FILED U.S. COURT OF AP P EALS E LEVEN T HC IRC UIT SEPT 12 , 2006 THOMAS K. KAH

N CLERK [ DO NO T P UB L I S H] I N THE UN I TE D STATE S C OU RT OF APPE ALS F O R T H E E L E V E N T H C IR C U IT

________________________ N o. 06- 12459 N on -A rgum entC al endar

________________________ D. C . Do c k e tNo . 0 5 - 1 0 1 2 - C V- J OF J OH N R. HA NTZ, M I C H A E L R E I D , e t a l., P la in tif f s - A p p e lla n ts , v ersu s P H I L L I P B E L Y E W , T . W A Y N E D A V I S , e t a l., D e f e n d a n ts - A p p e lle e s .

________________________ A pp ea l fr om the U ni t ed S t at es D i stri ctC ou rt f o rth e N o rth e rn D is tr ic t o f G e o r g ia

_________________________ ( S e p t e m b e r 12, 2006) B efo re C A RN E S , M A R C U S an dW IL S O N , C i rcu i tJu d g es. P E R C U R I A M: P l a i nt i f f s , J ohn R . H a nt z , M i c ha e l R e i d, M i c ha e l L a c om be , M a rk D r oui l l a r d,2

an d O ri so n C h affee ap p eal fro m th e d i stri ctco u rt ’ s d i sm i ssal o f th ei r su i tag ai n st D e f e nda nt s , P hi l l i p B e l y e w , T . W a y ne D a vi s , D e r e k E . D e w a n, F or d G . P e a r s on, G e n e r a l E le c tr ic C o m p a n y , G e n e r a l E le c tr ic C ap ita l C o rp o r a tio n , a n dT r a n s it G r o u p , I n c . T h e p la in tif f s a r e m e m b e r s o f

a n in v e s tm e n t g r o u p th a t f o rm e r lyh e ld s to c kin T r a n s it G r o u p . T h e ya lle g e d e r iv a tiv e a c tio n s f o rb r e a c h o f

f id u c ia ryd u ty a nd c ons pi r a c yt o br e a c h f i duc i a ryduty , a s w e l l a s adi r e c ta c t i on f orf r aud. T he di stri ctcourti dent i fi ed a num ber of defe ct s i n p l ai nt i ff’ s am ended com pl ai nt . T he courtfoun d: 1) thatpl ai nt i ff s w er e notshar ehol ders of T ransi tat the t i m e the s ui tw a s br ought , a nd thus do notha ve s t a ndi ng t o pur s ue ade r i va t i ve sui t , 2) thatpl ai nt i ff

s’ fr aud cl ai m i s nota di re ctcl ai m , and thu s m ustbe di sm i ss ed w i th the de r i va t i ve c l a i m s , 3) tha tthe f r aud c l a i m i s pl e a de d w i th i ns uf f i c i e nt p ar ti cu larity, an d 4 ) th at ea ch o f p lain ti ff s’ claim s a re p re clu d ed b y T ra n sit’ s ba nkrupt c ya c t i on. B e c aus e w e a gr e e tha tpl a i nt i f f s do notha ve s t a ndi ng t o br i ng d e r iv a tiv e c la im s , a n d th a t e a c h c la im a lle g e din th e a m e n d e dc o m p la in t is d eri v at i v e, i ti s u n n ecessary to rev i ew th e d i stri ctco u rt ’ s fi n al tw o fi n d i n g s. I. T he di s tr i c tc ourtf

ound tha tpl a i nt i f

f s w e r e nots ha r e hol de r s of T r a ns i ta tthe t i m e the ybr oughts ui t , a nd the r e f or e di d notha ve s t a ndi ng t o pur s ue de r i va t i ve c l a i m s . W e r e vi e w adi s m i s s a l f orl a c k of

s t a ndi ng de no vo . W r ig h t v . D o u g h e rtyIn B onner v . City of Pricha rd , 6 61 F .2 d 1 20 6, 12 07 (1 1th Cir . 1 98 1)(en b anc ), wehe ld 1 that all decisions hande d down by the former F ifth Circuit beforethe close of business on September 3 0, 19 81 arebindingpre c e dent in th eEl eventh Circuit . 3 C ou nty, 35 8 F . 3d 13 52 , 13 54 (11th C i r. 20 04 ). U nd erbo th federa l and F l ori da l aw , a pl ai nt i ff bri ng i ng a s hare ho l der de r i va t i ve s ui tm us tbe as ha r e hol de rw he n the a c t i on w a s br oughta nd thr oughout the course of the l i t i gat i on . S chi l l i ng v. B el cher , 58 2 F . 2d 99 5, 99 9-10 00 (5th C i r. 19 78 ); T i m ko v. T ri ar si , 89 8 S o. 2d 89 , 91 (F l a. D i st . C t . A pp . 20 05 ) ( fi nd i ng that

1 the pl ai nt i ff

i n a shar ehol der deri vat i ve sui t“ m ustm ee tthe com m on l aw r e q u ir e m e n t o f

c o n tin u o u s o w n e r s h ip th r o u g h o u t th e p e n d e n c yo f th e s u it” ) . B o th part i es agre e thatT ransi t ’ s r eorgani za t i on i n C hapt er11 proceedi ng s e l i m i nat ed pl a i nt i f f s ’ c om m on s t oc k. T he r e f or e pl a i nt i f

f s do notm e e tthe r e qui r e m e ntof c ont i nuous s t oc k ow ne r s hi p. T he pl a i nt i f

f s a s k thi s C ourtt o r e c ogni z e a n e xc e pt i on t o the rul e of c ont i nuous ow ne r s hi p w he r e the l os s of s t oc k i s i nvol unt a ry . T he yc i t e num e r ous c a s e s f r om othe rj ur i s di c t i ons c onc e rni ng i ndi vi dua l s w ho s oughtt o c ha l l e nge the prop ri ety of m er gers i n w hi ch they l ostthei r s hare ho l der r i gh t s. S ee , e. g. , In re G e ne r a l I ns trum e nt s C orp. , 23 F . S upp. 2d 867, 872 ( N . D . I l l . 1998) ; E a s tw ood v. N a tio n a l B a n ko f

C o m m e r c e , 6 7 3 F . S u p p . 1 0 6 8 , 1 0 7 7 ( W .D . O k la . 1 9 8 7 ) ; A rn e tt v. G e rbe rS c i e nt i f

i c , I nc . , 566 F . S upp. 1270, 1273 ( S . D . N . Y . 1983) ; L e w i s v.4

W a r d, 852 A . 2d 896, 902 ( D e l . 2004) ; N oa ke s v. S c hoe nborn, 841 P . 2d 682, 685 (O re . A pp . 19 92 ); G ai l l ar d v . N at om as , C o. , 17 3 C al . A pp . 3d 41 0, 42 1 (19 85 ); G abhartv. G abhart , 37 0 N . E . 2d 34 5, 35 8 (Ind. 19 77 ). T he pl ai nt i ff s argue that the s e c a s e s e s t abl i s h tha tas ha r e hol de rw ho l os e s hi s s t oc k i nvol unt a r i l yi s not subj ec tt o the cont i nu ou s ow ners hi p requi re m ent . S chi l l i ng di d i nv ol ve a pl ai nt i ff w h o v o lu n ta r ilys o ldh is s to c k , 5 8 2 F .2 da t 9 9 6 . W h ile th e s e p la in tif f s u n w illin g ly lo st th eir c o m m o n sto ck w h en th e B an k ru p tcy C o u rt co n firm ed T ra n sit’ s r e or ga ni z a t i on pl a n. I f thi s i s s ue turne d on vol unt a r i ne s s , pl a i nt i f f s ’ a na l ogym i ghtbe apt , but in v o lu n ta r in e s s a lo n e c a n n o t ju s tif ya n e x c e p tio n to F e d . R . C iv . P . 2 3 .1 . R u le 2 3 .1 fo l l o w s th e p ri n ci p l e th at“ [o ] n l y a sh areh o l d er, b y v i rtu e o f h i s p ro p ri et ary i n t erest i n the c orpor a t e e nt e rpr i s e , ” ha s s uf f i c i e nti nt e r e s ti n the w e l l - be i ng of the c orpor a t i on t o s ue on i t s be ha l f . S c hi l l i ng, 582 F . 2d a t999 ( i nt e rna l quot a t i on m arks om i tt ed). P l ai nt i ff s w ho l ose thei r s hare s i nv ol un t ar i l y have no g re at er in te r e s t in th e c o n tin u e d w e ll- b e in g o f ac o rp o r a tio n th a n p la in tif f s w h o w illin g ly s e l l the i rs ha r e s . N e i the rc l a s s of pl a i nt i f f r e t a i ns apr opr i e t a ryi nt e r e s ti n the corporat e e nt erpri se . T h e c a s e s th a t p la in tif

f s c ite tu rn o n r e d r e s s ab ility . T h e ys e rv e th e n e e dto p rev en ta p art i cu l ar fo rm o f i n j u st i ce w h ere th e d i rect o rs o f a co rp o rat i o n d i v est5

shar ehol ders of thei r s t ock v i a m er ger i n o rdert o i nsul at e the di re ct ors’ cond uct f r om j udi c i a l r e vi e w . S e e , e . g. , A rne tt , 566 F . S upp. a t1273 ( “ A s t o c om m on s e n s e , it is o b v io u s th a t to d e n yp la in tif f - s h a r e h o ld e r s s ta n d in g in c a s e s s u c h a s th is w ou l d i nsul at e def

endant s f rom l i abi l i ty w henever defe nd ant s c an consum m at e a s hort - f orm m e r ge rw i thoutpl a i nt i f f s ’ know l e dge a nd w i thouta nyopportuni tyf or pl a i nt i f f s t o obt a i n a n i nj unc t i on a ga i ns ti t . ” ) . T ha ti s notthe s i tua t i on he r e . T he defe nd ant s di d n otl ea ve the pl ai nt i ff s w i tho uta f

orum . T ransi t ’ s bankrup t cy p r o c e e d in g s p r o v id e d th e p la in tif f s w ith a n a d v e r s a r ia l p r o c e e d in g in w h ic h to a ir th ei r g ri ev an ces. T h e p l ai n t i ffs arg u e th atth i s case i s an al o g o u s t o th e m erg er cases b ecau se the de f e nda nt s us e d the ba nkrupt c ypr oc e e di ng i t s e l f t o de pr i ve the pl a i nt i f

f s of th e irin te r e s t in th e c o rp o r a tio n . T h e ya lle g e th a t T r a n s it f r au d u le n tlyp r o m is e d to i m pl e m e ntpl a i nt i f

f s ’ r e or ga ni z a t i on pl a n, buti ns t e a d a dopt e d G E ’ s pr opos a l . O ne p ro b lem w ith th is ar g u m en t i s th at T ra n sit’ s b o ar do f d irec to rs v o ted to ad o p t G E ’s reo rg an i zat i o n p l an o n A p ri l 1 9 , 2 0 0 1 . T h e b an k ru p t cy co u rtd i dn o tex t i n g u i sh p la in tif f s ’ s to c ku n til N o v e m b e r2 7 , 2 0 0 2 . T h is g ap in tim e le f t p la in tif f s w ith m or e tha n ay e a rt o c ont e s tG E ’ s pr opos a l . T hus pl a i nt i f f s w oul d notf

a l l w i thi n a n ew red ressab i l i ty ex cep t i o n t o ei th er F ed . R . C i v . P . 2 3 . 1 o r F l o ri d a l aw an yw ay, so th ere i s n o n eed t o d et erm i n e i f su ch an ex cep t i o n ex i st s.6 II. P l ai nt i ff s c on t end thatthei r f

raud cl ai m i s di re ct , ra ther than d er i vat i ve. If s o, i ti s nots ubj e c tt o the r e qui r e m e ntof c ont i nuous s t oc k ow ne r s hi p a nd thus avoi ds the st andi ng prob l em thatsi nk s thei r other c l ai m s. T he di stri ctcourt d is a g r e e d w ith p la in tif

f s , f in d in g th a t th e g r a v a m e n o f th e f r au dc la im is d e r iv a tiv e . We r e v i e w de no vo the di stri ctcourt ' s app l i ca t i on of the l aw t o the fa ct s. U ni t ed S t at es v. P oi ri er , 32 1 F . 3d 10 24 , 10 33 (11th C i r. 20 03 ). S t a t e l a w de t e rm i ne s w he the rac aus e of a c t i on i s di r e c torde r i va t i ve . 7547 C orp. v. P arker & P ar sl eyD evel op m entP artners , L . P . , 38 F . 3d 21 1, 22 1 (5th C i r. 1 9 9 4 ). G eo rg i a ap p l i es th e l aw o f th e st at e o f i n co rp o rat i o n t o d eri v at i v e act i o n s, s e e O . C . G . A . § 14- 2- 747, a nd T r a ns i ti s i nc orpor a t e d i n F l or i da , w hi c h us e s the g r a v a m e n te s t to d is tin g u is h b e tw e e n d ir e c t a n dd e r iv a tiv e c la im s . S e e e .g ., C i t i ze ns N at i on al B ank v . P et er s, 17 5 S o. 2d 54 (F l a. D i st . C t . A pp . 19 65 ). U nd er the gravam en t es t , “ a s t ockh ol der m aybri ng a s ui ti n h i s ow n ri gh tt o redres s an i nj ury s ust ai ned d i re ct l y by hi m , and w hi ch i s s epar at e and di st i nctfr om that su st ai n ed b y o th er st o ck h o l d ers. ” Id . A t5 6 . If, h o w ev er, th e i n j u ry i s “ p r im a r ily a g a in s t th e c o rp o r a tio n , o rth e s to c k h o ld e r s g e n e r a lly , th e n th e c au s e o f a c tio n is in the c orpor a t i on a nd the i ndi vi dua l ’ s r i ghtt o br i ng i ti s de r i ve d f r om the c orpor a t i on. ” I d. ( e m pha s i s a dde d) ; s e e a l s o A l a r i o v. M i l l e r , 354 S o. 2d 925, 9267

(F l a. D i st . C t . A pp . 19 78 ). Un d e rth i s t e s t , th e r e i s l i tt l e q u e s t i o n th a tp l a i n t i f f’ c l a i m i s d e r i v a t i v e . As th e d is tr ic t c o u rt d o c u m e n ts in g r e a t d e ta il, n e a r lya ll o f th e a lle g a tio n s in P l a i nt i f f s ’ f ourt e e n pa r a gr aph f

r aud c l a i m r e f

e rt o m i s be ha vi orde tr i m e nt a l t o a l l of T r a ns i t ’ s s ha r e hol de r s , notj us tpl a i nt i f f s . T he e xc e pt i on i s pl a i nt i f f s ’ a l l e ga t i on tha tde f e nda nt s e nc our a ge d the m t o w a s t e t i m e a nd r e s our c e s de vi s i ng a r e s tru c tu r in g p la n th a t T r a n s it’s B o a r do f D ir e c to r s n e v e rin te n d e dto im p le m e n t. T he s e e xpe ns e s a r e as m a l l f r a c t i on of

the t ot a l l os s t o the s ha r e hol de r s f r om T ransi t ’ s bankrup t cy . W e bel i eve thatthe di stri ctcourtcorr ec t l y c on cl ud ed that the f r aud c l a i m i s f

ori nj ur i e s tha tpr i m a r i l yw e r e s uf f e r e d bythe c orpor a t i on, a nd i s th erefo re d eri v at i v e. B ecau se p l ai n t i ffs h av e n o st an d i n g t o p u rsu e th ei r cl ai m s, w e d o n o t r e a c h th e r e m a in in g a lle g a tio n s o f e rr o r . AF F I RME D.