litigation growing out of the relations between the corporation and a third person, surrender their personal or individual entities to the corporation in which they are stockholders." Scott v. Anderson Newspapers, Inc., 477 N.E.2d 553, 563 (Ind.App.Ct.1985). As a result, when a corporation suffers injury, either from corporate insiders or, as in this case, from a third party, it is the corporate entity—not the individual shareholders—who retains the cause of action. Id. As a result, any claims that belong to the corporation must be made derivatively (i.e., brought in the name and on behalf of a corporation), and any resulting recovery flows to the corporate coffers.

In contrast, a shareholder may...