Banks & Banking – Breach of Duty – Negligent Misrepresentation – Derivative Claims

Browne v. Thompson. (Lawyers Weekly No. 11-15-0255, 21 pp.) (John Jolly, J.) N.C. Bus. Ct. Click here for the full text of the opinion.

Holding: In a case in which a bank purchased a mortgage company associated with risky loans, shareholders of the bank cannot claim that the action caused them to lose money because the stock price dropped because such actions are derivative. An accounting firm that performed audits on the bank cannot be sued on the basis of negligent misrepresentation when they cannot show justifiable reliance or how much money they would have lost.

Plaintiffs filed this complaint in 2009, alleging, among other things, negligence and breach of duty of a corporate director. Collectively plaintiffs own over 120,000 shares of Wachovia common stock, which has now been converted to Wells Fargo stock.

Plaintiffs’ allegations primarily concern the 2006 acquisition of Golden West Financial Corp., a mortgage lender that had a large portfolio of adjustable-rate mortgages known as “Pick-a-Pay” loans. In this type of loan, some borrowers end up owing more than the property is worth. Plaintiffs claim Golden West’s underwriting standards were risky. They also claim that Wachovia’s unprecedented losses from 2006-2008 were a result of the Golden West acquisition. They allege that defendants caused Wachovia to publish false SEC filings.

Defendants moved for dismissal under Rule 12(b)(6). Wachovia seeks to dismiss on three grounds: (1) North Carolina does not permit direct shareholder claims for losses resulting solely from a drop in the value of the stock as such claims are derivative. (2) North Carolina does not recognize “holder” claims, and (3) plaintiffs fail to state viable claims.

The substantial drop in the price of Wachovia stock was felt equally by all shareholders. In Barger v. McCoy Hilliard & Parks, 346 N.C. 650 (1997), our Supreme Court ruled that shareholders cannot pursue individual actions against third parties for wrongs or injuries to the corporation. For a “separate injury” exception to apply, the injury must be peculiar or personal to the shareholder and distinct from damage suffered by the corporation. This is not the case here.

Plaintiffs also seek to recover damages for profits they allege they could have realized if they had sold their shares before the Wachovia merger with Wells Fargo was announced. Defendants argue that because holder claims are both derivative and highly speculative, they are not recognized in North Carolina.

The court concludes that none of the authorities cited by plaintiffs support their position. Even if North Carolina were to recognize derivative claims in a limited discrete and narrow fact situation, the allegations in this complaint as a matter of law are insufficient.

The motion to dismiss by Wachovia is granted.

Defendants KPMG seeks dismissal on the grounds that plaintiff has not shown the elements of a claim for negligent representation. To state such a claim, the plaintiffs must allege that they justifiably relied to their own detriment information prepared without reasonable care by one who owed the relying party a duty of care.

As a threshold, KPMG argues that plaintiffs’ claim is fatally defective because their decision not to sell their stock is not a transaction as required. The parties have not presented any N.C. case law on this point. In their complaint, plaintiffs do not allege any sort of specific reliance such as how many shares they would have sold or that they specifically relied up KPMG’s audit opinions. Plaintiffs have failed to state a claim against KPMG.

Dismissed.