13‐4488‐cv(L)
AHW Investment Partnership, et al. v. Citigroup Inc., et al.
United States Court of Appeals
FOR THE SECOND CIRCUIT
______________
August Term, 2014
(Argued: January 9, 2015 Decided: November 25, 2015)
Docket Nos. 13‐4488‐cv(L), 13‐4504‐cv(XAP)
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AHW INVESTMENT PARTNERSHIP, MFS, INC., ANGELA H. WILLIAMS, AS
TRUSTEE OF THE ANGELA H. WILLIAMS GRANTOR RETAINED ANNUITY TRUST UAD
MARCH 24, 2006, THE ANGELA WILLIAMS GRANTOR RETAINED ANNUITY TRUST
UAD APRIL 17, 2006, THE ANGELA WILLIAMS GRANTOR RETAINED ANNUITY TRUST
UAD MAY 9, 2006, THE ANGELA WILLIAMS GRANTOR RETAINED ANNUITY TRUST
UAD NOVEMBER 1, 2007, THE ANGELA WILLIAMS GRANTOR RETAINED ANNUITY
TRUST UAD MAY 1, 2008, THE ANGELA WILLIAMS GRANTOR RETAINED ANNUITY
TRUST UAD JULY 1, 2008, AND THE ANGELA WILLIAMS 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.
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B e f o r e :
HALL, LYNCH, and CARNEY, Circuit Judges.
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1 Plaintiffs—a corporation, partnership, and seven grantor‐retained annuity
2 trusts controlled by Angela and Arthur Williams—appeal from an October 30,
3 2013 judgment of the United States District Court for the Southern District of
4 New York (Sidney H. Stein, Judge), dismissing their amended complaint for
5 failure to state a claim. Plaintiffs allege that they suffered losses in excess of
6 $800 million when, from May 2007 through March 2009, they refrained from
7 selling their shares of Citigroup stock based on the fraud and negligent
8 misrepresentations of defendants Citigroup and Citigroup executives.
9 Defendants cross‐appeal, arguing that the District Court erred simply by
10 addressing the adequacy of plaintiffs’ substantive claims as “holders” of the
11 shares during a period of decline in share value: According to defendants,
12 Delaware law mandates that such claims be brought in a shareholder derivative
13 action, not as direct claims. If defendants are correct, plaintiffs—who are no
14 longer Citigroup shareholders—lack standing to maintain this suit. The
15 characterization of plaintiffs’ claims as direct or derivative calls for an
16 interpretation of an unsettled area of Delaware law, and we anticipate that the
17 issue’s resolution will have significance well beyond the instant suit.
18 Accordingly, we respectfully certify to the Delaware Supreme Court the question
19 whether, under Delaware law, “holder” claims such as those plaintiffs attempt to
20 assert are properly brought in a direct or derivative action.
21
22 QUESTION CERTIFIED.
23 ______________
24 STEVEN F. MOLO (Robert K. Kry and Hassan A. Shah, on
25 the brief), MoloLamken LLP, New York, NY, and
26 Jacob H. Zamansky, Zamansky LLC, New York,
27 NY, for Plaintiffs‐Appellants‐Cross‐Appellees.
28
29 WALTER RIEMAN (Brad S. Karp, Susanna M. Buergel,
30 Jane B. O’Brien, and Stephen P. Lamb, on the brief),
31 Paul, Weiss, Rifkind, Wharton & Garrison, New
32 York, NY, for Defendants‐Appellees‐Cross‐Appellants.
______________
2
1 SUSAN L. CARNEY, Circuit Judge:
2 Plaintiffs—a corporation, partnership, and seven grantor‐retained annuity
3 trusts (“GRATs”) controlled by Florida residents Angela and Arthur Williams—
4 appeal from an October 30, 2013 judgment of the United States District Court for
5 the Southern District of New York (Sidney H. Stein, Judge), dismissing their
6 amended complaint for failure to state a claim. Plaintiffs allege that they
7 suffered losses in excess of $800 million when, from May 2007 through March
8 2009, they refrained from selling their shares of Citigroup stock based on the
9 fraudulent and negligent misrepresentations of defendants Citigroup and
10 Citigroup executives. Defendants cross‐appeal, arguing that the District Court
11 erred by addressing the adequacy of plaintiffs’ substantive claims as “holders” of
12 the shares during a period of decline in share value: According to defendants,
13 Delaware law mandates that such claims be brought in a shareholder derivative
14 action, not as direct claims (as plaintiffs have done).
15 If defendants are correct, plaintiffs—who are no longer Citigroup
16 shareholders—lack standing to maintain this suit. The proper characterization
17 of plaintiffs’ claims as direct or derivative calls for an interpretation of an
18 unsettled area of Delaware law in which there appear to be conflicting decisions,
19 and we anticipate that the resolution of this issue will have significance well
3
1 beyond the instant suit. See Del. Sup. Ct. R. 41. Accordingly, we respectfully
2 certify to the Delaware Supreme Court the question whether, under Delaware
3 law, “holder” claims such as those plaintiffs attempt to assert are properly
4 brought in a direct or derivative action.
5
6 BACKGROUND
7 I. Factual Background1
8 In 1977, Arthur L. Williams founded an insurance company that by 1989
9 had become very successful and merged with Travelers Group. In 1998,
10 Travelers Group merged with Citibank to become Citigroup. In the 1998 merger,
11 Williams acquired 17.6 million shares of Citigroup common stock, then valued at
12 approximately $616 million, or $35 per share. By early 2007, “for tax, estate and
13 investment‐planning purposes,” the shares had been transferred to a partnership,
14 a corporation, and various GRATs controlled by Arthur and his wife, Angela.
15 Am. Compl. ¶ 3.
16 In May 2007, Williams made a plan to sell his entire Citigroup position,
17 based on the shared recommendation of his financial advisors at that time. In
1 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., 711 F.3d
261, 264 (2d Cir. 2013).
4
1 the advisors’ view, the Citigroup stock price was then “close to the ‘top’ for the
2 near‐term and [it was] a good time for Williams to sell.” Id. ¶ 202. He began
3 implementing this plan on May 17, 2007, when he sold one million of his 17.6
4 million shares at $55 per share.
5 Against the counsel of his advisors and despite his plans to sell, Williams
6 “delayed executing his sales” of the remainder of his shares when, later in 2007,
7 “Citigroup’s stock price declined as the markets began to experience volatility
8 from the subprime mortgage crisis.” Id. ¶ 174. Williams believed that
9 Citigroup had “little downside risk and its shares were likely being dragged
10 down by the fortunes of other players” and that “once the market understood . . .
11 the different—and far superior—risk posture of Citigroup, its shares would
12 recover and he could complete his planned sale as intended.” Id. ¶ 175.
13 Plaintiffs allege that Williams formulated this belief in reliance on Citigroup’s
14 “public statements and financial reports” that “concealed the full extent and
15 impairment of billions in ‘toxic’ assets, including [collateralized debt obligations]
16 backed by subprime assets.” Id. ¶ 51; see also ¶¶ 175, 176. Plaintiffs further
17 allege that Citigroup “gave investors the impression that it was reducing and
18 prudently managing its risks, which was simply not true.” Id. ¶ 51.
5
1 In the sixteen months that followed his initial sale of one million shares,
2 Williams “continually tried to choose the appropriate time to complete the
3 liquidation of his position in order to minimize his damages.” Id. ¶ 177. But,
4 allegedly misled by Citigroup’s misrepresentations in “conference calls, investor
5 slideshows, earnings releases, public filings and statements from senior officers,”
6 Williams held on to his remaining 16.6 million shares as the stock price
7 plummeted to $3.09 per share. Id. ¶¶ 169, 172. He “considered” selling in
8 December 2007, on August 20, 2008, and on December 2, 2008. Id. ¶¶ 178–80.
9 It was not until March 2009, however, “by which time William’s [sic] faith in the
10 truthfulness of the Company had finally been erased, [that] he sold his remaining
11 16.6 million shares at a price of $3.09 per share.” Id. ¶ 172. Plaintiffs maintain
12 that, had Williams received truthful and accurate information from Citigroup, he
13 would have sold his entire position on May 17, 2007, when the “true value” of
14 the stock was $51.59.2 Id. ¶ 171.
15 Williams thus calculates that his reliance on Citigroup’s misrepresentations
16 resulted in losses to him, his wife, and their controlled entities of over $800
17 million.
2 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.
6
1
2 II. Procedural Background
3 Having filed their original complaint in December 2010, in July 2011
4 plaintiffs filed the amended complaint at issue here. In it, they seek damages
5 for negligent misrepresentation and for common law fraud. Defendants moved
6 to dismiss, arguing first that plaintiffs lack standing because under Delaware law
7 their claims are derivative, and second, that under New York law the alleged
8 misrepresentations are not actionable.
9 In a 2013 opinion and order, the District Court granted defendants’ motion
10 and dismissed the amended complaint with prejudice. AHW Inv. P’ship v.
11 Citigroup Inc., 980 F. Supp. 2d 510, 527 (S.D.N.Y. 2013). Applying Delaware law,
12 the District Court first “reject[ed] defendants’ contention that [the] claims are in
13 reality derivative claims brought on behalf of Citigroup.” Id. at 516. It
14 “recognize[d] a tension” in the Delaware precedent, but nevertheless concluded
15 that “plaintiffs, not Citigroup, are the victims of Citigroup and the officer
16 defendants’ alleged deception, and therefore plaintiffs are the ones with standing
17 to sue.” Id. at 517. The District Court then conducted a conflict of laws
18 analysis and concluded that New York law—as opposed to Florida law, as urged
7
1 by plaintiffs3—governed the substance of plaintiffs’ claims. Applying New York
2 law, the court determined that both the negligent misrepresentation and the
3 fraud allegations failed to state a claim; accordingly, it dismissed the complaint.
4 This appeal and cross‐appeal followed.
5
6 DISCUSSION
7 We review de novo a district court’s dismissal of a complaint under Federal
8 Rule of Civil Procedure 12(b)(6), drawing all reasonable inferences in the
9 plaintiff’s favor. Roth v. CitiMortgage Inc., 756 F.3d 178, 181 (2d Cir. 2014) (per
10 curiam).
11 On appeal, plaintiffs argue that the District Court erred by applying New
12 York, not Florida, law to their claims, and that, even applying New York law,
13 their fraud and negligent misrepresentation claims were sufficient to withstand a
14 motion to dismiss. Defendants dispute these contentions and argue in their
15 cross‐appeal that, contrary to the District Court’s conclusion, plaintiffs’ claims
16 are properly considered derivative rather than direct.
3 The Williamses are both Florida residents. The plaintiff entities, which they control, were
created under Nevada and Florida law.
8
1 If we accept defendants’ argument, then the District Court lacked
2 jurisdiction to adjudicate the sufficiency of plaintiffs’ claims, and we must affirm
3 the dismissal of the amended complaint without further considering plaintiffs’
4 claims. See Franchise Tax Bd. of Cal. v. Alcan Aluminum Ltd., 493 U.S. 331, 336–37
5 (1990) (noting that the question whether an individual shareholder is suing to
6 enforce his own rights versus those of the corporation presents an issue of
7 prudential standing). The lack of prudential standing would present an
8 independent basis for dismissing the complaint. Id. We therefore turn our
9 attention first to the issues raised in defendants’ cross‐appeal.
10
11 I. Tooley and its Application to Plaintiffs’ Claims
12 In diversity cases such as this, “federal courts look to the laws of the forum
13 state in deciding issues regarding conflicts of law.” Wall v. CSX Transportation,
14 Inc., 471 F.3d 410, 415 (2d Cir. 2006). Plaintiffs filed their complaint in the
15 Southern District of New York; therefore, we examine the law of New York, the
16 forum state, to determine which state’s substantive law governs the dispute.
17 Under New York law, we look to the law of the state of incorporation when
18 adjudicating whether a claim is direct or derivative. See Galef v. Alexander, 615
19 F.2d 51, 58 (2d Cir. 1980); Seidl v. Am. Century Cos., 713 F. Supp. 2d 249, 255
9
1 (S.D.N.Y. 2010), aff’d, 427 F. App’x 35 (2d Cir. 2011). Because Citigroup is
2 incorporated in Delaware, Delaware law controls whether plaintiffs’ claims are
3 properly characterized as direct or derivative. Plaintiffs mount no challenge to
4 this conclusion.
5 The leading Delaware Supreme Court case on the direct/derivative
6 dichotomy is widely acknowledged to be Tooley v. Donaldson, Lufkin & Jenrette,
7 Inc., 845 A.2d 1031 (Del. 2004). Like the District Court here, however, we
8 perceive some tension between Tooley and later state court decisions—primarily
9 lower court decisions, but also one decision of the Delaware Supreme Court that
10 post‐dates Tooley. Before considering how these later cases may have affected
11 Tooley’s import, we first review Tooley in some detail, since it is central to our
12 inquiry.
13 In Tooley, minority shareholder plaintiffs sought damages from the
14 corporation on the basis of allegations that members of the corporation’s board of
15 directors breached their fiduciary duties to the corporation by agreeing to delay
16 closing a proposed merger for twenty‐two days, thereby depriving minority
17 shareholders of use of the funds they were to receive upon closing for that
18 twenty‐two‐day period. Id. at 1033–34. The Court of Chancery dismissed the
19 action, concluding the plaintiffs’ claim was derivative, not direct. It reasoned
10
1 that the wrong alleged did not cause plaintiffs a “special injury”—that is, “a
2 wrong that is separate and distinct from that suffered by other shareholders.”
3 Tooley v. Donaldson, Lufkin & Jenrette, Inc., No. Civ. A. 18414‐NC, 2003 WL 203060,
4 at *3 (Del. Ch. Jan. 21, 2003) (internal quotation marks omitted). The “special
5 injury” requirement was then used in Delaware courts to differentiate between
6 direct and derivative claims, including claims that alleged breach of duty to
7 shareholders through a defendant corporation’s alleged misrepresentations. See,
8 e.g., Manzo v. Rite Aid Corp., No. Civ. A. 18451‐NC, 2002 WL 31926606, at *5–6 (Del.
9 Ch. Dec. 19, 2002) (concluding that a “plaintiff must identify some resultant
10 injury that . . . affects some shareholders disproportionately to their pro rata
11 stock ownership” to state a direct claim based on the “depriv[ation] of accurate
12 information upon which to base investment decisions”), aff’d, 825 A.2d 239 (Del.
13 2003).
14 On Tooley’s appeal from the Court of Chancery decision, however, the
15 Delaware Supreme Court expressly “disapprove[d] the use of the concept of
16 ‘special injury’ as a tool” in distinguishing between direct and derivative claims.
17 Tooley, 845 A.2d at 1035. The court held instead that “whether a stockholder’s
18 claim is derivative or direct . . . must turn solely on the following questions:
19 (1) who suffered the alleged harm (the corporation or the suing stockholders,
11
1 individually); and (2) who would receive the benefit of any recovery or other
2 remedy (the corporation or the stockholders, individually)?” Id. at 1033
3 (emphasis in original). When deciding whether a claim is properly viewed as
4 direct or derivative, it instructed, “a court should look to the nature of the wrong
5 and to whom the relief should go.” Id. at 1039.
6 Turning back to the Williamses’ complaint, we see that Tooley’s two‐part
7 test suggests that the Williamses may bring their claims directly. With regard to
8 “who suffered the alleged harm,” it is true that in a general sense both plaintiffs
9 and Citigroup suffered harm when the Company’s share price fell over time as
10 the extent of its investment in subprime‐related assets came to light. But the
11 harm for which plaintiffs seek recovery is more particularized: It arises from
12 their detrimental reliance on what they cast as defendants’ misrepresentations,
13 made through “personal and direct communications” to them, not merely public
14 announcements. See, e.g., Am. Compl. ¶ 181 (describing the decision not to sell
15 as being based on Arthur Williams’s “personal and direct communications with
16 senior Citigroup officers”); id. ¶¶ 291–92 (seeking relief for having been “the
17 recipients of multiple misrepresentations and omissions of material fact” and
18 alleging that “Defendants knew their statements to Plaintiffs concerning
19 Citigroup’s subprime exposure were false at the time they were made”).
12
1 Because the harm alleged is inextricably linked to defendants’ misstatements and
2 the asserted breach of a duty of disclosure, the harm from the alleged
3 misrepresentations may be said to have been suffered by “the suing stockholders,
4 individually,” not by “the corporation.” And the complaint alleges that the
5 misstatements were made in an attempt to cover up the harm already done to the
6 corporation, not to have themselves caused the harm—further decoupling the
7 harm allegedly suffered by the Williamses and that sustained by the corporation.
8 And as to the second Tooley question, it seems that the Williamses, not
9 Citigroup, would “receive the benefit of any recovery.” The complaint alleges
10 that, “as a direct result of Defendants’ fraudulent statements and Plaintiffs’
11 reliance thereon, Plaintiffs suffered approximately $809,950,000 in compensatory
12 damages.” Id. ¶ 296. Theirs is fundamentally an action for compensatory
13 damages, and if any party were to recover damages for the asserted
14 misrepresentations (if actionable at all), it would be plaintiffs: It would be a
15 strange outcome indeed for Citigroup to pay itself for losses sustained by certain
16 shareholders arising from alleged misrepresentations made to those shareholders
17 by the Company and its officers. Thus, our response to the second Tooley
18 question also appears to support plaintiffs’ argument that they may bring their
19 claims directly.
13
1 In sum, Tooley suggests that the Williamses have stated direct claims. If
2 Tooley were the only decision of the Delaware courts relevant to this action, we
3 would likely conclude that plaintiffs may bring these claims directly.
4
5 II. Delaware Courts’ More Recent Application of Tooley
6 Subsequent developments in the Delaware courts’ application of Tooley
7 give us pause, however. As detailed below, in a number of cases the Delaware
8 Chancery Court has found that claims that would be “direct” under the two‐part
9 Tooley test must nonetheless be brought “derivatively” because the claims are not
10 “independent of any alleged injury to the corporation,” Tooley, 845 A.2d at 1039.
11 Relying on the same language from Tooley, a recent Delaware Supreme Court
12 case may have given new life to the “special injury” requirement that was earlier
13 disavowed in Tooley. We think that these developments have major implications
14 for whether, under Delaware law, shareholder‐plaintiffs in general, and the
15 Williamses in particular, have stated direct or derivative claims.
16 In Gentile v. Rossette, 906 A.2d 91 (Del. 2006), for example, the Delaware
17 Supreme Court reviewed an action brought by a group of minority shareholders
18 against the corporation’s directors and chief executive officer for breach of
19 fiduciary duty related to an alleged overpayment to the CEO. The court held
14
1 that when a claim is based on “any dilution in value of the corporation’s stock,”
2 the claim is generally derivative, because the loss of value “is merely the
3 unavoidable result . . . of the reduction in the value of the entire corporate entity.”
4 Id. at 99 (applying Tooley to a claim of corporate overpayment for an asset).
5 Similarly, in In re J.P. Morgan Chase & Co. Shareholder Litigation, 906 A.2d 808
6 (Del. Ch. 2005), aff’d on other grounds, 906 A.2d 766 (Del. 2006), the plaintiff
7 stockholders filed what they contended were direct claims based on the
8 defendant company’s alleged overpayment in a merger with another bank, id. at
9 812. Plaintiffs complained that the value of their shares was diluted by virtue of
10 the overpayment, and that this was the type of harm that would give rise to a
11 direct action under Tooley. Id. at 818. The Court of Chancery looked to “the
12 heart of the[] complaint” and found that “[t]he plaintiffs, if they were harmed at
13 all, were harmed indirectly and only because of their ownership in JPMC.” Id.
14 at 818–19. Therefore, the court concluded, “the plaintiffs’ claim is derivative.”
15 Id. at 819.
16 These cases suggest that the two‐part Tooley test may now have evolved
17 and that the Williamses’ claims here, which are tied to the dramatic plunge in the
18 value of Citigroup stock between 2007 and 2009, might not be correctly treated as
19 direct under Delaware law.
15
1 The Delaware Supreme Court’s decision in Feldman v. Cutaia, 951 A.2d 727
2 (Del. 2008), lends support. In Feldman, the plaintiff alleged that the defendants
3 breached their fiduciary duties when approving a merger agreement that
4 resulted in an allegedly improper payout to company executives. Id. at 729–30.
5 In affirming the Court of Chancery’s dismissal of Feldman’s claim as derivative,
6 the Delaware Supreme Court observed the following, writing four years post‐
7 Tooley:
8 Where all of a corporation’s stockholders are harmed and would
9 recover pro rata in proportion with their ownership of the
10 corporation’s stock solely because they are stockholders, then the
11 claim is derivative in nature. The mere fact that the alleged harm is
12 ultimately suffered by, or the recovery would ultimately inure to the
13 benefit of, the stockholders does not make a claim direct under
14 Tooley. In order to state a direct claim, the plaintiff must have
15 suffered some individualized harm not suffered by all of the
16 stockholders at large.
17 Id. at 733.
18 Feldman thus casts doubt on the viability of plaintiffs’ claims in two ways.
19 First, the Williamses seek recovery for losses sustained as a result of the
20 diminution of value in their Citigroup stock over a certain period. These are
21 losses experienced by “all of [the] corporation’s stockholders” who held stock for
22 that same time, and each of them, like the rebuffed plaintiff Feldman, “would
23 recover pro rata in proportion with their ownership of the corporation’s stock”
16
1 were they to pursue claims. Second, according to Feldman, a plaintiff must have
2 “suffered some individualized harm not suffered by all of the stockholders at
3 large.” Id. Although the reason that the Williamses retained their shares might
4 be individualized—see Am. Compl. ¶ 169 (“Williams made all of the investment
5 decisions to hold . . . Citigroup shares, based entirely upon information and
6 representations disseminated directly from the Company and its senior officers
7 to him and his Advisors.”)—the actual harm suffered was the loss in stock value
8 during a period of retention, which was sustained by the stockholders at large.
9 Thus, plaintiffs do not seem to meet the more recent requirements for stating
10 direct claims that were articulated in Feldman.
11 To be clear, the Feldman court purports to rely on Tooley, not to overrule it.
12 See Feldman, 951 A.2d at 732–33 (applying the Tooley analytical framework). But
13 the Feldman decision appears to us possibly to revive the “special injury”
14 requirement disclaimed in Tooley. As we have highlighted, under Feldman, “to
15 state a direct claim, the plaintiff must have suffered some individualized harm
16 not suffered by all of the stockholders at large.” Id. at 733. As referenced
17 earlier, Tooley purportedly did away with the requirement that, to state a direct
18 claim, a plaintiff must identify “a wrong that is separate and distinct from that
19 suffered by other shareholders.” 845 A.2d at 1035 (internal quotation marks
17
1 omitted). Thus, it is not clear, after Feldman, whether Tooley’s rejection of the
2 “special injury” requirement still accurately represents Delaware law, or whether
3 a different distinction is being drawn.
4 In the Williamses’ case, the District Court confronted this issue and
5 concluded that, notwithstanding Feldman’s suggestion to the contrary, “plaintiffs’
6 injuries are not depend[e]nt on Citigroup’s injury.” AHW, 980 F. Supp. 2d at 517.
7 It explained insightfully that “plaintiffs can prevail without showing an injury to
8 Citigroup because the nature of the allegation is that the misstatements and
9 omissions concealed damage to Citigroup’s assets that had already been done.” Id.
10 (internal quotation marks omitted) (emphasis added).
11 It is true that the misconduct alleged by the Williamses occurred after the
12 damage to the Company had been done and that the ostensible purpose of the
13 alleged misconduct was to conceal this damage. But the “claimed direct injury”
14 here is the shrinking value in plaintiffs’ stockholdings during the period in which
15 defendants’ statements convinced plaintiffs to retain their shares. The core of
16 this injury is the decline in stock price, which of course reflects injury sustained
18
1 by the corporation. We therefore find it difficult to conclude that the Williamses’
2 asserted injury is truly “independent” of any injury to Citigroup.4
3 Delaware case law interpreting Tooley does not, however, uniformly point
4 toward a conclusion that the Williamses’ claims are derivative. The Delaware
5 Court of Chancery has held that when the gravamen of a plaintiff’s claims is that
6 the defendants “failed to disclose material information when they had a duty to
7 disclose it and made other misleading or fraudulent statements,” those claims
8 are direct under Delaware law. Albert v. Alex. Brown Mgmt. Servs., Inc., Nos. Civ.
9 A. 762‐N, 763‐N, 2005 WL 2130607, at *12 (Del. Ch. Aug. 26, 2005). In Albert,
10 plaintiffs—who were unitholders and limited partners in two exchange funds—
11 claimed, among other things, that the fund managers withheld material
12 information about the operation and performance of the funds, in breach of
13 contract and breach of their fiduciary duty. Id. at *1–3. The court, applying
14 Tooley, found that those claims were direct because (1) the disclosure violations
15 were contractual and harmed the unitholders, not the partnership, by depriving
16 them of the opportunity to withdraw money from the funds, and (2) the
4
We have adopted such an analysis before, albeit in a non‐precedential summary order. See
Elendow Fund, LLC v. Rye Inv. Mgmt., 588 F. App’x 27, 29 (2d Cir. 2014) (concluding that, because
the plaintiff’s injury was “intertwined” with that of the defendant fund, the action was
derivative under Delaware law).
19
1 unitholders would receive any recovery. Id. at *12–13; see also Big Lots Stores, Inc.
2 v. Bain Capital Fund VII, LLC, 922 A.2d 1169, 1181 n.54 (Del. Ch. 2006) (“[N]on‐
3 disclosure claims are direct claims where a defendant has failed to disclose
4 material information when they had a duty to disclose it.” (internal quotation
5 marks omitted)). When we consider the core misconduct alleged in this case—
6 defendants’ misrepresentations both to the plaintiffs specifically and to the public
7 generally—these two Delaware Chancery Court decisions suggest that, even
8 under a standard evolved since Tooley, plaintiffs may have stated direct claims.
9 Softening the import of Brown for the Williamses, however, the Williamses have
10 alleged no contractual duty on Citigroup’s part to disclose.
11 Nonetheless, Delaware cases post‐Tooley complicate our analysis and
12 suggest that the Williamses may lack standing to pursue their claims against
13 defendants. Thus, our review of recent Delaware case law suggests a conclusion
14 contrary to that we would have reached had we applied Tooley alone.
15
16 III. Our Circuit’s Application of Tooley
17 Our Circuit’s own prior decisions applying Delaware law also cast doubt
18 on whether the specific sort of claims advanced by the Williamses—those
19 alleging harm based on the retention of stock in reliance on a defendant’s
20
1 statements (“holder claims”), rather than the actual purchase or sale of stock—may
2 be brought directly, absent some special relationship. Although we have not
3 addressed the issue by precedential opinion,5 our rulings suggest a view that
4 such holder claims, in particular, are properly brought under Delaware law as
5 derivative claims. The Delaware Supreme Court is of course free to reject these
6 analyses, but we review them here briefly to illustrate our past understanding of
7 Tooley.
8 In Newman v. Family Management Corp., 530 F. App’x 21 (2d Cir. 2013), for
9 example, we recently interpreted Tooley to require plaintiffs to allege a “unique
10 injury” to assert a direct claim. Id. at 27.6 The Newman plaintiffs were investors
11 in a “sub‐feeder fund” that was invested in the notorious Madoff Ponzi scheme
12 via the defendant Family Management Corporation. See Newman v. Family
13 Mgmt. Corp., 748 F. Supp. 2d 299, 302, 304–05 (S.D.N.Y. 2010). Plaintiffs alleged,
5 According to our Local Rules, “Rulings by summary order do not have precedential effect.”
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, 658 F.3d 225, 244 (2d Cir.
2011).
6 This “unique injury” 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.
21
1 among other things, that defendants misled them about the quality of the fund’s
2 investments. Newman, 530 F. App’x at 26–27. The Newman Court found that
3 the misrepresentation claims must be brought derivatively. Id. at 27. It
4 acknowledged that when a “claim for negligent misrepresentation against [a
5 defendant] alleges fraudulent inducement, such a claim alleges ‘injury other than
6 that to the corporation’ and may proceed directly.” Id. at 27 n.1 (quoting Big Lots,
7 922 A.2d at 1177). A fraudulent inducement claim, however, may not
8 encompass a holder claim; rather, it may require some affirmative action by the
9 claimant, such as a purchase or sale.
10 In a second case decided by summary order, Stephenson v.
11 PricewaterhouseCoopers, LLP, 482 F. App’x 618 (2d Cir. 2012), we drew a distinction
12 between a plaintiff’s claim of being “induced . . . to invest” in a partnership,7
13 which may be brought directly, and a claim “based on his decision to remain
14 invested,” which must be brought derivatively. Id. at 621. Stephenson was an
15 investor in a Delaware limited partnership operating as a “feeder fund” into the
16 Madoff Ponzi scheme. Id. at 620. He sued PricewaterhouseCoopers, LLP, the
17 partnership’s auditor, for fraud, and sought damages based on the loss of value
7 “[U]nder Delaware law[,] 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, 482 F. App’x at 621 (alterations and internal quotation marks omitted).
22
1 of his partnership interest. We reasoned that holder claims, like the one alleged
2 by the Williamses, involve no “harm” to an individual investor or partner that is
3 distinct from the harm to other investors or partners. Id. at 621. Although it
4 may offer insight, Stephenson is not dispositive with respect to the treatment of
5 the Williamses’ claim, however, because it—like Newman—is a summary order.
6 Although our Circuit’s history implies a view that the Williamses’ claims
7 here and holder claims generally are properly brought derivatively under
8 Delaware law, this implication arises entirely from our holdings in non‐binding
9 summary orders.8 The Delaware Supreme Court, to our knowledge, has not yet
10 evaluated whether the distinction between a holder claim and an inducement to
11 purchase or sell claim is relevant (or dispositive) under Tooley and its progeny.
12
13 IV. Certification
14 In sum, the seemingly various approaches taken by the Delaware state
15 courts on the “direct versus derivative” question suggest a need for caution in
8 We recently certified another question to the Delaware Supreme Court because of our
uncertainty as to the applicability of Tooley. NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 772
F.3d 740 (2d Cir. 2014). The Delaware Supreme Court instructed us that, in its view, Tooley was
inapposite to the facts of that case, in which the plaintiff sought to enforce its own contract with
the defendant, to which the corporation was only a third‐party beneficiary. See NAF Holdings,
LLC v. Li & Fung (Trading) Limited, 118 A.3d 175, 176 (Del. 2015). The Delaware Supreme Court
did not, however, elaborate upon the Tooley test further for cases, such as the one before us, in
which it seems difficult to conclude that Tooley does not apply.
23
1 our resolution of this case. Tooley and its progeny may teach that a loss resulting
2 from a deliberate decision not to sell stock, taken in reliance on the particularized
3 statements of corporate officers, is a sufficiently “independent” injury to be
4 brought as a direct rather than a derivative claim; but the opposite conclusion
5 may also be drawn in light of the difficulty in separating the harm to the
6 plaintiffs and the harm to the corporation.
7 As adverted to above, our Local Rules provide a means for us to certify a
8 question of state law to the state’s highest court if state law permits. See 2d Cir.
9 Local R. 27.2(a). Delaware law allows this Court to certify questions of state law
10 to the Delaware Supreme Court. Del. Sup. Ct. R. 41(a)(ii). That court is
11 authorized to exercise its discretion to accept certified questions “where there
12 exist important and urgent reasons for an immediate determination . . . of the
13 questions certified,” including a conflict among the state trial courts. Del. Sup.
14 Ct. R. 41(b).
15 The issues we confront here seem particularly well suited to certification.
16 First, despite the Tooley court’s rejection of a “special injury” requirement for
17 direct claims, some Delaware courts appear to have reinvigorated that doctrine
18 by reference to Tooley’s requirement that a plaintiff’s injury be “independent” of
19 an injury to the corporation. Under Delaware’s certification rules, that conflict
24
1 appears to serve as an appropriate basis for the Delaware Supreme Court to take
2 up the certified question. Second, this case presents a question that “seems
3 likely to recur and to have significance beyond the interests of the parties” in this
4 lawsuit. In re Motors Liquidation Co., 755 F. 3d 78, 86 (2d Cir. 2014) (alterations
5 and internal quotation marks omitted), certified question accepted, 103 A.3d 1010
6 (Del. 2014). And finally, the factual setting for addressing the question
7 presented is certain: It is set by the amended complaint. See Espinoza v. Dimon,
8 No. 425, 2015 WL 5439176, at *1 (Del. Sept. 15, 2015).
9
10 CONCLUSION
11 For the foregoing reasons, we respectfully CERTIFY the following question
12 to the Delaware Supreme Court:
13 Are the claims of a plaintiff against a corporate defendant alleging
14 damages based on the plaintiff’s continuing to hold the
15 corporation’s stock in reliance on the defendant’s misstatements as
16 the stock diminished in value properly brought as direct or
17 derivative claims?
18 We invite the Delaware Supreme Court to expand, alter, or reformulate
19 this question as it deems appropriate.
25
1 This panel will retain jurisdiction to decide the case once we have had the
2 benefit of the views of the Delaware Supreme Court or once that Court declines
3 to accept certification.9
9 Defendants’ motion for certification to the Delaware Supreme Court is GRANTED as to the question
stated here.
26