Atkins v. Hibernia Corp.

                  UNITED STATES COURT OF APPEALS

                      FOR THE FIFTH CIRCUIT



                           No. 98-30215



   MARY JEAN ATKINS; WALTER CALDWELL, III; LINDA ATKINS PERRY;
JOSEPH ALLAN POGUE, on behalf of Jack P. Pogue Succession, Sr.;
THOMAS HENRY POGUE, on behalf of Jack P. Pogue Succession, Sr., Co-
Administrator,

                                              Plaintiffs-Appellants,


                              VERSUS


 HIBERNIA CORPORATION, JOHN HERBERT BOYDSTUN, ROBERT P. McLEOD,
RONALD L. DAVIS, JR., PATRICK L. SPENCER, MALCOLM MADDOX, DELMA
CARTER, and DAVE N. NORRIS,

                                              Defendants-Appellees.




          Appeal from the United States District Court
              for the Western District of Louisiana


                          July 22, 1999
Before EMILIO M. GARZA, DeMOSS and PARKER, Circuit Judges.
ROBERT M. PARKER, Circuit Judge:

     The Plaintiffs Mary Jean Atkins, Walter Caldwell III, Linda

Atkins Perry, Joseph Allan Pogue, and Thomas Henry Pogue appeal

from an order granting partial summary judgment for the Defendants,

Hibernia Corporation, Robert P. McLeod, Patrick L. Spencer, Malcolm



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Maddox, Delma Carter, Dave N. Norris, John Herbert Boydstun and

Ronald   L.   Davis    Jr.   (collectively   “Hibernia”),   and   from   the

dismissal of the Plaintiffs’ remaining claims.         We affirm.

                      I. FACTS AND PROCEDURAL HISTORY

     In 1987, Defendant Boydstun, along with Walter Silmon and Will

Pratt, formed and served as the directors of a bank holding

company, First Bancorp of Louisiana, Inc. (“Bancorp”), which set

out to purchase First National Bank of West Monroe, Louisiana

(“FNB”).      Boydstun personally owned some FNB stock and Bancorp

borrowed over $6 million from AmSouth Bank to purchase more of the

stock. Before making the loan, AmSouth required an injection of $1

million of capital into Bancorp.          In order to satisfy that loan

condition, Bancorp borrowed $1 million from Silmon in exchange for

ten convertible debentures earning 10% interest a year.

     Later, the relationship between Boydstun and Silmon soured and

Boydstun offered to buy the debentures but Silmon refused to sell.

Boydstun advised Silmon that the debentures would be retired if he

did not convert them by August 31, 1992.          Silmon then agreed and

the debentures were retired.

     Contemporaneously with the retirement of the Silmon debentures

in August 1992, Bancorp’s current directors, Boydstun, Robert

McLeod, Ronald L. Davis, Jr. and Dave Norris voted to issue

$850,000 in new debentures, at 10% interest. Boydstun, McLeod, and

Davis (directors of Bancorp), Patrick Spencer (CFO of FNB), Malcolm



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Maddox (President of FNB), and Delma Carter (director emeritus)

purchased the replacement debentures.1                    Boydstun, McLeod, Maddox

and Spencer also increased their stock holding through other

purchases between August 1992 and May 1993.

           In May 1993, it was announced that Boydstun was negotiating

to       sell   Bancorp.      In    November     1993,    Boydstun      wrote      to    the

shareholders to announce that Hibernia had offered to buy Bancorp.

In       July   1994,    Boydstun   sent    a    letter    and    Prospectus       to    the

shareholders, announcing a special shareholder meeting during which

the shareholders would vote on the proposed merger between Bancorp

and       Hibernia.       Walter    Caldwell,     III     attended     the   July       1994

shareholder meeting and raised questions about the 1992 debentures,

expressing        his     concern    that       they    would     dilute     the    other

stockholders’           positions   and    arguing      that     the   defendants       had

breached their fiduciary duties in issuing them.                       Thereafter, the

stockholders, including Caldwell and the other plaintiffs, voted to

approve the merger.

          On the eve of the merger, the defendants converted their

debentures into shares of Bancorp stock. The actual purchase price

was not affected, and the value of one share of Bancorp stock on

the date of closing was $155.67, slightly higher than the $151.50


     1
   J.W. Robertson, another director emeritus, also purchased
replacement debentures.     Robertson died on March 24, 1994.
Thereafter, his debentures were redeemed by Bancorp for their face
value plus accrued interest.      Robertson was not named as a
defendant in this suit.

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estimated in the original communication to stockholders.

     Caldwell continued to pursue his complaint, writing to the

Bancorp Board of Directors and to Hibernia.        Hibernia investigated

and reported that it had found no wrongdoing.        The Plaintiffs then

filed the instant action.           Hibernia retained attorneys from an

outside law firm and appointed a Special Litigation Committee

(“SLC”) that investigated the claims and recommended dismissal of

the litigation as not in the best interest of Hibernia.

     The district court dismissed the Plaintiffs’ federal causes of

action   brought   pursuant    to    Racketeer   Influenced   and   Corrupt

Organizations Act (“RICO”), 18 U.S.C. § 1961, and the Securities

Exchange Act, 18 U.S.C. §§ 78j(b) and 78t-1, with prejudice for

failure to state a claim on which relief could be granted, pursuant

to Federal Rule of Civil Procedure 12(b)(6).          The district court

later granted summary judgment for defendants on the Plaintiffs’

remaining claims based on alleged breaches of fiduciary duty.

                              II. DISCUSSION

A. Standard of Review

     We review the grant of summary judgment de novo.          See S.W.S.

Erectors, Inc. v. Infax, Inc., 72 F..3d 489, 494 (5th Cir. 1996).

Likewise,    we review a Rule 12(b)(6) dismissal independently,

applying the same standards employed by the district court.             See

Crowe v. Henry, 43 F.3d 198, 203 (5th Cir. 1995).




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B. Direct or Derivative Action?

     The   Plaintiffs’     complaint       asserted   both    a    stockholder’s

derivative action on behalf of Hibernia and a class action “on

behalf of all persons, other than the defendants, who owned stock

of First Bancorp . . . at the time that Bancorp merged with

Hibernia,”    alleging that the defendants breached their fiduciary

duty “to the bank and its shareholders.”           The district court found

that the gravamen of the Plaintiffs’ claim is that the individual

defendants’ alleged acts of self-dealing diluted the value of each

share of Bancorp stock.       This, the district court held, is a wrong

suffered     by   the    corporation       which   can   only       be    enforced

derivatively, citing Lawly Brooke Burns Trust v. RKR, Inc., 691

So.2d 1349 (La. App. 1 Cir. 1997) and Nowling v. Aero Services

International, Inc., 752 F. Supp. 1304 (E.D.La. 1990).

     Louisiana’s state law determines whether, and in what manner,

a shareholder may assert an action based on a corporate officer’s

or director’s breach of a fiduciary duty.             See Crocker v. Federal

Deposit Ins. Corp., 826 F.2d 347, 349 (5th Cir. 1987).                            The

Plaintiffs correctly set out the test recognized in Louisiana

jurisprudence:     “It   is   established      that   where       the    breach   of

fiduciary duty causes loss to a corporation itself, the suit must

be brought as a derivative or secondary actions.                   However . . .

where the breach of a fiduciary duty causes loss to a shareholder

personally . . . the shareholder may sue individually to recover


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his loss.”     Palowsky v. Premier Bancorp, Inc., 597 So.2d 543, 545

(La.App. 1 Cir. 1992).

      The Plaintiffs contend that the district court erred in

failing to distinguish between a decrease in the value of stock due

to a decrease in the overall value of a corporation and a decrease

in the value of stock due to a dilution of a shareholder’s interest

in a corporation.         They argue that they suffered a 12.49% decline

in their stock in a single day when the debentures were converted

to new shares of stock, for which they have a right of direct

action.     On the other hand, they argue, Bancorp (and Hibernia, as

Bancorp’s successor in interest) suffered no injury and therefore

has no right of action.2

      The   facts    alleged    do   not     support   this   argument.       The

Plaintiffs’ shares were worth approximately $155 prior to the

redemption    of    the    debentures.        This   figure   was   derived    by

calculating the assets of Bancorp and subtracting its debts,

including the principle and interest on the debentures. Subsequent

to the debenture redemption, the Plaintiffs’ shares were worth

approximately $157 per share. Bancorp had the same assets, but had

exchanged a portion of its debt for newly issued stock.                       The



  2
   The issuance of new stock may also dilute a stockholder’s
control, which has been characterized as a right enforceable by
direct rather than derivative action.          See Glenn Morris,
Shareholder Derivative Suits: Louisiana Law, 56 LA. L. REV. 583, 587
(1986).   The Plaintiffs, however, posit a claim for diminished
stock value not for diminished control.

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Plaintiffs’ argument that their stock would have been worth $178.21

per share had the stock not been issued has no basis in the

allegations in their own pleadings, as it ignores the fact that the

debentures represented debt for the 1992 infusion of $850,000 into

the holding company. Their remaining arguments, that it was unwise

to incur the debt and that the interest rate on the debentures was

higher than market value, allege injuries to the corporation and

must be pursued in a derivative action.

     The district court held,

     The plaintiffs have not alleged the type of harm that a
     shareholder can claim individually, that is, they have
     not averred that the alleged injury to their stock is
     distinct from the injury suffered by other shareholders,
     nor have they shown that their injury is separable from
     their stock ownership in Bancorp. Therefore, under the
     terms of their complaint, the plaintiffs have no
     standing, either personally or as representatives of all
     of Bancorp’s former shareholders, to pursue individual
     actions against the defendants.

The district court’s holding is correct. The Plaintiff’s complaint

is correctly categorized as a derivative action.

C. Business Judgment Rule

     Louisiana’s business judgment rule provides that as long as

directors of a corporation decide matters rationally, honestly, and

without a disabling conflict of interest, the decision will not be

reviewed by the courts.       Bordelon v. Cochrane, 533 So.2d 82

(La.App. 3 Cir. 1988).      In the instant case, Hibernia filed a

motion to dismiss, contending:

          Since the filing of this litigation, the board of

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      directors of Hibernia Corporation appointed a special
      litigation committee to examine the advisability of
      pursuing the plaintiffs’ derivative fiduciary claims.
      With the help of special counsel . . . and following an
      exhaustive review of pleadings, documents and interviews
      with counsel and witnesses, the committee recommended
      against continuing the derivative action as without a
      basis and too costly.      The Hibernia board, without
      participation by interested parties, accepted the
      Committee’s recommendation and voted against pursuing
      this action on behalf of the corporation.

      Whether Hibernia, the true party in interest, is entitled to

dismissal under these circumstances is a matter of first impression

in Louisiana.     See Morris, Shareholder Derivative Suits: Louisiana

Law, 56 LA. L.REV. at 633 (“Louisiana has yet to address, directly,

the   powers     of   management-appointed         litigation      committees     in

[shareholder derivative actions]”).

      Because derivative suits provide a means for stockholders to

police outlaw directors, a body of jurisprudence has developed

limiting corporations’ freedom to seek dismissal of such suits.

The   district    court,    after      a    thorough   survey     of   the   various

incarnations of the rule, concluded that, without exception, the

cases have held that after demand has been made and refused,3 a

decision by the board of directors (or a committee thereof) of the

corporate-defendant        to   seek       dismissal   of   a   derivative    action

brought on its behalf should be accorded by the courts the same


  3
   The line of cases fashioning an appropriate role for the court
when a plaintiff has brought suit without first making demand on
the corporation is inapposite here because the Plaintiffs properly
made demand that defendants refused. See, e.g., Zapata Corp. v.
Maldonado, 430 A.2d 779, 784 & n.10 (Del. 1981).

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deference as other management decisions. See Auerbach v. Bennett,

47 N.Y.2d 619 (N.Y. 1979); Aronson v. Lewis, 473 A.2d 805 (Del.

1983).

     The Plaintiffs argue that their allegations of self dealing

against the Bancorp insiders make this case inappropriate for

business judgment deference.    They cite Watkins v. North American

Land & Timber Co., 31 So. 683 (La. 1902), in which the Louisiana

Supreme Court reversed a decision of a lower court dismissing a

suit under a business judgment theory and stated that Louisiana

authorizes court involvement in allegations of fraud, willful

breach of a known duty, gross mismanagement, and waste.    See also

Hirsch v. Cahn Elec. Co., Inc., 694 So.2d 636, 643 (La. App. 2 Cir.

1997)(the court will not interfere with normal business decisions

“unless it is manifestly evident that interference is necessary in

the interest of the corporation and its stockholders, and it must

appear that there is capricious, arbitrary, or discriminatory

management”).     The Plaintiffs submit that the court, and not the

Hibernia board, should be the arbiter of the fairness of the

transactions because their suit alleges self dealing and breach of

fiduciary duty.    We are unpersuaded by this contention, as was the

district court.    The Louisiana decisions in which a court declined

to defer to the board each involved a dispute over the management

of a closely-held corporation in which all of the shareholders were

present as parties.    See id. (claim of excess compensation brought


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by       shareholder       holding   49.502   percent   of   the    stock    against

shareholder who held remainder of the company); Donaldson v.

Universal Engineering of Maplewood, Inc., 606 So. 2d 980 (La. App.

3 Cir. 1992)(all eleven shareholders in the subject corporation

were included as parties in the action); Spruiell v. Ludwig, 586

So. 2d 133 (La. App. 5 Cir. 1990)(family dispute, involving claims

between two family groups which together owned the closely-held

corporation in its entirety); Dunbar v. Williams, 554 So. 2d 56

(La. App. 4 Cir.            1988)(same).

          The Louisiana jurisprudence invoked by the Plaintiffs does not

involve        derivative         actions     against    large,         publicly-held

corporations.          Our best Eire4 guess concerning what the Louisiana

Supreme Court will do when faced with such a question, is that

Louisiana will follow the majority of jurisdictions which have

considered the issue.             That is, it will defer to the management of

large, publicly-traded corporations, so long as the board, or its

chosen representatives “possess a disinterested independence and do

not stand       in     a   dual   relation    which   prevents     an    unprejudiced

exercise of judgment.”            Auerbach v. Bennett, 47 N.Y.2d at 631.           As

Professor Morris explained:

               Faced with the unappealing choice between different
          types of conflicted corporate representation, the leading
          national authorities have essentially decided to side
          with management, at least in the case of publicly-traded
          corporations.    Management, after all, is elected by


     4
      See Eire Railroad Co. v. Tompkins, 304 U.S. 64 (1938).

                                             10
     shareholders, faces market-based incentives to enhance
     overall corporate values, and lacks any interest in
     generating legal expenses for their own sake. The strike
     suit lawyer is not elected by those he purports to
     represent, has no financial interest in enhancing the
     value of the corporation as a whole, and actually has an
     interest in maximizing legal expenses that he will be
     able to inflict upon the corporation. The decision by the
     national authorities to adopt rules that favor the
     defense in most derivative suits suggests that these
     authorities are more distrustful of the plaintiff’s
     lawyers than of corporate management, and that they are
     skeptical of the value of derivative suits in the context
     of publicly-traded corporations.

Morris, supra, at 618.

     Therefore, because the Plaintiffs have not established a

genuine issue of material fact concerning the disinterestedness of

Hibernia’s board or its special litigation committee, we affirm the

district court’s grant of summary judgment for defendants.

     In a related argument, the Plaintiffs contend that the burden

is on the defendant-fiduciaries not only to prove the good faith of

the transactions, but also to show their inherent fairness from the

viewpoint of the corporation and the shareholders.   Because, we do

not look behind the disinterestedness of Hibernia in seeking

dismissal of the suit, we do not reach this question.

D. Securities Violations and RICO Claims

     The Plaintiffs appeal the district court’s dismissal for

failure to state a claim, pursuant to Federal Rule of Civil

Procedure 12(b)(6), of their securities violations and mail fraud

claims.

     The Plaintiffs allege that the Bancorp directors violated

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securities laws by committing fraud on the corporation and on its

stockholders in failing to make adequate disclosure concerning the

issuance and conversion of the debentures. See Alabama Farm Bureau

Mut. Cas. Co. v. American Fidelity Life Ins. Co., 606 F.2d 602, 611

(5th Cir. 1979)(Failure to make adequate disclosure of self-dealing

acts as a deceit or works as a fraud on a corporation.)                            The

district court dismissed the securities fraud allegations because

the Plaintiffs failed to allege a material misrepresentation or

omission.    We agree.        The Prospectus disclosed all the information

material to the alleged self dealing. It named those directors who

owned replacement debentures, stated that holders of the debentures

had   the   right   to     acquire     additional       shares    through         their

conversion, indicated that all of the outstanding debentures would

be converted into Bancorp shares prior to the close of the sale to

Hibernia    and   gave    a    clear   example    of    the   effect       that    such

conversion would have on the overall exchange price.                        Further,

Caldwell discussed his concern over the dilution of stock, gleaned

from the Prospectus that he now complains was unclear, at the

shareholder meeting.          The Plaintiffs failed to state a securities

violation    because      they     have    failed      to   allege     a    material

misrepresentation or omission.

      The Plaintiffs next appeal the dismissal of their RICO claims.

The   district    court   held     that    the   Plaintiffs      had   alleged       no

predicate acts which could serve as the basis of a pattern of


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racketeering activity.      As discussed above, the Plaintiffs alleged

no   securities   fraud.     Likewise,    they    have   failed    to     allege

predicate acts of mail fraud.

      The mail fraud statute, 18 U.S.C. § 1341, prohibits the use of

the United States mails in furthering or executing a scheme to

defraud.   See Armco Indus. Credit Corp. v. SLT Warehouse Co., 782

F.2d 475 (5th Cir. 1986).         The Plaintiffs’ RICO case statement

identifies a series of mailings which included, inter alia, the

annual shareholder reports, a letter to shareholders concerning

Hibernia’s    offer   and   the   Prospectus     of   July   7,   1994.      The

Plaintiffs contend that these communications failed to disclose the

issuance and conversion of the debentures and the director’s plans

to sell Bancorp.       All of the information that the Plaintiffs

contend was omitted was in fact revealed in the very series of

mailings they identify.       The Plaintiffs’ mail fraud claims are

without merit.

                             III. CONCLUSION

      For the foregoing reasons, we affirm the district court’s

orders granting summary judgment for defendants and dismissing the

remaining claims for failure to state a claim on which relief could

be granted.

      AFFIRMED.




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