Rivers v. Wachovia Corp.

• Decision Date: 22 December 2011
• Docket Number: No. 10–2222.,10–2222.
• Citation: 665 F.3d 610
• Parties: John M. RIVERS, Jr., Plaintiff–Appellant, v. WACHOVIA CORPORATION; Wells Fargo & Company; G. Kennedy Thompson; Donald K. Truslow; Thomas J. Wurtz; Robert K. Steel; Does 1 Through 25, Defendants–Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

665 F.3d 610

John M. RIVERS, Jr., Plaintiff–Appellant,
v.
WACHOVIA CORPORATION; Wells Fargo & Company; G. Kennedy Thompson; Donald K. Truslow; Thomas J. Wurtz; Robert K. Steel; Does 1 Through 25, Defendants–Appellees.

No. 10–2222.

United States Court of Appeals, Fourth Circuit.

Argued: Oct. 26, 2011.Decided: Dec. 22, 2011.

[665 F.3d 613]

ARGUED: Ian Wesley Freeman, George Trenholm Walker, Pratt–Thomas Walker, PA, Charleston, South Carolina, for Appellant. Robert Walker Fuller, III, Robinson, Bradshaw & Hinson, PA, Charlotte, North Carolina, for Appellees. ON BRIEF: Daniel S. McQueeney, Jr., Pratt–Thomas Walker, PA, Charleston, South Carolina, for Appellant. Louis Adams Bledsoe, III, Stephen Montgomery Cox, Adam Karl Doerr, Robinson, Bradshaw & Hinson, PA, Charlotte, North Carolina, for Appellees.

Before WILKINSON, MOTZ, and DUNCAN, Circuit Judges.

Affirmed by published opinion. Judge WILKINSON wrote the opinion, in which Judge MOTZ and Judge DUNCAN joined.

OPINION WILKINSON, Circuit Judge:

A former shareholder in Wachovia Corporation, appellant John M. Rivers, Jr. seeks to recover personally for the precipitous decline in value of his approximately 100,000 shares of Wachovia stock during the recent financial crisis. The district court, however, dismissed Rivers's suit against Wachovia and four of its senior executives. The court concluded that Rivers's complaint stated a claim derivative of injury to the corporation and that he was therefore barred from bringing a direct or individual cause of action against the defendants. Because Rivers's varied attempts to recast his derivative claim as individual are unavailing, we shall affirm the judgment.

I.

On October 1, 2009, John M. Rivers, Jr. filed suit in South Carolina state court against Wachovia Corporation (since acquired by Wells Fargo & Company) and four of its former officers, G. Kennedy Thompson, Robert K. Steel, Thomas J. Wurtz, and Donald K. Truslow. Rivers's complaint fills almost 100 pages and lists seven causes of action: fraud, negligent misrepresentation, breach of fiduciary duty, constructive fraud, breach of duties as corporate officers, gross negligence, and violation of the South Carolina Securities Act of 2005.

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The crux of the complaint, however, alleges that the defendants misrepresented the financial health of Wachovia and that, as a result, Rivers retained over 100,000 Wachovia shares until they lost nearly all value in the market downturn of 2008. According to the complaint: “Faced with the challenging housing market, and resulting strain on the mortgage system [the defendants] set about on a course of conduct to falsely represent the financial position and performance of Defendant Wachovia ... to discourage the Plaintiff from selling his Wachovia stock.”

Rivers claims that the defendants concealed problems growing out of Wachovia's 2006 acquisition of Golden West Financial Corporation, a California-based lender specializing in adjustable-rate mortgages that enabled borrowers to make minimum payments lower than the accrued interest on the loan. As the housing market declined, Rivers alleges that defendants understated Wachovia's credit losses, misrepresented the riskiness of Wachovia's assets, and overstated the strength of Wachovia's balance sheet in press releases, SEC filings, shareholder conference calls, and other materials disseminated to shareholders. Despite the defendants' continued assurances, in late 2007 Wachovia's true financial condition began to emerge on the heels of the subprime mortgage crisis. By the end of September 2008 the price of Wachovia's common stock had dropped dramatically to below $1 per share from $13.70 earlier that month and $56.65 in early 2007.

Under such circumstances if the corporation fails or refuses to assert a claim of injury on its own behalf, the “proper remedy ... is a ‘derivative action,’ which is an action brought by a shareholder in the name or right of a corporation to redress an injury sustained by, or to enforce a duty owed to, the corporation.” 13 Fletcher Cyclopedia of the Law of Corporations §§ 5939–5940 (rev. ed. 2011). Rivers, however, declined to pursue a derivative action, under which any recovery would inure to the benefit of the corporation. Instead, he sought a personal recovery for the decline in Wachovia's share price on the theory that he had intended to sell his Wachovia stock before the collapse of the market but was induced not to by the defendants' misrepresentations of Wachovia's financial stability and health.

The defendants removed the action to federal court on diversity grounds and moved to dismiss Rivers's complaint on the basis that “neither North Carolina law nor South Carolina law permits direct shareholder claims for losses resulting solely from a fall in the value of stock.” The district court granted the motion to dismiss all counts of the complaint, finding that the complaint “boils down to the claim that Defendants[ ] participated in a fraudulent scheme designed to deceive Plaintiff and the investing public as to the financial stability of Wachovia” and that “Plaintiff's claims ... are derivative claims that must be dismissed.” Rivers appeals, and for purposes of this review we take the factual contentions in his complaint as true. See Braun v. Maynard, 652 F.3d 557, 559 (4th Cir.2011).

II. A.

Rivers's attempt to recover individually for the decline in Wachovia's share price contravenes firmly settled corporate law governing derivative claims. Under both North Carolina and South Carolina law, “[t]he well-established general rule is that shareholders cannot pursue individual causes of action against third parties for wrongs or injuries to the corporation that result in the diminution or destruction

[665 F.3d 615]

of the value of their stock.” Barger v. McCoy Hillard & Parks, 346 N.C. 650, 488 S.E.2d 215, 219 (1997); see also Babb v. Rothrock, 303 S.C. 462, 401 S.E.2d 418, 419 (1991) (“It is firmly established by our decisions that individual shareholders may not sue corporate directors or officers directly for losses suffered by the corporation.”).^* Instead, shareholders may pursue such claims as a derivative suit on behalf of the corporation. The Supreme Court has described such shareholder derivative suits as a remedy “for those situations where the management through fraud, neglect of duty or other cause declines to take the proper and necessary steps to assert the rights which the corporation has.” Meyer v. Fleming, 327 U.S. 161, 167, 66 S.Ct. 382, 90 L.Ed. 595 (1946).

Prohibiting individual suits to recover for injuries that result in the decline in value of a corporation's stock is understandable, for “the gravamen of [the] complaint is an injury to the corporation and not to the individual interest of the shareholder.” Hite v. Thomas & Howard Co. of Florence, 305 S.C. 358, 409 S.E.2d 340, 342 (1991); see Fletcher Cyclopedia § 5913. An individual action “would not protect the interests of all stockholders” who suffer a common injury from the decline in value of the corporation's stock. Brown v. Stewart, 348 S.C. 33, 557 S.E.2d 676, 685 (S.C.Ct.App.2001). Rather, the recovery of one shareholder in an individual suit would invariably be at the expense of other shareholders who suffered an identical harm.

By contrast, any recovery in a derivative suit redounds to the benefit of the corporation. Because any recovered damages “constitute assets which belong to the corporation,” “any action therefor must be brought in the right of the corporation, for the benefit of all persons entitled to participate in the distribution of its assets.” Gary v. Matthews, 148 S.C. 125, 145 S.E. 702, 703 (1928). The procedural requirements for derivative suits further protect the corporation and its stockholders by preventing a “multiplicity of lawsuits,” by limiting “who should properly speak for the corporation” and by precluding “self-selected advocate[s] pursuing individual gain rather than the interests of the corporation or the shareholders as a group, [from] bringing costly and potentially meritless strike suits.” Norman v. Nash Johnson & Sons' Farms, Inc., 140 N.C.App. 390, 537 S.E.2d 248, 253 (2000) (quoting F.H. O'Neal & R. Thompson, O'Neal's Oppression of Minority Shareholders § 7:07 (2d ed. 2000)) (internal quotation marks omitted). A derivative lawsuit is thus the vehicle for a shareholder to litigate injuries that result in the diminution in value of the corporation's stock.

B.

Given these principles, Rivers would appear to have no leg to stand on. The heart of his complaint is that he did not sell his shares in Wachovia before their decline in value due to his reliance on the defendants' alleged misrepresentations and misstatements in Wachovia's public statements from January 2007 to September

[665 F.3d 616]

2008, including SEC filings, press releases, and earnings calls. He claims that due to the defendants' “concerted actions to conceal the truth and issue reassuring misrepresentations to financial markets and Plaintiff,” he “has been damaged and caused to lose millions of dollars in the value of stock he held in Wachovia which he otherwise would have sold.”

The problem, of course, is that these allegations describe a classic injury inflicted on the corporation and identify losses common to all Wachovia shareholders during the credit crisis. See Kagan v. Edison Bros. Stores, Inc., 907 F.2d 690, 692 (7th Cir.1990) (“[T]he nub of the problem is that the investors' injury flows not...