Plаintiffs — 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
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 arеa of Delaware law in which there appear to be conflicting decisions, and we anticipate that the resolution of this issue will have significance well beyond the instant suit. See Del. Sup.Ct. R. 41. 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.
BACKGROUND
I. Factual Background
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- the advisors’ view, the Citigroup stock price was then “close to the ‘top’ for the near-term and [it was] a good time for Williams to sell.” Id. ¶ 202. He began implementing this plan on May 17, 2007, when he sold one million of his 17.6 million shares at $55 per share.
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 fаr superi- or — 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 [collat-eralized debt obligations] backed by sub-prime assets.” Id. ¶ 51; see also ¶¶ 175, 176. Plaintiffs further allege that Citigroup “gave investors the impression that it was reducing and prudently managing
In the sixteen months that followed his initial sale of one million shares, Williams “continually tried to choоse the appropriate time to complete the liquidation of his position in order to minimize his damages.” Id. ¶ 177. But, allegedly misled by Citigroup’s misrepresentations in “conference calls, investor slideshows, earnings releases, public filings and statements from senior officers,” Williams held on to his remaining 16.6 million shares as the stock price plummeted to $3.09 per share. Id. ¶¶ 169,172. He “considered” selling in December 2007, on August 20, 2008, and on December 2, 2008. Id. ¶¶ 178-80. It was not until March 2009, however, “by which time William’s [sic] faith in the truthfulness of the Company had finally been erased, [that] he sold his remaining 16.6 million shares at a pricе of $3.09 per share.” Id. ¶ 172. Plaintiffs maintain that, had Williams received truthful and accurate information from Citigroup, he would have sold his entire position on May 17, 2007, when the “true value” of the stock was $51.59.
Williams thus calculates that his rebanee on Citigroup’s misrepresentations resulted in losses to him, his wife, and their controlled entities of over $800 million.
II. Procedural Background
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.,
This appeal and cross-appeal followed.
DISCUSSION
We review de novo a district court’s dismissal of a complaint under Federal Rule of Civil Procedure 12(b)(6), drawing all reasonable inferences in the plaintiffs favor. Roth v. CitiMortgage Inc.,
If we accept defendants’ argument, then the District Court lackеd jurisdiction to adjudicate the sufficiency of plaintiffs’ claims, and we must affirm the dismissal of the amended complaint without further considering plaintiffs’ claims. See Franchise Tax Bd. of Cal. v. Alcan Aluminium, Ltd.,
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 rеgarding conflicts of law.” Wall v. CSX Transportation, Inc.,
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,
The leаding Delaware Supreme Court case on the direct/derivative dichotomy is widely acknowledged to be Tooley v. Donaldson, Lufkin & Jenrette, Inc.,
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 that the wrong alleged did not cause plaintiffs a “special injury”&emdash;that is, “a wrong that is separate and distinct from that suffered by other shareholders.” Tooley v. Donaldson, Lufkin & Jenrette, Inc., No. Civ. A. 18414-NC,
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,
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 east as defendants’ misrepresentations, made through “personal and direct communications” to them, not merely public annotmcements. 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”).
Because the harm alleged is inextricably linked to defendants’ misstatements and the asserted breach оf a duty of disclosure, the harm from the alleged misrepresentations may be said to have been suffered by “the suing stockholders, individually,” not by “the corporation.” And the complaint alleges that the misstatements were made in an attempt to cover up the harm already done to the corporation, not to have themselves caused the harm — further decoupling the harm allegedly suffered by the Williamses and that sustained by the corporation.
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 misrep
In sum, Tooley suggests that the Williamses have stated direct claims. If Tooley were the only decision of the Delaware courts relevant to this action, we would likely conclude that plaintiffs may bring these 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,
In Gentile v. Rossette,
Similarly, in In re J.P. Morgan Chase & Co. Shareholder Litigation,
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 plungе in the value of Citigroup stock between 2007 and 2009, might not be correctly treated as direct under Delaware law.
The Delaware Supreme Court’s decision in Feldman v. Cutaia,
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*702 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.
Id. at 733.
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 thеir 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” were they tó pursue claims. Second, according to Feldman, a plaintiff must have “suffered some individualized harm not suffered by all of the stockholders at large.” Id. Although the reason that the Williamses retained their shares might be individualized — see Am. Compl. ¶ 169 (“Williams made all of the investment decisions to hold ... Citigroup shares, based entirely upon information and representations disseminated directly from the Company and its senior officers to him and his Advisors.”) — the actual harm suffered was the loss in stock value during a period of retention, which was sustained by the stockholders at large. Thus, plaintiffs do not seem to meet the more recent requirements for stating direct claims that were articulated in Feld-man.
To be clear, the Feldman court purports to rely on Tooley, not to overrule it. See Feldman,
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,
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 by the corporation. We therefore find it difficult to conclude that the Williamses’ asserted injury is tru
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 plaintiffs 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,
Nonetheless, Delaware cases post-Xoo-ley 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 statements (“holder claims”), rather than the actual purchase or sale of stoсk — may be brought directly, absent some special relationship. Although we have not addressed the issue by precedential opinion,
In Newman v. Family Management Corp.,
In a second case decided by summary order, Stephenson v. Pricewaterhouse-Coopers, LLP,
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.
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 our resolution of this case. Tooley and its progeny may teach that a loss resulting from a deliberate decision not to sell stock, taken in reliance on the particularized statements of corporate officers, is a sufficiently “independent” injury to be brought as a direct rather than a derivative claim; but the opposite conclusion may also be drawn in light of the difficulty in separating the harm to the plaintiffs and the harm to the corporation.
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 2d Cir. Local R. 27.2(a). Delaware law allows this Court to certify questions of state law to the Delaware Supreme Court. Del. Sup. Ct. R. 41(a)(ii). That court is authorized to exercise its discretion to accept certified questions “where there exist important and urgent reasons for an immediate determination ... of the questions cеrtified,” including a conflict among the state trial courts. Del. Sup.Ct. R. 41(b).
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 plaintiffs injury be “independent” of an injury to the corporation. Under Delaware’s certification rules, that conflict appears to serve as an appropriate basis for the Delawаre Supreme Court to take up the certified question. Second, this case presents a question that “seems likely to recur and to have significance beyond the interests of the parties” in this lawsuit. In re Motors Liquidation Co.,
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 plaintiffs 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.
This panel will retain jurisdiction to decide the case once we have had the benefit of the views of - the Delaware Supreme Court or once that Court declines to accept certification.
Notes
. This statement of facts is drawn from the allegations of plaintiffs' amended complaint. For purposes of this appeal, we assume the allegations to be true. Cruz v. TD Bank, N.A.,
. Although Williams actually sold Citigroup stock at $55 per share on May 17, 2007, plaintiffs assert that the “true value” of the stock on the date — i.e., what the price would have been had Citigroup fully disclosed its subprime exposure — was $51.59 per share.
. The Williamses are both Florida residents. The plaintiff entities, which they control, were created under Nevada and Florida law.
. We have adopted such an analysis before, albeit in a non-precedential summary order. See Elendow Fund, LLC v. Rye Inv. Mgmt.,
. According to our Local Rules, “Rulings by summary order do not have precedential ef-feet.” 2d Cir. Local R. 32.1.1(b). "[T]he rationale underlying the Rule is that such orders, being summary, frequently do not set out the factual background of the case in enough detail to disclose whether its facts are sufficiently similar to those of a subsequent unrelated case to make our summary ruling applicable to the new case.” Jackler v. Byrne,
. This "unique injuiy” approach seems akin to the “special injury” requirement under Delaware law. The Williamses’ injuries here, while suffered on a large scale, do not appear to be truly "unique” in nature — shareholders other than plaintiffs who also retained stock experienced losses during the period specified in the complaint. And plaintiffs here aver that defendants’ "false statements ... directly induced” them to retain Citigroup shares. Am. Compl. ¶ 11.
. "[U]nder Delaware Iaw[,] the determination of whether a claim is derivative or direct in nature is substantially the same for corporate cases as it is for limited partnership cases.” Stephenson,
. We recently certified another question to the Delaware Supreme Court because of opr uncertainty as to the applicability of Tooley. NAF Holdings, LLC v. Li & Fung (Trading) Ltd.,
. Defendants' motion for certification to the Delaware Supreme Court is GRANTED as to the question stated here.