Perry v. Cohen, No. 03-05-0078-CV (Tex. App.—Austin, March 26, 2009) [Read Opinion]
In this case, 14 shareholders of now-defunct RAMP Corporation sued the former directors alleging negligence, common law fraud, negligent misrepresentation, statutory fraud, and conspiracy. The defendants specially excepted seeking to have the plaintiffs plead specifically which defendants made what misrepresentations to which plaintiffs and what injury was caused thereby. The defendants also contended that the claims were derivative claims and specially excepted seeking to have the plaintiffs plead what injuries the plaintiffs suffered individually, as distinguished from injuries to the corporation. The court sustained the special exceptions and ordered the plaintiffs to replead. After two amendments, the court held that the plaintiffs had not complied with the order and dismissed the entire claim with prejudice.
[Texas civil procedure does not have a general demurrer or 12(b)(6) type motion. Defendants are required to make "special exceptions" to defective pleadings and to give the plaintiffs an opportunity to cure the defect. If the plaintiff fails to comply with a court's order sustaining special exceptions, then the court may dismiss the plaintiff's lawsuit.] The court of appeals affirmed the dismissal on the grounds that the plaintiffs had waived their grounds of appeal because they appealed only the special exceptions order and not the dismissal order. The Supreme Court granted review and reversed, holding that there was no waiver. Now on remand, the court of appeals affirms the dismissal.
The court of appeals held that the "general rule in Texas is that 'individual stockholders have no separate and independent right of action for injuries suffered by the corporation which merely result in the depreciation of the value of their stock.' Wingate v. Hadjik, 795 S.W.2d 717, 719 (Tex. 1990). As the supreme court explained in Wingate v. Hadjik, 'This rule is based on the principle that where such an injury occurs each shareholder suffers relatively in proportion to the number of shares he owns, and each will be made whole if the corporation obtains restitution or compensation from the wrongdoer.' Id. at 719. Accordingly, an action for such injury must be brought by the corporation, not individual shareholders. Id. (citing cases). This rule, of course, does not prohibit a shareholder from bringing a cause of action to recover damages for wrongs done to him individually where a wrongdoer violates a duty owed directly to the shareholder. Id."
All of the plaintiffs' various claims were manifestations of a claim for misrepresentation based on communications from the directors to the shareholders and the public on which the plaintiffs relied in purchasing and holding on to their stock. Specifically, the plaintiffs alleged:
- The shareholders met with appellees Brown and Cohen through an internet conference call in which Brown and Cohen made false statements regarding RAMP Corporation, RAMP management, RAMP bookkeeping and accounting, RAMP stock, RAMP financing, and SEC filings concerning the company.
- The shareholders met with Brown and Cohen on various occasions, and Brown and Cohen made false statements regarding RAMP Corporation, RAMP management, RAMP bookkeeping and accounting, RAMP stock, RAMP financing, and SEC filings concerning the company.
- The defendants issued a series of press releases and other advertisements regarding RAMP Corporation that the defendants knew were false.
- The defendants filed documents containing false statements with the SEC.
- The defendants held a telephone conference with one or more shareholders in which the defendants made false statements concerning RAMP Corporation and RAMP stock.
- Based on the acts, omissions, advice, promises, representations, and misrepresentations of the defendants, the shareholders were induced to continue to invest in and/or to retain their stock in RAMP.
- These acts, omissions, advice, promises, representations, and misrepresentations were made with the intent that the shareholders rely on them and the shareholders did in fact rely on them in continuing to invest in and/or retaining their stock.
The court of appeals agreed with the trial court that the plaintiffs' claims were derivative claims and that the plaintiffs utterly failed to plead the specifics of the misrepresentations, the identity of the defendants uttering them, the particular plaintiffs who relied on them, and the individual transactions in which stock was bought and sold specifically as a result. In all likelihood, the plaintiffs failed to plead with the specificity demanded by the trial court because all of the misrepresentations were made after the plaintiffs bought their shares, and the pleading ordered by the court would have demonstrated problems with reliance and causality. However, the plaintiffs also pleaded on a "holder" theory of liability—in other words, that the plaintiffs could have and would have sold their shares and cut their losses but refrained from doing so and held their stock in reliance on misrepresentations made be the defendants.
There are a number of things that are strikingly odd about this opinion. First, the court is completely wrong about the claims being derivative claims. The court seems to be hung up on the language in Wingate that shareholders don't have standing to bring claims individually for "the depreciation of the value of their stock." However, this is a misreading of the Wingate opinion. What makes a claim a corporation's claim rather than a shareholder's claim is that the claim is for "injuries suffered by the corporation which merely result in the depreciation of the value of their stock." In other words, the duty breached must be a duty owed to the corporation, and the injury suffered must be harm suffered by the corporation. Shareholders are not allowed to sue for the diminution in value of their stock that is caused by harm done to the corporation by its directors. If the plaintiffs' claims were for the diminution in value of their shares that resulted from the directors' mismanagement or stealing from the corporation, the claim would belong solely to the corporation and could be brought be shareholders only derivatively. In this case, the acts creating liability were misrepresentations about the condition of the company made by the directors directly or indirectly to various shareholders. The making of these false representations did not violate any duty to the corporation and certainly did not cause any financial injury to the corporation. Rather the legal duty violated was a duty not to commit fraud, which is a duty owed to the shareholders individually, and not to the corporation. The harm suffered is not the diminution in value of the shares per se, but the loss of the opportunity to sell the shares at a higher price. [It is not important that the plaintiffs in this case never did sell, because the company is now defunct; the stock is worth zero and can't be sold. If the corporation was still in operation, and the plaintiffs continued to hold the shares after learning the truth, then there would be a problem.] Furthermore, the issue of whether a shareholder has standing to assert a claim that may be owned by the corporation should be raised by a plea to the jurisdiction and not bu special exceptions. The fact that the corporation and not the shareholder owns the cause of action is not a defect in the pleading of the claim or in the legal validity of the claim, but is a question of standing to assert the claim, which Texas law recognizes as a jurisdictional issue. A plea to the jurisdiction requires findings by the court, and the remedy is a dismissal without prejudice. From a procedural point of view, the trial court in this case dismissed the plaintiffs' suit with prejudice on the grounds that the court did not have jurisdiction to hear the claim but without ever considering or ruling directly on the actual jurisdictional issue.
Whether Texas would recognize a "holder's" claim of fraud is a very good question. Such a claim is probably not viable under federal securities fraud law. However, that issue was not before the court. The court of appeals contended that the plaintiffs failed to specify and correlate the dates of the misrepresentations and the dates of the purchases or sales in reliance. This reasoning is silly when applied to a "holder's" claim. There was no purchase or sale in reliance on any specific misrepresentation, rather the plaintiffs contended that they continued to hold their shares over a long period of time in reliance on a series of misrepresentations. The requirement of specific dates for misrepresentations does not comport with Texas law. Texas is a notice-pleading state. There is nothing equivalent to a Rule 9(b) requirement of particularity in pleading fraud. The wrongful conduct in the pleadings cited by the court seems reasonably specific, certainly specific enough to allow the defendants to move forward with discovery and a defense.