Banks & Banking – Derivative Claims – Holders Claims – Special Duty

Harris v. Wachovia Corp. (Lawyers Weekly No. 11-15-0254, 29 pp.) (John Jolly, J.) N.C. Bus. Ct. Click here for the full text of the opinion.

Holding: In an issue of first impression, the court rules that an officer of a corporation who has a personal relationship has no special duty to that shareholder; shareholders cannot claim losses because they did not sell stock based on information that the company’s portfolio was strong, even if that information was incorrect. Motion to dismiss granted.

Background

At the times material to the allegations, plaintiffs held over 900,000 shares of Wachovia common stock. Plaintiffs allege that defendants, who include not only Wachovia but some of its officers, participated in a fraudulent scheme to deceive plaintiffs and the public as to the financial stability of Wachovia. They allege the scheme grew out of the bank’s purchase of Golden West Financial Corp., a mortgage company that specialized in so-called “Pick-a-Pay” loans. These adjustable-rate loans were risky in a declining real estate market, plaintiffs allege.

Wachovia experienced unprecedented losses after the acquisition. The complaint details at length Wachovia’s allegedly false public SEC filings, press releases and earnings calls regarding the financial strength of the bank.

In addition, plaintiffs contend they had numerous instances of direct contact with the bank’s officers during which they were assured of Wachovia’s stability. In June 2007 one of the plaintiffs spoke by phone with Wachovia’s CEO, who called the bank’s portfolio “solid” and said that the bank was not susceptible to the effects of the declining real estate market. On another occasion the two plaintiffs were on a hunting trip with the CEO, who told them their stock would be “OK” and that Wachovia was not planning on cutting its dividend. After the stock price fell to less than $1 a share, Wachovia merged with Wells Fargo.

Plaintiffs had borrowed $24 million from Wachovia and subsequently defaulted, at which time they owed $12.89 million. Plaintiff asked the bank to forbear from exercising its rights and remedies and provide them with financial accommodations. The agreement provides a release executed by plaintiffs as part of the consideration.

Defendants move to dismiss under Rule 12(b)(6). They argue that plaintiffs may not assert individual claims in this action because the claims seek to recover directly for a loss caused by a wrong committed against the company, saying such claims are derivative. Defendants also argue that North Carolina does not recognize holder claims, typically claims for damages by shareholders who allege they decided not to sell because of a misrepresentation or failure to disclose unfavorable information.

Plaintiffs assert that they have individual claims against individual persons, not derivative claims for injuries to Wachovia. They contend the claims fall into one or both of the exceptions to the ruling on derivative claims because the individual defendants owed the plaintiffs a special duty or plaintiffs suffered injuries separate from the other shareholders.

Under N.C. law, it is well established that shareholders cannot pursue individual causes of action against third parties. Courts have also noted that such a claim should be barred because awarding damages to an individual shareholder could impair the rights of creditors, whose claims may be superior.

Here, plaintiffs allege defendants made misrepresentations to them regarding Wachovia’s financial stability, giving rise to a special duty. The parties have not cited and the court is not aware of any N.C. appellate decisions addressing the issue of whether personal relationships between shareholders and officers of a corporation are sufficient to establish a special duty apart from duties owed all shareholders; this issue appears to be one of first impression. Looking to a case in New York in which plaintiffs had met personally with the company’s CEO, the court found the plaintiff’s claims to be derivative in nature.

In the instant case, it is clear that the individual defendants were giving the same information to plaintiffs as they were giving to the public at large. The injuries complained of by the plaintiffs were the same as all other Wachovia shareholders. Plaintiffs here argue that the officers had a duty to disclose information to them at private meetings and over the phone based on their personal relationships, but such a duty would be inconsistent with federal securities law that prohibits selective disclosure.

It is difficult to escape the conclusion that plaintiffs would have profited by inside information at the expense of unknowing third-party purchasers. At best it is improper; at worst, it would have violated a host of SEC laws.

As to plaintiffs’ claim of separate injury exception, plaintiff’s “lost property” is nothing more than a claim for the loss in the value of Wachovia stock. Any harm caused by defendants was shared by all Wachovia stockholders. The court concludes that the allegations of the complaint are not sufficient to support a finding that plaintiffs suffered injury different than other Wachovia stockholders.

Plaintiffs allege they would have sold their Wachovia shares at a higher price had defendants not convinced to do otherwise. A claim for damages to shareholders who do not sell their shares due to unduly rosy representation is called a “holder’s claim.” Defendants contend that N.C. law does not recognize such claims.

On the theory that holder claims could benefit individual shareholders at the expense of the others, numerous courts have dismissed such claims as derivative. Holder claims also present substantive difficulties with regard to the elements of causation and damages, as plaintiff’s holder claims involve only a hypothetical transaction.

Defendant’s motion to dismiss is granted. Motion for summary judgment is denied as moot.