Cranston REID, Plaintiff-Appellant, v. Gerald BAKER, Robert B. Carter, Simon F. Cooper, Mark A. Emkes, J. Kenneth Glass, Frank J. Gusmus, Jr., James A. Haslam, III, D. Bryan Jordan, R. Brad Martin, Vicki R. Palmer, Colin V. Reed, Michael D. Rose, William B. Sansom, and Luke Yancy, III, Defendants-Appellees, First Horizon National Corporation, Intervenor-Appellee.
No. 11-5473.
United States Court of Appeals, Sixth Circuit.
Sept. 7, 2012.
520-527
SOLOMON OLIVER, JR., Chief District Judge.
BEFORE: COLE and BOGGS, Circuit Judges; and OLIVER, Chief District Judge.
V.
For these reasons, we AFFIRM the district court‘s decision in part and REMAND in part.
HELENE N. WHITE, Circuit Judge, dissenting.
The district court addressed the good-faith exception—which had not been asserted by the government—only in passing, as a side observation. I would hold the issue was waived and affirm the district court‘s judgment.
OPINION
SOLOMON OLIVER, JR., Chief District Judge.
Plaintiff-Appellant, Cranston Reid, appeals from the dismissal of his claims filed derivatively on behalf of Intervenor-Appellee First Horizon National Corporation (“First Horizon“) against Defendants-Appellees Gerald L. Baker, Robert B. Carter, Simon F. Cooper, Mark A. Emkes, J. Kenneth Glass, Frank J. Gusmus, Jr., James A. Haslam, III, D. Bryan Jordan, R. Brad Martin, Vicki R. Palmer, Colin V. Reed, Michael D. Rose, William B. Sansom, and Luke Yancy, III. The United States District Court for the Western District of Tennessee dismissed Reid‘s claims against Defendants for failure to state a claim upon which relief could be granted. For the reasons stated below, we AFFIRM the decision of the district court.
I. BACKGROUND AND PROCEDURAL HISTORY
On June 2, 2010, Plaintiff filed a shareholder derivative action on behalf of First Horizon in the United States District Court for the Western District of Tennessee against Defendants. His Complaint asserted the following five claims against each Defendant: (1) intentional breach of fiduciary duty; (2) aiding and abetting a breach of fiduciary duty; (3) abuse of control; (4) gross mismanagement; and (5) unjust enrichment. Plaintiff alleged the facts set out below in support of all claims.
The Complaint asserted that Defendants engaged in aggressive, high-risk lending practices, causing First Horizon to originate financially unsafe subprime mortgage loans, second lien mortgage loans, home equity loans, home construction loans to individuals, and commercial construction loans to single-family home builders. Plaintiff maintained that First Horizon‘s Credit Policy and Executive Committee, which included some of the named Defendants, commenced this practice in 2004 by implementing new underwriting guidelines. Plaintiff further maintained that the new policy allowed First Horizon to lend to high-risk borrowers, and resulted in loans that fell below the standards for the sale of loans on the secondary market and/or did not conform to guidelines for federally insured mortgages. Plaintiff also stated that, while Defendants publicly acknowledged the inherent risks in First Horizon‘s new lending policies, Defendants did not undertake measures to control the new risks.
Plaintiff alleged that Defendants engaged in practices that failed to protect
Plaintiff also alleged that Defendants further ignored guidelines published by federal agencies concerning how to manage the risk associated with certain home loan products and by failing to properly manage the risk. Furthermore, Defendants’ concealment and misrepresentation of First Horizon‘s increased risks failed to conform with the principles recognized by the accounting profession, which define generally accepted accounting practices. For example, from 2005 through 2009, Defendants represented in First Horizon‘s SEC filing, Form 10-K, that First Horizon was unlikely to incur massive loan losses, and if any losses were incurred, they would likely be insignificant. Plaintiff asserted that these representations reflect material misstatements by Defendants made in bad faith.
Finally, Plaintiff maintained that Defendants permitted FTN Financial Securities Corporation (“FTN“), another subsidiary of First Horizon, to violate federal securities laws, or alternatively, they failed to prevent FTN from violating such laws. The Complaint alleged that FTN‘s actions became the subject of a lawsuit filed by the United States Bankruptcy Trustee, Grede v. Folan, No.: 1:08 CV 6587 (N.D.Ill), in 2008. The Complaint further alleged that Defendants delayed disclosing this lawsuit until it filed its 2009 Form 10-K on February 26, 2010.
In the section of his Complaint entitled, Tolling of the Statute of Limitations and Fiduciary Duties, Plaintiff sought to explain why there was a tolling of the statute of limitations as it relates to his claims. Plaintiff stated the following:
Defendants issued false and misleading financial reports from at least 2005 that misrepresented and concealed defendants’ misconduct in connection with First Horizon‘s unlawful lending and risk management practices. Defendants routinely failed to disclose material criminal and civil litigation concerning its unlawful and other high-risk lending practices, and claims by a whistleblower that First Horizon routinely concealed instances of mortgage fraud from outsiders.
At all relevant times, the full extent of the wrongful actions complained of herein were unlawfully concealed from First Horizon shareholders until late 2009 and early 2010, when it became known that a colorable breach of fiduciary duty claim had been brought by employees against the Board.... Further, it was not until 2009 and 2010, that defendants disclosed the true extent of losses suffered as a result of risk and unlawful lending practices, including the 2010 disclosure that First Horizon had incurred almost $200 million of costs associated with foreclosures and mortgage buybacks for which defendants had caused First Horizon to retain significant (but undisclosed) risks. (Compl. at 35, ¶¶ 84-85.)
Plaintiff claimed that he was put on notice on September
On July 30, 2010, Defendants and First Horizon each separately filed a Motion to Dismiss all of Plaintiff‘s claims. Defendants attached approximately twenty exhibits, consisting of news articles, pleadings, orders, and dockets from judicial proceedings, and Defendants-created summary exhibits to their Motion. Defendants asked the district court to take judicial notice of the exhibits. Subsequently, Plaintiff filed a Motion to Strike the majority of Defendants’ exhibits. He also filed Plaintiff‘s Request for Judicial Notice of eight exhibits. In response, Defendants filed a motion to exclude from consideration Plaintiff‘s request for judicial notice (“Motion to Exclude“). On March 16, 2011, the district court granted Defendants’ Motion to Dismiss, denied all other motions either on the merits or as moot, and dismissed all of Plaintiff‘s claims with prejudice.
The district court determined that Tennessee law governed and that a one-year statute of limitation applied to all of Plaintiff‘s claims.1
The district court found that the Complaint failed to present any allegations of actionable conduct that arose on or after June 2009, as the conduct outlined in the Complaint occurred between 2004 and 2008. (Id. at 16.) The district court stated that Sixth Circuit precedent instructs that if a complaint facially shows that a plaintiff failed to timely file a claim, then the plaintiff must affirmatively plead facts to avoid the statute of limitations. (Id. at 16-17.) The district court held that, as a matter of law, Plaintiff failed to plead facts to avoid the one-year statute of limitation applicable to his claims. (Id. at 19.) Specifically, he did not plead facts that show a claim arose on or after June 2, 2009, and he did not plead facts that support his claim that he did not discover, and it was not reasonable for him to discover, the facts giving rise to his claims until late 2009 or early 2010, which would have permitted him to pursue his otherwise time-barred claims. (Id.)
The district court found that “Plaintiff‘s allegation that he could not have reasonably discovered his legal claims against Defendants until he knew about the extent of the corporation‘s losses does not plausibly trigger the discovery rule,” because there is no legal requirement that the full extent of damages be known before an injured party files a lawsuit or is considered on notice of a claim. The district court further found that Plaintiff‘s
Moreover, the district court determined that Plaintiff had not properly put forth facts to support an allegation that fraudulent concealment by Defendants prevented Plaintiff‘s discovery, which is an additional basis for tolling under
Before evaluating the merits of Defendants’ Motion to Dismiss, the district court denied Plaintiff‘s Motion to Strike Defendants’ Exhibits because
II. LEGAL STANDARD
A district court‘s grant of a motion to dismiss under
A defendant may raise a statute of limitations defense in the context of a
III. LAW AND ANALYSIS
Plaintiff asserted claims as a shareholder on behalf of First Horizon against Defendants. Defendants argued that Plaintiff‘s claims are barred by the applicable statute of limitations. The district court determined, and the parties agreed, that Plaintiff‘s entire action is governed by
Any action alleging breach of fiduciary duties by directors or officers, including alleged violations of the standards established in
§ 48-18-301 ,§ 48-18-302 , or§ 48-18-403 , must be brought within one (1) year from the date of such breach or violation; provided, that in the event the alleged breach or violation is not discovered nor reasonably should have been discovered within the one-year period, the period of limitation shall be one (1) year from the date such was discovered or reasonably should have been discovered. In no event shall any such action be brought more than three (3) years after the date on which the breach or violation occurred, except where there is fraudulent concealment on the part of the defendant, in which case the action shall be commenced within one (1) year after the alleged breach or violation is, or should have been, discovered.
This statute codified the discovery rule. It is well-established law in Tennessee that “the discovery rule is an equitable exception that tolls the running of the statute of limitations.” Pero‘s Steak & Spaghetti House v. Lee, 90 S.W.3d 614, 621 (Tenn. 2002). Thus, a plaintiff has one year to bring a breach of fiduciary duty claim.2 That one-year limitation may be excused upon establishing a tolling exception delineated in the statute.
A. Timeliness of Plaintiff‘s Claims
The district court outlined the factual allegations in the Complaint that support Plaintiff‘s claims. These allegations begin with Defendants’ adoption of a new policy concerning underwriting guidelines in 2004 and Defendants’ subsequent implementation of high-risk lending practices. The district court explained that Plaintiff alleged that various misconduct occurred over the next several years, through 2008, where Defendants’ complicity in the violations of federal securities laws perpetrated by one of its subsidiaries resulted in a lawsuit against the subsidiary. The court determined that the facts alleged in the Complaint established that Plaintiff‘s time to bring his action had expired, and Plaintiff attempted to avoid the timeliness issue by pleading that he discovered the alleged breaches in late 2009 and that Defendants fraudulently concealed their breaches. The district court found that Plaintiff insufficiently pleaded facts to support his claim of late discovery.
On appeal, Plaintiff argues that Defendants have the burden to establish their affirmative defense that Plaintiff‘s time
Indeed, while a defendant ordinarily has the burden to establish its statute of limitations defense, when the court can ascertain from the complaint that the period for bringing the claim has expired, a plaintiff must affirmatively plead an exception to the limitations statute. Auslender, 832 F.2d at 356. In essence, a defendant has met its burden to establish its statute of limitations defense when a plaintiff admits facts in the complaint that establish that the statute has run. The burden then shifts back to a plaintiff to show that it qualifies for an exception. The Complaint here established that the events that Plaintiff alleged were breaches of fiduciary duties occurred between 2004 and early 2009. The statute of limitations for claims that assert a breach of fiduciary duty is one year.
B. Tolling of the Statute of Limitations
Plaintiff alleged that he did not discover that he might have a claim until September 30, 2009, when the United States District Court for the Western District of Tennessee denied a motion to dismiss in Sims, a case against First Horizon and some of the named Defendants, among others. In that case, plaintiffs’ asserted breaches of fiduciary duties similar to those asserted in the instant case.
The court‘s inquiry is limited to whether Plaintiff sufficiently pled a tolling exception based on when he discovered the breaches. In construing the Complaint liberally in favor of Plaintiff, taking all factual allegations as true, Benzon, 420 F.3d at 605, Plaintiff failed to sufficiently plead why the limitations statute should be tolled. Plaintiff alleges that the court order denying a motion to dismiss in Sims was the manner in which he discovered
Tennessee law states that it is not the date that a plaintiff discovered that he had a colorable action, which Plaintiff stated is September 30, 2009, that dictates the accrual of the limitations statute; instead, it is the date the plaintiff discovered the facts that would put a person on notice that injury has been suffered as a result of wrongful conduct. Sherrill v. Souder, 325 S.W.3d 584, 593 (Tenn.2010). Plaintiff did not plead that he was unaware of the conduct underlying the action until late 2009. He pleaded that he was not aware that the conduct gave rise to a colorable breach of fiduciary duty claim until late 2009. Plaintiff did not plead when he became aware of the alleged actions of Defendants that he maintained constituted a breach of fiduciary duty. While it is not clear from the Complaint when Plaintiff discovered these facts, it is clear that there were claims asserted against some of the named Defendants for similar actions in 2008 in a lawsuit of which Plaintiff was aware. Consequently, Plaintiff has not met his burden to plead affirmatively why the statute of limitations should be tolled.
Moreover, Plaintiff argued that the limitations statute should be tolled because Defendants fraudulently concealed their conduct by issuing false and misleading financial reports that misrepresented and concealed their misconduct. As the district court correctly stated, in order for Plaintiff‘s delay in filing to be excused due to Defendants’ fraudulent concealment, Plaintiff must affirmatively plead with particularity: “(1) wrongful concealment of their actions by the defendants; (2) failure of the plaintiff to discover the operative facts that are the basis of his cause of action within the limitations period; and (3) plaintiff‘s due diligence until discovery of the facts.” Dayco Corp. v. Goodyear Tire & Rubber Co., 523 F.2d 389, 394 (6th Cir.1975); see also Benton v. Snyder, 825 S.W.2d 409, 414 (Tenn.1992) (holding that to establish fraudulent concealment plaintiff must show (1) “defendant took affirmative action to conceal the cause of actions and that [ (2)] the plaintiff could not have discovered the cause of action despite exercising reasonable diligence.“). A review of the Complaint shows that Plaintiff failed to plead an essential element of fraudulent concealment. He did not plead that he exercised due diligence in seeking out the information that Plaintiff claims was wrongfully concealed. Consequently, Plaintiff has not met his burden to affirmatively plead sufficient facts to toll the one-year statute of limitations. Consequently, this court AFFIRMS the decision of the district court.
IV. CONCLUSION
For the foregoing reasons, we AFFIRM the decision of the district court granting Defendants’ Motion to Dismiss.