Court Opinion

ID: 7803174
Source: CourtListenerOpinion
Date Created: 2022-08-24 17:00:38.494529+00
Date Added: 2024-06-11T16:29:35.695141
License: Public Domain

PRECEDENTIAL

       UNITED STATES COURT OF APPEALS
            FOR THE THIRD CIRCUIT
                 ____________

                      No. 21-2258
                     ____________

          ADAM POTTER; MOXIE HC LLC,
                   Appellants

                            v.

               COZEN & O'CONNOR;
               ANNE BLUME, Esquire;
             ANNE M. MADONIA, Esquire
                  ____________

     On Appeal from the United States District Court
          for the Eastern District of Pennsylvania
              (District Court No. 2-20-cv-1825)
U.S. District Judge: Honorable Nitza I. Quiñones Alejandro
                        ____________

       Submitted Under Third Circuit LAR 34.1(a)
                   March 14, 2022

Before: JORDAN, KRAUSE, and PORTER, Circuit Judges

            (Opinion Filed: August 24, 2022)
Clifford E. Haines
Haines & Associates
1339 Chestnut Street
The Widener Building, 5th Floor
Philadelphia, PA 19103

      Attorney for Adam Potter and Moxie HC LLC

Brian P. Flaherty
Cozen & O’Connor
1650 Market Street
One Liberty Place, Suite 2800
Philadelphia, PA 19103

      Attorney for Cozen & O’Connor, Anne Blume,
      Esquire, and Anne Madonia, Esquire

                                2
                        ____________

                          OPINION
                        ____________

KRAUSE, Circuit Judge.

        A plaintiff who seeks to invoke the jurisdiction of the
federal courts must meet the standing requirements of Article
III of the United States Constitution. But courts have also
attached the label of “standing doctrine” to various “equitable”
or “prudential” limitations they have imposed on a plaintiff’s
ability to bring a claim, raising the question whether those so-
called standing doctrines are also jurisdictional. This case
involves the third-party standing doctrine, which as applied in
the context of derivative harm to shareholders, has come to be
called the “shareholder standing rule.” On the basis of that
rule, the District Court dismissed Appellants’ claim under
Federal Rule of Civil Procedure 12(b)(1) for lack of
jurisdiction. But the third-party standing rule is merely
prudential, not constitutional and jurisdictional, and is
therefore properly considered under Rule 12(b)(6), not Rule
12(b)(1). And because there are different considerations in
deciding a motion to dismiss under Rule 12(b)(6) that could
produce a different outcome in this case, we will vacate and
remand.

    I.       FACTUAL AND PROCEDURAL BACKGROUND1

     Appellees Cozen O’Connor, Anne Blume, and Anne
Madonia (collectively, the “Lawyers”) comprise the legal team

         1
        Because we conclude the motion to dismiss should
have been analyzed under Rule 12(b)(6), we draw the facts

                               3
involved in the 2018 sale to The Institutes, LLC, of certain
companies of which Appellants, Adam Potter and Moxie HC
LLC (collectively, the “Shareholders”), are the sole
shareholders.2 JA 34a-36a, 39a. Starting in 2011, Attorney
Blume also served on the board of directors and as the General
Counsel for one of the LLCs, where she and the other board
members were responsible for assisting the Shareholders in
making various business decisions. JA 37a. Unbeknownst to
the Shareholders at the time, however, Cozen represented The
Institutes in a number of matters, including in delivering the
purchase offer and negotiating the price for this very
transaction. JA 39a-41a. Even when Potter asked directly
whether there was a conflict, Blume allegedly brushed aside
the question and continued to provide legal advice about the
proposed sale. JA 40a-41a. Ultimately, Potter took Blume’s
advice to accept an offer of $20 million for the LLCs and
executed the Asset Purchase Agreement (APA) drafted by
Cozen attorneys.3 JA 40a-41a.

from the complaint and accept them as true. See Hartig Drug
Co. v. Senju Pharm. Co., 836 F.3d 261, 264 n.1 (3d Cir. 2016).
      2
        At the time of sale, Potter owned 100% of the stock of
C&E MGMT and Planning, Inc. while Moxie—an LLC of
which Potter was the sole member—owned 100% of Claims
Pages, LLC and CLM Group, Inc. JA 34a-36a. Potter and
Moxie (together, “the Shareholders”) are the Plaintiffs-
Appellants in this case; the LLCs are not parties.
      3
        Potter eventually retained separate outside counsel
who reviewed and negotiated the transaction documents on
Shareholders’ behalf. JA 41a. By that point, however, the
purchase price was fixed and non-negotiable. Id.

                              4
        After the deal closed, the Shareholders allegedly
determined that they had sold the LLCs at a price substantially
below their fair market value. Id. They further determined
that, in a subsequent dispute under the APA about the value of
installment payments, Cozen and Attorney Madonia had
wrongfully secured a favorable outcome for The Institutes by
using confidential client information that Blume had learned in
the course of her work with Potter and the LLCs, costing the
LLCs an additional $344,951. JA 42a-44a. All told, the
Shareholders allege that the Lawyers’ involvement in the sale
caused them “millions of dollars in damages.” JA 44a.

       Once these conflicts came to light, Potter brought suit
against the Lawyers, claiming breach of fiduciary duty and
professional malpractice sounding in tort and contract. JA
44a-51a. Significantly, though, he chose to bring suit in the
Shareholders’ names, even as he identified the harm as “the
difference in the true value of the [LLCs] and the purchase
price” that, under the APA, was to be paid to the LLCs
themselves. JA 44a; see JA 58a, 63a (defining “Sellers” as the
LLCs and specifying that payments would be made to
“Sellers”).

        Seizing on this discrepancy, the Lawyers moved to
dismiss for failure to state a claim under Federal Rule of Civil
Procedure 12(b)(6), arguing under the “shareholder standing
rule” that Potter and Moxie did not have the legal right to bring
claims of the corporate entities in their own names. JA 209,
237a-40a. In opposition to that motion, however, the
Shareholders characterized the Lawyers’ motion as a challenge
to their Article III standing and, hence, a facial attack on the
court’s subject matter jurisdiction, pursuant to Rule 12(b)(1).
JA 571a.

                               5
        In a nod to both sides, the District Court ruled in the
Lawyers’ favor, JA 19a, but adopted the Shareholders’ framing
and dismissed their complaint under Rule 12(b)(1), instead of
under Rule 12(b)(6), JA 23a. Subsequently, the Court denied
the Shareholders’ motion for reconsideration or leave to
amend, reasoning that because the Shareholders “lack[ed]
Article III standing to prosecute their underlying claims,” they
necessarily “lack[ed] standing to cure th[e] jurisdictional
defect” with an amendment. JA 18a n.1. The Shareholders
filed this timely appeal. JA 1a.

     II.    JURISDICTION AND STANDARD OF REVIEW

        The District Court had jurisdiction under 28 U.S.C. §
1332, and, as always, had “jurisdiction to determine its own
jurisdiction.” United States v. Ruiz, 536 U.S. 622, 628 (2002)
(citing United States v. Mine Workers of Am., 330 U.S. 258,
291 (1947)). We have jurisdiction to review the District
Court’s order of dismissal under 28 U.S.C. § 1291.

        In reviewing a district court’s dismissal for lack of
standing, we consider whether the complaint “contain[s]
sufficient factual matter that would establish standing if
accepted as true.” In re Horizon Healthcare Servs. Inc. Data
Breach Litig., 846 F.3d 625, 633 (3d Cir. 2017) (quotation and
internal quotation marks omitted). Our standard of review on
that ruling is de novo, accepting the facts alleged in the
complaint as true and construing the complaint in the light
most favorable to the non-moving party. Id.; Graden v.
Conexant Sys. Inc., 496 F.3d 291, 294 n.2 (3d Cir. 2007). In
contrast, we review a district court’s denial of leave to amend
for abuse of discretion. In re Burlington Coat Factory Sec.
Litig., 114 F.3d 1410, 1434 (3d Cir. 1997).

                               6
                      III.    DISCUSSION

        Neither party challenges the District Court’s decision to
analyze shareholder standing as an issue of subject matter
jurisdiction under Rule 12(b)(1). But although a court’s
“inquir[y] into its own jurisdiction is most frequently exercised
in the negative—that is, by questioning whether federal
jurisdiction exists even when all parties assume that it does,”
Hartig Drug Co. v. Senju Pharm. Co., 836 F.3d 261, 267 (3d
Cir. 2016), the court also has a “virtually unflagging
obligation” to exercise the jurisdiction that it does have, even
when the parties assume it does not, Colo. River Water
Conservation Dist. v. United States, 424 U.S. 800, 817 (1976).
So here, we must determine whether the shareholder standing
rule did, in fact, deprive the District Court of Article III
jurisdiction, even though both parties on appeal accept that
premise.4 Cf., e.g., Hartig, 836 F.3d at 267 (“[R]egardless of
the acquiescence or wishes of the parties, we must question
whether the District Court properly treated antitrust standing
as a jurisdictional issue under Rule 12(b)(1).”); Grp. Against
Smog & Pollution, Inc. v. Shenango Inc., 810 F.3d 116, 122 &
n.5 (3d Cir. 2016) (addressing sua sponte “whether the diligent
prosecution bar is jurisdictional . . . or . . . nonjurisdictional”
because the court must “raise and decide [even] jurisdictional

       4
         Although the Lawyers, as noted, moved to dismiss in
the District Court under Rule 12(b)(6), they have opted on
appeal to defend the District Court’s ruling that Potter and
Moxie’s lack of shareholder standing equates to a lack of
Article III standing. The Shareholders, in their opening and
reply briefs, accept the District Court’s premise but claim the
shareholder standing rule does not apply because they suffered
injuries separate from the LLCs.

                                7
questions that the parties . . . elect not to press” (quotation
omitted)).

       Below, we first address the nature of the shareholder
standing rule, concluding it is non-jurisdictional and did not
warrant dismissal under Federal Rule of Civil Procedure
12(b)(1), before discussing the implications of this holding for
remand.

       A.     The Shareholder Standing Rule is Prudential
              and Non-Jurisdictional.

        The District Court reasoned that because all of the harm
the Shareholders attributed to the Lawyers’ alleged misconduct
was inflicted directly on the LLCs and affected the
Shareholders only to the extent of their derivative ownership
interests, “the only injury-in-fact alleged . . . is an injury
suffered by the [LLCs] themselves,” so the Shareholders
lacked Article III standing. JA 25a–26a. The Court had in
mind the third-party standing doctrine, which requires that “the
plaintiff generally must assert his own legal rights and
interests, and cannot rest his claim to relief on the legal rights
or interests of third parties.” Franchise Tax Bd. of Cal. v. Alcan
Aluminium Ltd., 493 U.S. 331, 336 (1990). In the context of
harm to a corporation, this doctrine has given rise to the “so-
called shareholder standing rule,” which is “a longstanding
equitable restriction that generally prohibits shareholders from
initiating actions to enforce the rights of the corporation unless
the corporation’s management has refused to pursue the same
action for reasons other than good-faith business judgment.”
Id. But in equating shareholder standing with Article III
standing and dismissing under Rule 12(b)(1), the Court treated
the shareholder standing rule as constitutional and
jurisdictional, and not merely as prudential. To understand

                                8
why this was error we consider (1) the distinction between
constitutional and prudential standing for federal jurisdiction;
and (2) whether the third-party standing doctrine is
jurisdictional.

                   1. Constitutional v. Prudential Standing

        The distinction between the requirements of
constitutional and prudential standing is significant. As the
Supreme Court has explained, standing “consist[s] of two
related components: the constitutional requirements of Article
III and nonconstitutional prudential considerations.” Id. at
335; see also Miller v. Nissan Motor Acceptance Corp., 362
F.3d 209, 221 (3d Cir. 2004) (“[T]he question of standing is
whether the litigant is entitled to have the court decide the
merits of the dispute or of particular issues,” and answering
that question “subsumes a blend of constitutional requirements
and prudential considerations.” (quotation omitted)). To
invoke the jurisdiction of a federal court, a plaintiff must meet
the “irreducible constitutional minimum” of Article III
standing by establishing three elements: that she has suffered
an “injury in fact” which is “concrete and particularized” and
“actual or imminent”; that the injury is “fairly traceable to the
challenged action of the defendant”; and that it is likely “that
the injury will be redressed by a favorable decision.” Lujan v.
Defs. of Wildlife, 504 U.S. 555, 560–61 (1992) (alterations and
quotations omitted).

       But prudential standing requirements are not derived
from Article III, Lexmark Int’l, Inc. v. Static Control
Components, Inc., 572 U.S. 118, 125–26 (2014), and rather are
“a set of judge-made rules forming an integral part of judicial
self-government,” Joint Stock Soc’y v. UDV N. Am., Inc., 266
F.3d 164, 179 (3d Cir. 2001) (internal quotation marks

                               9
omitted) (quoting Gen. Instrument Corp. of Del. v. Nu-Tek
Elecs. & Mfg., Inc., 197 F.3d 83, 87 (3d Cir. 1999)). These
judge-made doctrines are meant to help the courts “avoid
deciding questions of broad social import where no individual
rights would be vindicated and to limit access to the federal
courts to those best suited to assert a particular claim.”
Freeman v. Corzine, 629 F.3d 146, 154 (3d Cir. 2010) (quoting
Joint Stock Soc’y, 629 F.3d at 179).

        Because “[b]randing a rule as going to a court’s subject-
matter jurisdiction alters the normal operation of our
adversarial system,” Grp. Against Smog & Pollution, 810 F.3d
at 122 (alteration in original) (quoting Henderson ex rel.
Henderson v. Shinseki, 562 U.S. 428, 434 (2011)), a motion to
dismiss for lack of subject jurisdiction pursuant to Rule
12(b)(1) and a motion to dismiss for failure to state a claim
pursuant to Rule 12(b)(6) come with myriad procedural
differences. Those differences include that objections to
subject matter jurisdiction can be raised at any stage of the
proceedings; that a court can and must raise jurisdictional
issues sua sponte; that a court can consider evidence beyond
the pleadings when considering a jurisdictional challenge; and
that the two rules invert the burden of persuasion, i.e., the
defendant bringing a Rule 12(b)(6) motion must show that the
plaintiff has not stated a claim, but if it brings a Rule 12(b)(1)
motion, it is the plaintiff’s responsibility to show that the court
has subject matter jurisdiction. Id. at 122 n.6 (citing
Henderson, 562 U.S. at 434–35; Gotha v. United States, 115
F.3d 176, 179 (3d Cir. 1997)); Hartig, 836 F.3d at 272 n.14
(quoting Davis v. Wells Fargo, 824 F.3d 333, 348–49 (3d Cir.
2016)).

                                10
                   2. The Third-Party Standing Doctrine

        The distinction between constitutional and prudential
standing can also be elusive, and the Courts of Appeals have
not always spoken clearly about whether the third-party
standing doctrine (including the shareholder standing rule)
implicates Article III standing, and hence, the court’s
jurisdiction. Compare Korte v. Sebelius, 735 F.3d 654, 668
(7th Cir. 2013) (“Like other rules of third-party standing . . .
the shareholder-standing rule is a prudential limitation and
does not affect the court’s authority to hear the case [because]
[p]rudential-standing doctrine[s] [are] not jurisdictional in the
sense that Article III standing is.” (quotation omitted)),
Wilderness Soc’y v. Kane County, 632 F.3d 1162, 1168 n.1
(10th Cir. 2011) (“[P]rudential standing is not a jurisdictional
limitation and may be waived . . . .”), and Ensley v. Cody Res.,
Inc., 171 F.3d 315, 320 (5th Cir. 1999) (holding that
shareholder standing rule does not implicate the court’s
jurisdiction and thus objections based on it could be waived),
with Fair Elections Ohio v. Husted, 770 F.3d 456, 461 n.2 (6th
Cir. 2014) (noting that “the limit on third-party standing” can
be raised by the court sua sponte as a matter of its own
jurisdiction), and Hillside Metro Assocs., LLC v. JPMorgan
Chase Bank, Nat. Ass’n, 747 F.3d 44, 49–50 & n.5 (2d Cir.
2014) (noting that the application of prudential standing
doctrines implicated the court’s subject matter jurisdiction).

       We have not yet addressed this issue directly, although
we have noted the divergence of views. See Lewis v.
Alexander, 685 F.3d 325, 340 n.14 (3d Cir. 2012). We hold
today that the shareholder standing rule is non-jurisdictional,
implicating only a plaintiff’s power to bring claims, not the
Court’s power to hear them. We reach this conclusion based
on Supreme Court precedent, our precedent in other contexts,

                               11
and the nature of the derivative injury to shareholders, each of
which we discuss below.

        Supreme Court Precedent. While the Supreme Court
has not yet squarely addressed this question, we find its
statements regarding the distinctions between Article III
standing and prudential standing instructional. In Franchise
Tax Board of California v. Alcan Aluminium Ltd., the Court
noted that separate from Article III standing requirements are
the various “prudential requirements of the standing doctrine,”
including the third-party standing doctrine and its related
application, the “so-called shareholder standing rule.” 493
U.S. at 336. It described the shareholder standing rule not as a
jurisdictional limitation, but as an “equitable restriction,” and
it reasoned that regardless of whether the shareholder
respondents in that case could meet the requirements of the
shareholder standing rule, they nonetheless “ha[d] Article III
standing to challenge the taxes that their wholly owned
subsidiaries are required to pay” because their ownership
interest meant the subsidiaries’ financial injuries created
“actual financial injur[ies]” to the shareholders. Id. But cf.
United States v. Sineneng-Smith, 140 S. Ct. 1575, 1586–87
(2020) (Thomas, J., concurring) (acknowledging that “the
modern Court has characterized the [third-party standing] rule
as a prudential rather than jurisdictional matter,” and arguing
that is inconsistent with “a historical understanding of Article
III”).

       On other occasions, too, the Court has held that, while
defects in Article III jurisdiction can never be waived, even
when parties fail to raise them, the same is not true of issues
related to the third-party standing doctrine. Compare Va.
House of Delegates v. Bethune-Hill, 139 S. Ct. 1945, 1951
(2019) (noting that the jurisdictional requirements of Article

                               12
III standing “cannot be waived or forfeited”), with Craig v.
Boren, 429 U.S. 190, 193–94 (1976) (concluding that
arguments regarding third-party standing could be waived,
even though, by contrast, similar concessions “would not be
controlling upon the reach of this Court’s constitutional
authority to exercise jurisdiction under Art[icle] III”). Unlike
its approach to federal jurisdiction, the Court “ha[s] not treated
th[e] rule [against third-party standing] as absolute” and has
carved out certain exceptions. Kowalski v. Tesner, 543 U.S.
125, 129 (2004). And while the Supreme Court has not yet
clarified the third-party standing doctrine’s “proper place in the
standing firmament,” it has done so for other standing
doctrines labeled “prudential” and concluded, e.g., in the
context of statutory standing, that the phrase “prudential
standing” is a “misnomer” and “misleading” because the
doctrine relates not to the court’s jurisdiction, but to whether
the particular plaintiff can state a cause of action. See Lexmark,
572 U.S. at 127 & n.3, 128 n.4; Shalom Pentecostal Church v.
Acting Sec’y U.S. Dept. of Homeland Sec., 783 F.3d 156, 163–
64 & n.7 (3d Cir. 2015).

        In sum, while the Court has described third-party
standing as an “alternative threshold question whether
[plaintiffs] have standing to raise the rights of others,” it views
this question as “prudential” and distinct from “the
constitutional minimum of standing, which flows from Article
III’s case-or-controversy requirement.” Kowalski, 543 U.S. at
129–30.

       Our Precedent.        Concluding that the third-party
standing doctrine is not jurisdictional is also consistent with
our treatment of a similar question regarding antitrust standing.
See Hartig, 836 F.3d at 269. Antitrust standing, like
shareholder standing, is not an Article III standing doctrine, but

                                13
rather one that is variously characterized as prudential or a
matter of “statutory standing.”5 Id. at 270; see also Ethypharm
S.A. Fr. v. Abbott Lab’ys, 707 F.3d 223, 232 n.17 (3d Cir.
2013). Antitrust standing “focus[es] on the nature of the
plaintiff’s alleged injury [and] ask[s] whether it is of the type
that the antitrust statute was intended to forestall.” Hartig, 836
F.3d at 269 (second alteration in Hartig) (quoting Barton &
Pittinos, Inc. v. SmithKline Beecham Corp., 118 F.3d 178, 181
(3d Cir. 1997)). If it is not, the plaintiff has “no standing to sue
under the antitrust laws.” Id. (quoting Barton & Pittinos, 118
F.3d at 181). In Hartig, we held that antitrust standing, in
contrast to Article III standing, does not “implicat[e] a court’s
subject matter jurisdiction” but rather “affect[s] only the
plaintiff’s ability to succeed on the merits,” and accordingly a
defect in antitrust standing does not put “a dismissal under
Rule 12(b)(1) . . . legitimately in play.” Id. at 269, 273. Our
holding today is a natural extension of this precedent: Because
the shareholder standing rule, like other third-party standing

       5
         Whereas “[c]onstitutional and prudential standing are
about, respectively, the constitutional power of a federal court
to resolve a dispute and the wisdom of so doing,” “[s]tatutory
standing is simply statutory interpretation”; it only asks
whether a plaintiff has a cause of action under the relevant
statute. Graden v. Conexant Sys. Inc., 496 F.3d 291, 295 (3d
Cir. 2007); see also Lexmark Int’l, Inc. v. Static Control
Components, Inc., 572 U.S. 118, 128 & n.6. We have
concluded that, for the purposes of deciding whether antitrust
standing is jurisdictional and whether it must be considered
under Rule 12(b)(6), the outcome is the same whether it is
considered a prudential or statutory standing doctrine. Hartig,
836 F.3d at 270; Ethypharm S.A. Fr. v. Abbott Lab’ys, 707 F.3d
223, 232 n.17 (3d Cir. 2013).

                                14
doctrines, is not a matter of Article III standing, it presents only
merits, rather than jurisdictional concerns.

         The Nature of Derivative Shareholder Harm. The very
nature of the injury to shareholders in the derivative context
confirms that, even when they are barred from suit under the
shareholder standing rule as a prudential matter, those
shareholders have constitutional standing, bringing them
within the ambit of federal court jurisdiction. The facts of this
case are illustrative. The disadvantageous terms of the APA,
the below-market purchase price, and the disputed installment
payments resulting from the Lawyers’ alleged conflicted
representation inflicted a direct financial injury on the LLCs,
but they also inflicted an indirect injury on the LLCs’
shareholders: the diminution of value in their ownership
interests. And that injury meets all the requirements of Article
III standing: the loss of financial value in their investments
constitutes an injury-in-fact in that it is “actual,” “concrete[,]
and particularized,” Lujan, 504 U.S. at 560 (quotations
omitted), that injury was allegedly caused by the conflicted
Lawyers’ involvement in their sale, and that injury, if proven
at trial, can be redressed by the court through a damages award.
The absence of prudential “standing” under the shareholder
standing rule thus does not alter the Shareholders’
constitutional standing or the Article III jurisdiction that
attends it.

         In sum, the shareholder standing rule is a prudential
rule, not a constitutional or jurisdictional one, and, just as in
Hartig, because the Shareholders “had Article III standing
sufficient to give the District Court subject matter jurisdiction,
. . . a dismissal under Rule 12(b)(1) was not legitimately in
play.” Hartig, 836 F.3d at 273. The District Court therefore
should have treated the Lawyers’ motion to dismiss for lack of

                                15
shareholder standing as a motion under Rule 12(b)(6), instead
of 12(b)(1). We turn now to the consequence of its failure to
do so.

       B.     Scope of remand

        Though we conclude the District Court erred by
dismissing on jurisdictional grounds under Rule 12(b)(1), “we
may affirm on any basis supported by the record,” Hartig, 836
F.3d at 273 (quoting Davis, 824 F.3d at 350), and could
consider doing so here on Rule 12(b)(6) grounds, especially as
the District Court indicated that it was “appl[ying] the same
standard that it [would have] for Rule 12(b)(6) motions,” that
is, “accept[ing] the factual allegations of the complaint to be
true and consider[ing] them in the light most favorable to the
plaintiffs.” JA 23a.

        On inspection, however, it appears that the District
Court’s analysis of the Shareholders’ complaint under Rule
12(b)(1) differed in certain respects from the analysis required
under Rule 12(b)(6). For example, by applying Rule 12(b)(1)
rather than Rule 12(b)(6), it left the burden of persuasion to
establish subject matter jurisdiction with the Shareholders, as
“the party asserting its existence.” Id. In addition, because it
incorrectly assumed the shareholder standing rule presented a
jurisdictional issue, it considered the Appellants’ status as
shareholders to be dispositive given the terms of the APA, and
thus may not have grappled with the specific allegations in the
complaint that Potter argues establish a personal injury to him,
based on an alleged independent attorney-client relationship
and its attendant breach of duties that would not be subject to
the shareholder standing rule. See JA 25a-27a. He alleges, for
example, that the Lawyers, “in addition to serving the [LLCs],
provided legal advice and counsel to Potter in his individual

                              16
capacity” and learned confidential information in the course of
that representation that they later misused, JA 38a; see also JA
38a–39a, 43a–46a, and it is a well-established exception to the
shareholder standing rule that “a shareholder with a direct,
personal interest in a cause of action [may] bring suit even if
the corporation’s rights are also implicated.” Franchise Tax
Bd., 493 U.S. at 336. Whether the allegations of the complaint
are sufficient to meet this exception is a matter appropriate for
the District Court to consider in the first instance.

       Remand is also appropriate so that the District Court can
consider whether the Shareholders should be permitted to
amend their complaint. After the dismissal of their complaint
under Rule 12(b)(1) for lack of standing, the Shareholders
submitted a motion for reconsideration or, in the alternative, to
amend. JA 17a-18a n.1. The District Court denied the motion
for reconsideration on the merits, id., but did not do so for the
motion to amend. Instead, it reasoned that because it had
already held that the Shareholders “lack Article III standing to
prosecute their underlying claims . . . they also lack standing to
cure th[at] jurisdictional defect” with an amendment. JA 18a
n.1.

        Of course, “[u]ltimately, a motion to amend is
committed to the ‘sound discretion of the district court.’” In re
Allergan Erisa Litig., 975 F.3d 348, 356 n.13 (3d Cir. 2020)
(quoting Cureton v. Nat’l Collegiate Athletic Ass’n, 252 F.3d
267, 272 (3d Cir. 2001)). But when a court wrongly concludes
that it does not have the power to entertain amendments at all
and therefore denies the motion without considering its merits,
that “is not an exercise of discretion; it is merely abuse of that
discretion.” Foman v. Davis, 371 U.S. 178, 182 (1962). And,
in that circumstance, the order denying leave to amend must be
vacated and the motion’s merits considered on remand. See

                               17
Newark Branch, NAACP v. Town of Harrison, 907 F.2d 1408,
1417 (3d Cir. 1990).

        In short, because neither the question of whether the
Shareholders’ allegations successfully state a claim under the
appropriate Rule 12(b)(6) framework nor whether amendment
should be permitted has yet been passed upon by the District
Court, we will remand for that Court to address these issues
in the first instance.

                       * * *

       For the foregoing reasons, we will vacate the District
Court’s order of dismissal under Rule 12(b)(1) and its order
denying leave to amend, and remand for further proceedings
consistent with this opinion.

                             18