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).
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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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