AHW INVESTMENT PARTNERSHIP, MFS, INC., ANGELA H. WILLIAMS, AS TRUSTEE OF THE ANGELA H. WILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD MARCH 24, 2006, THE ANGELAWILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD APRIL 17, 2006, THE ANGELAWILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD MAY 9, 2006, THE ANGELAWILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD NOVEMBER 1, 2007, THE ANGELAWILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD MAY 1, 2008, THE ANGELAWILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD JULY 1, 2008, AND THE ANGELAWILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD NOVEMBER 21, 2008, Plaintiffs‐Appellants‒Cross‐Appellees, –v.– CITIGROUP INC., CHARLES PRINCE, VIKRAM PANDIT, GARY CRITTENDEN, ROBERT RUBIN, ROBERT DRUSKIN, THOMAS G. MAHERAS, MICHAEL STUART KLEIN, DAVID C. BUSHNELL, Defendants‐Appellees‒Cross‐Appellants.
Docket Nos. 13‐4488‐cv(L), 13‐4504‐cv(XAP)
United States Court of Appeals FOR THE SECOND CIRCUIT
Decided: November 25, 2015
August Term, 2014 (Argued: January 9, 2015)
HALL, LYNCH, and CARNEY, Circuit Judges.
Plaintiffs—a corporation, partnership, and seven grantor‐retained annuity trusts controlled by Angela and Arthur Williams—appeal from an October 30, 2013 judgment of the United States District Court for the Southern District of New York (Sidney H. Stein, Judge), dismissing their amended complaint for failure to state a claim. Plaintiffs allege that they suffered losses in excess of $800 million when, from May 2007 through March 2009, they refrained from selling their shares of Citigroup stock based on the fraud and negligent misrepresentations of defendants Citigroup and Citigroup executives. Defendants cross‐appeal, arguing that the District Court erred simply by addressing the adequacy of plaintiffs’ substantive claims as “holders” of the shares during a period of decline in share value: According to defendants, Delaware law mandates that such claims be brought in a shareholder derivative action, not as direct claims. If defendants are correct, plaintiffs—who are no longer Citigroup shareholders—lack standing to maintain this suit. The characterization of plaintiffs’ claims as direct or derivative calls for an interpretation of an unsettled area of Delaware law, and we anticipate that the issue‘s resolution will have significance well beyond the instant suit. Accordingly, we respectfully certify to the Delaware Supreme Court the question whether, under Delaware law, “holder” claims such as those plaintiffs attempt to assert are properly brought in a direct or derivative action.
QUESTION CERTIFIED.
STEVEN F. MOLO (Robert K. Kry and Hassan A. Shah, on the brief), MoloLamken LLP, New York, NY, and Jacob H. Zamansky, Zamansky LLC, New York, NY, for Plaintiffs‐Appellants‐Cross‐Appellees.
WALTER RIEMAN (Brad S. Karp, Susanna M. Buergel, Jane B. O‘Brien, and Stephen P. Lamb, on the brief), Paul, Weiss, Rifkind, Wharton & Garrison, New York, NY, for Defendants‐Appellees‐Cross‐Appellants.
Plaintiffs—a corporation, partnership, and seven grantor‐retained annuity trusts (“GRATs“) controlled by Florida residents Angela and Arthur Williams—appeal from an October 30, 2013 judgment of the United States District Court for the Southern District of New York (Sidney H. Stein, Judge), dismissing their amended complaint for failure to state a claim. Plaintiffs allege that they suffered losses in excess of $800 million when, from May 2007 through March 2009, they refrained from selling their shares of Citigroup stock based on the fraudulent and negligent misrepresentations of defendants Citigroup and Citigroup executives. Defendants cross‐appeal, arguing that the District Court erred by addressing the adequacy of plaintiffs’ substantive claims as “holders” of the shares during a period of decline in share value: According to defendants, Delaware law mandates that such claims be brought in a shareholder derivative action, not as direct claims (as plaintiffs have done).
If defendants are correct, plaintiffs—who are no longer Citigroup shareholders—lack standing to maintain this suit. The proper characterization of plaintiffs’ claims as direct or derivative calls for an interpretation of an unsettled area of Delaware law in which there appear to be conflicting decisions, and we anticipate that the resolution of this issue will have significance well
BACKGROUND
I. Factual Background1
In 1977, Arthur L. Williams founded an insurance company that by 1989 had become very successful and merged with Travelers Group. In 1998, Travelers Group merged with Citibank to become Citigroup. In the 1998 merger, Williams acquired 17.6 million shares of Citigroup common stock, then valued at approximately $616 million, or $35 per share. By early 2007, “for tax, estate and investment‐planning purposes,” the shares had been transferred to a partnership, a corporation, and various GRATs controlled by Arthur and his wife, Angela. Am. Compl. ¶ 3.
In May 2007, Williams made a plan to sell his entire Citigroup position, based on the shared recommendation of his financial advisors at that time. In
Against the counsel of his advisors and despite his plans to sell, Williams “delayed executing his sales” of the remainder of his shares when, later in 2007, “Citigroup‘s stock price declined as the markets began to experience volatility from the subprime mortgage crisis.” Id. ¶ 174. Williams believed that Citigroup had “little downside risk and its shares were likely being dragged down by the fortunes of other players” and that “once the market understood . . . the different—and far superior—risk posture of Citigroup, its shares would recover and he could complete his planned sale as intended.” Id. ¶ 175. Plaintiffs allege that Williams formulated this belief in reliance on Citigroup‘s “public statements and financial reports” that “concealed the full extent and impairment of billions in ‘toxic’ assets, including [collateralized debt obligations] backed by subprime assets.” Id. ¶ 51; see also ¶¶ 175, 176. Plaintiffs further allege that Citigroup “gave investors the impression that it was reducing and prudently managing its risks, which was simply not true.” Id. ¶ 51.
Williams thus calculates that his reliance on Citigroup‘s misrepresentations resulted in losses to him, his wife, and their controlled entities of over $800 million.
Having filed their original complaint in December 2010, in July 2011 plaintiffs filed the amended complaint at issue here. In it, they seek damages for negligent misrepresentation and for common law fraud. Defendants moved to dismiss, arguing first that plaintiffs lack standing because under Delaware law their claims are derivative, and second, that under New York law the alleged misrepresentations are not actionable.
In a 2013 opinion and order, the District Court granted defendants’ motion and dismissed the amended complaint with prejudice. AHW Inv. P‘ship v. Citigroup Inc., 980 F. Supp. 2d 510, 527 (S.D.N.Y. 2013). Applying Delaware law, the District Court first “reject[ed] defendants’ contention that [the] claims are in reality derivative claims brought on behalf of Citigroup.” Id. at 516. It “recognize[d] a tension” in the Delaware precedent, but nevertheless concluded that “plaintiffs, not Citigroup, are the victims of Citigroup and the officer defendants’ alleged deception, and therefore plaintiffs are the ones with standing to sue.” Id. at 517. The District Court then conducted a conflict of laws analysis and concluded that New York law—as opposed to Florida law, as urged
This appeal and cross‐appeal followed.
DISCUSSION
We review de novo a district court‘s dismissal of a complaint under
On appeal, plaintiffs argue that the District Court erred by applying New York, not Florida, law to their claims, and that, even applying New York law, their fraud and negligent misrepresentation claims were sufficient to withstand a motion to dismiss. Defendants dispute these contentions and argue in their cross‐appeal that, contrary to the District Court‘s conclusion, plaintiffs’ claims are properly considered derivative rather than direct.
I. Tooley and its Application to Plaintiffs’ Claims
In diversity cases such as this, “federal courts look to the laws of the forum state in deciding issues regarding conflicts of law.” Wall v. CSX Transportation, Inc., 471 F.3d 410, 415 (2d Cir. 2006). Plaintiffs filed their complaint in the Southern District of New York; therefore, we examine the law of New York, the forum state, to determine which state‘s substantive law governs the dispute.
Under New York law, we look to the law of the state of incorporation when adjudicating whether a claim is direct or derivative. See Galef v. Alexander, 615 F.2d 51, 58 (2d Cir. 1980); Seidl v. Am. Century Cos., 713 F. Supp. 2d 249, 255 (S.D.N.Y. 2010), aff‘d, 427 F. App‘x 35 (2d Cir. 2011). Because Citigroup is incorporated in Delaware, Delaware law controls whether plaintiffs’ claims are properly characterized as direct or derivative. Plaintiffs mount no challenge to this conclusion.
The leading Delaware Supreme Court case on the direct/derivative dichotomy is widely acknowledged to be Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004). Like the District Court here, however, we perceive some tension between Tooley and later state court decisions—primarily lower court decisions, but also one decision of the Delaware Supreme Court that post‐dates Tooley. Before considering how these later cases may have affected Tooley‘s import, we first review Tooley in some detail, since it is central to our inquiry.
In Tooley, minority shareholder plaintiffs sought damages from the corporation on the basis of allegations that members of the corporation‘s board of directors breached their fiduciary duties to the corporation by agreeing to delay closing a proposed merger for twenty‐two days, thereby depriving minority shareholders of use of the funds they were to receive upon closing for that twenty‐two‐day period. Id. at 1033–34. The Court of Chancery dismissed the action, concluding the plaintiffs’ claim was derivative, not direct. It reasoned
On Tooley‘s appeal from the Court of Chancery decision, however, the Delaware Supreme Court expressly “disapprove[d] the use of the concept of ‘special injury’ as a tool” in distinguishing between direct and derivative claims. Tooley, 845 A.2d at 1035. The court held instead that “whether a stockholder‘s claim is derivative or direct . . . must turn solely on the following questions: (1) who suffered the alleged harm (the corporation or the suing stockholders,
Turning back to the Williamses’ complaint, we see that Tooley‘s two‐part test suggests that the Williamses may bring their claims directly. With regard to “who suffered the alleged harm,” it is true that in a general sense both plaintiffs and Citigroup suffered harm when the Company‘s share price fell over time as the extent of its investment in subprime‐related assets came to light. But the harm for which plaintiffs seek recovery is more particularized: It arises from their detrimental reliance on what they cast as defendants’ misrepresentations, made through “personal and direct communications” to them, not merely public announcements. See, e.g., Am. Compl. ¶ 181 (describing the decision not to sell as being based on Arthur Williams‘s “personal and direct communications with senior Citigroup officers“); id. ¶¶ 291–92 (seeking relief for having been “the recipients of multiple misrepresentations and omissions of material fact” and alleging that “Defendants knew their statements to Plaintiffs concerning Citigroup‘s subprime exposure were false at the time they were made“).
And as to the second Tooley question, it seems that the Williamses, not Citigroup, would “receive the benefit of any recovery.” The complaint alleges that, “as a direct result of Defendants’ fraudulent statements and Plaintiffs’ reliance thereon, Plaintiffs suffered approximately $809,950,000 in compensatory damages.” Id. ¶ 296. Theirs is fundamentally an action for compensatory damages, and if any party were to recover damages for the asserted misrepresentations (if actionable at all), it would be plaintiffs: It would be a strange outcome indeed for Citigroup to pay itself for losses sustained by certain shareholders arising from alleged misrepresentations made to those shareholders by the Company and its officers. Thus, our response to the second Tooley question also appears to support plaintiffs’ argument that they may bring their claims directly.
II. Delaware Courts’ More Recent Application of Tooley
Subsequent developments in the Delaware courts’ application of Tooley give us pause, however. As detailed below, in a number of cases the Delaware Chancery Court has found that claims that would be “direct” under the two‐part Tooley test must nonetheless be brought “derivatively” because the claims are not “independent of any alleged injury to the corporation,” Tooley, 845 A.2d at 1039. Relying on the same language from Tooley, a recent Delaware Supreme Court case may have given new life to the “special injury” requirement that was earlier disavowed in Tooley. We think that these developments have major implications for whether, under Delaware law, shareholder‐plaintiffs in general, and the Williamses in particular, have stated direct or derivative claims.
In Gentile v. Rossette, 906 A.2d 91 (Del. 2006), for example, the Delaware Supreme Court reviewed an action brought by a group of minority shareholders against the corporation‘s directors and chief executive officer for breach of fiduciary duty related to an alleged overpayment to the CEO. The court held
Similarly, in In re J.P. Morgan Chase & Co. Shareholder Litigation, 906 A.2d 808 (Del. Ch. 2005), aff‘d on other grounds, 906 A.2d 766 (Del. 2006), the plaintiff stockholders filed what they contended were direct claims based on the defendant company‘s alleged overpayment in a merger with another bank, id. at 812. Plaintiffs complained that the value of their shares was diluted by virtue of the overpayment, and that this was the type of harm that would give rise to a direct action under Tooley. Id. at 818. The Court of Chancery looked to “the heart of the[] complaint” and found that “[t]he plaintiffs, if they were harmed at all, were harmed indirectly and only because of their ownership in JPMC.” Id. at 818–19. Therefore, the court concluded, “the plaintiffs’ claim is derivative.” Id. at 819.
These cases suggest that the two‐part Tooley test may now have evolved and that the Williamses’ claims here, which are tied to the dramatic plunge in the value of Citigroup stock between 2007 and 2009, might not be correctly treated as direct under Delaware law.
Where all of a corporation‘s stockholders are harmed and would recover pro rata in proportion with their ownership of the corporation‘s stock solely because they are stockholders, then the claim is derivative in nature. The mere fact that the alleged harm is ultimately suffered by, or the recovery would ultimately inure to the benefit of, the stockholders does not make a claim direct under Tooley. In order to state a direct claim, the plaintiff must have suffered some individualized harm not suffered by all of the stockholders at large.
Feldman thus casts doubt on the viability of plaintiffs’ claims in two ways. First, the Williamses seek recovery for losses sustained as a result of the diminution of value in their Citigroup stock over a certain period. These are losses experienced by “all of [the] corporation‘s stockholders” who held stock for that same time, and each of them, like the rebuffed plaintiff Feldman, “would recover pro rata in proportion with their ownership of the corporation‘s stock”
To be clear, the Feldman court purports to rely on Tooley, not to overrule it. See Feldman, 951 A.2d at 732–33 (applying the Tooley analytical framework). But the Feldman decision appears to us possibly to revive the “special injury” requirement disclaimed in Tooley. As we have highlighted, under Feldman, “to state a direct claim, the plaintiff must have suffered some individualized harm not suffered by all of the stockholders at large.” Id. at 733. As referenced earlier, Tooley purportedly did away with the requirement that, to state a direct claim, a plaintiff must identify “a wrong that is separate and distinct from that
In the Williamses’ case, the District Court confronted this issue and concluded that, notwithstanding Feldman‘s suggestion to the contrary, “plaintiffs’ injuries are not depend[e]nt on Citigroup‘s injury.” AHW, 980 F. Supp. 2d at 517. It explained insightfully that “plaintiffs can prevail without showing an injury to Citigroup because the nature of the allegation is that the misstatements and omissions concealed damage to Citigroup‘s assets that had already been done.” Id. (internal quotation marks omitted) (emphasis added).
It is true that the misconduct alleged by the Williamses occurred after the damage to the Company had been done and that the ostensible purpose of the alleged misconduct was to conceal this damage. But the “claimed direct injury” here is the shrinking value in plaintiffs’ stockholdings during the period in which defendants’ statements convinced plaintiffs to retain their shares. The core of this injury is the decline in stock price, which of course reflects injury sustained
Delaware case law interpreting Tooley does not, however, uniformly point toward a conclusion that the Williamses’ claims are derivative. The Delaware Court of Chancery has held that when the gravamen of a plaintiff‘s claims is that the defendants “failed to disclose material information when they had a duty to disclose it and made other misleading or fraudulent statements,” those claims are direct under Delaware law. Albert v. Alex. Brown Mgmt. Servs., Inc., Nos. Civ. A. 762‐N, 763‐N, 2005 WL 2130607, at *12 (Del. Ch. Aug. 26, 2005). In Albert, plaintiffs—who were unitholders and limited partners in two exchange funds—claimed, among other things, that the fund managers withheld material information about the operation and performance of the funds, in breach of contract and breach of their fiduciary duty. Id. at *1–3. The court, applying Tooley, found that those claims were direct because (1) the disclosure violations were contractual and harmed the unitholders, not the partnership, by depriving them of the opportunity to withdraw money from the funds, and (2) the
Nonetheless, Delaware cases post‐Tooley complicate our analysis and suggest that the Williamses may lack standing to pursue their claims against defendants. Thus, our review of recent Delaware case law suggests a conclusion contrary to that we would have reached had we applied Tooley alone.
III. Our Circuit‘s Application of Tooley
Our Circuit‘s own prior decisions applying Delaware law also cast doubt on whether the specific sort of claims advanced by the Williamses—those alleging harm based on the retention of stock in reliance on a defendant‘s
In Newman v. Family Management Corp., 530 F. App‘x 21 (2d Cir. 2013), for example, we recently interpreted Tooley to require plaintiffs to allege a “unique injury” to assert a direct claim. Id. at 27.6 The Newman plaintiffs were investors in a “sub‐feeder fund” that was invested in the notorious Madoff Ponzi scheme via the defendant Family Management Corporation. See Newman v. Family Mgmt. Corp., 748 F. Supp. 2d 299, 302, 304–05 (S.D.N.Y. 2010). Plaintiffs alleged,
In a second case decided by summary order, Stephenson v. PricewaterhouseCoopers, LLP, 482 F. App‘x 618 (2d Cir. 2012), we drew a distinction between a plaintiff‘s claim of being “induced . . . to invest” in a partnership,7 which may be brought directly, and a claim “based on his decision to remain invested,” which must be brought derivatively. Id. at 621. Stephenson was an investor in a Delaware limited partnership operating as a “feeder fund” into the Madoff Ponzi scheme. Id. at 620. He sued PricewaterhouseCoopers, LLP, the partnership‘s auditor, for fraud, and sought damages based on the loss of value
Although our Circuit‘s history implies a view that the Williamses’ claims here and holder claims generally are properly brought derivatively under Delaware law, this implication arises entirely from our holdings in non‐binding summary orders.8 The Delaware Supreme Court, to our knowledge, has not yet evaluated whether the distinction between a holder claim and an inducement to purchase or sell claim is relevant (or dispositive) under Tooley and its progeny.
IV. Certification
In sum, the seemingly various approaches taken by the Delaware state courts on the “direct versus derivative” question suggest a need for caution in
As adverted to above, our Local Rules provide a means for us to certify a question of state law to the state‘s highest court if state law permits. See
The issues we confront here seem particularly well suited to certification. First, despite the Tooley court‘s rejection of a “special injury” requirement for direct claims, some Delaware courts appear to have reinvigorated that doctrine by reference to Tooley‘s requirement that a plaintiff‘s injury be “independent” of an injury to the corporation. Under Delaware‘s certification rules, that conflict
CONCLUSION
For the foregoing reasons, we respectfully CERTIFY the following question to the Delaware Supreme Court:
Are the claims of a plaintiff against a corporate defendant alleging damages based on the plaintiff‘s continuing to hold the corporation‘s stock in reliance on the defendant‘s misstatements as the stock diminished in value properly brought as direct or derivative claims?
We invite the Delaware Supreme Court to expand, alter, or reformulate this question as it deems appropriate.