Court Opinion

ID: 66727
Source: CourtListenerOpinion
Date Created: 2010-04-26 06:13:36+00
Date Added: 2024-06-11T17:20:47.696463
License: Public Domain

[DO NOT PUBLISH]

           IN THE UNITED STATES COURT OF APPEALS

                 FOR THE ELEVENTH CIRCUIT           FILED
                  ________________________ U.S. COURT OF APPEALS
                                                    ELEVENTH CIRCUIT
                                                       NOV 5, 2008
                           No. 08-11186
                                                     THOMAS K. KAHN
                       Non-Argument Calendar
                                                         CLERK
                     ________________________

              D. C. Docket No. 04-81025-CIV-ZLOCH

THOMAS MEDKSER,
THOMAS J. BLUM,
T. H. HOLLOWAY,
RICHARD BRINKMAN,
W. MANOR LTD.,
MILTON F. LANGER,
CHARLES PHELPS,
WILLIAM E. N. PONSETI,
CHRISTOPHER M. PONSETI,
JERRY S. REDD,
CRAYTON R. WALKER,

                                                    Plaintiffs-Appellants,

                              versus

DAVID J. FEINGOLD,
DARREN SILVERMAN,
KRISTIAN BASO,
PAUL SLOAN,

                             Defendants-Third-Party-Plaintiffs-Appellees,
ALL DEFENDANTS,

                                                                          Defendant,

                                       versus

STEVEN S. BISS,

                                                             Third-Party-Defendant.

                           ________________________

                   Appeal from the United States District Court
                       for the Southern District of Florida
                         _________________________

                               (November 5, 2008)

Before ANDERSON, HULL and KRAVITCH, Circuit Judges.

PER CURIAM:

      Thomas Medsker and ten other shareholder-plaintiffs appeal the district

court’s grant of judgment on the pleadings in favor of defendants David Feingold,

Darren Silverman, Kristian Baso, and Paul Sloan. For the reasons stated below,

we vacate the district court’s judgment in part, affirm in part, and remand for

further proceedings.

                                 BACKGROUND

      In the plaintiffs’ complaint, they allege that the defendants engaged in fraud

and civil conspiracy to induce them to invest in IDT Group, a hedge fund, and in

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Brandaid Marketing Corporation, resulting in over $4.8 million in losses to these

plaintiffs. Specifically, the complaint alleges: that Silverman and Sloan made

knowingly false misrepresentations upon which the plaintiffs relied in deciding to

invest in IDT Group, thereby violating Section 10(b) of the Securities Exchange

Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder, 17

C.F.R. §240.10b-5, and committing common law fraud (counts 1 and 2); that

Feingold, Silverman, Baso, and Sloan were control persons of IDT Group and

Brandaid and their actions in that capacity resulted in IDT Group’s and Brandaid’s

violations of the securities law (count 3); and that the defendants defrauded

plaintiffs in their investments and transferred plaintiffs’ funds to offshore

accounts, thus committing civil conspiracy (count 4).

      The defendants moved for judgment on the pleadings under Federal Rule of

Civil Procedure 12(c). The defendants argued that the plaintiffs’ claims were

derivative in nature as their allegations were common to all shareholders and were

thus improperly brought in a direct action. The defendants further contended that

IDT had filed for bankruptcy protection and therefore only the bankruptcy trustee

could pursue a suit on IDT’s behalf.

      The case was referred to a magistrate judge who agreed with the defendants

that the plaintiffs’ claims were derivative and recommended granting judgment on

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the pleadings. The magistrate judge noted in particular that the complaint referred

to “other investors” who also received the fraudulent materials containing the

misrepresentations, and that an allegation of diverting assets was a derivative

claim belonging to all shareholders. The magistrate judge concluded that because

IDT was involved in bankruptcy proceedings, the trustee was the proper party to

raise the claims. The district court adopted the report and recommendation of the

magistrate and granted the defendants’ motion for judgment on the pleadings.

                           STANDARD OF REVIEW

      This Court reviews de novo a motion for judgment on the pleadings. Moore

v. Liberty Nat. Life Ins. Co., 267 F.3d 1209, 1213 (11th Cir. 2001). Judgment on

the pleadings is appropriate where no issue of material fact remains unresolved

and the moving party is entitled to judgment as a matter of law. Mergens v.

Dreyfoos, 166 F.3d 1114, 1117 (11th Cir. 1999). We must accept all facts in the

complaint as true and “view them in the light most favorable to the nonmoving

party” — here, the plaintiffs. Hawthorne v. Mac Adjustment, Inc., 140 F.3d 1367,

1370 (11th Cir. 1998)

                                  DISCUSSION

      Appellees argue that the Rule 12(c) judgment was appropriate because

Appellants’ claims may only be brought as shareholder derivative claims, and

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because the corporation in question is currently involved in bankruptcy

proceedings, such claims belong only to the bankruptcy trustee. Thus, our first

question is whether these claims are direct or derivative claims. “In a diversity

action, the determination will be made under state law; in suits in which the rights

being sued upon stem from federal law, federal law will control the issue whether

the action is derivative.” 7C WRIGHT, MILLER, & KANE, FEDERAL PRACTICE AND

PROCEDURE, § 1821 (3d ed. 2007). Plaintiffs here raise both federal claims, citing

violations of Rule 10b-5, as well as common law fraud and conspiracy. The

definitions of a derivative claim under both federal and Florida state law are

similar and, for the purposes of this suit, the discrepancies are not relevant. In

traditional derivative suits, shareholders sue to enforce a right belonging to the

corporation for which the corporation itself could have brought suit. Daily Income

Fund, Inc. v. Fox, 464 U.S. 523, 528-29 (1984); Citizens National Bank of St.

Petersburg v. Peters, 175 So. 2d 54, 56 (Fla. Dist. Ct. App. 1965). A claim may be

brought in a direct action, however, where the injury was sustained directly by the

plaintiff bringing the suit and is separate and distinct from injuries sustained by

the corporation and all other shareholders equally. Citizens National Bank, 175
So. 2d at 56; Cowin v. Bresler, 741 F.2d 410, 415 (D.C. Cir. 1984).

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      The injuries alleged in counts 1, 2, and 3 constitute direct injuries sustained

by these plaintiffs. The complaint states that the defendants made intentional

misrepresentations to these plaintiffs and thereby fraudulently induced them to

invest their money into IDT and Brandaid which they would not otherwise have

done. This is not an injury to the corporation, but to these investors, and the suit

may be brought as a direct action. Although the magistrate judge characterized the

allegations in the complaint as common to “all investors,” this was inaccurate.

The complaint states merely that “other investors” may have heard the

misrepresentations in addition to the plaintiffs, but specifically alleges that these

plaintiffs relied upon the misrepresentations and invested their money. The claims

involve direct injuries sustained by these plaintiffs based their own reliance on

fraudulent statements and misrepresentations made to them. The fact that some

other investors may also have been similarly injured does not transform these

direct claims into derivative ones. The corporate entity could not bring suit to

recover the investment that these plaintiffs made relying on the fraudulent actions

of the defendants; thus, these claims may be maintained in this direct action.

      Count 4, on the other hand, may only be brought as a derivative claim.

Count 4 focuses on the defendants’ actions converting “Plaintiffs’ funds” invested

in IDT and Braindaid and transferring those funds to personal accounts of the

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defendants. This claim alleges that the defendants used their positions as

managers and directors of the entities to abscond with funds invested in IDT and

Brandaid. This claim is indistinguishable from the myriad claims of self-dealing

and mismanagement that courts have held may only be brought as derivative

claims. See Cowin, 741 F.2d at 416 (holding that claims involving self-dealing

and diversion of assets are “fundamentally claims belonging to the corporation and

to the [shareholder] only derivatively”). The loss of value to these Plaintiffs’

investment in IDT and Brandaid is indistinguishable from the loss to all other

investors who were similarly harmed when funds were transferred from the

corporate account to personal accounts of the defendants. See Citibank, N.A. v.

Data Lease Fin. Corp., 828 F.2d 686, 693 (11th Cir. 1987). In terms of the

conversion and loss of invested funds and subsequent loss in the value of their

investment, these plaintiffs “retain the same opportunity to be made whole by a

corporate recovery from the wrongdoer” as do all the other similarly situated

investors. Id. Furthermore, we fail to see how Plaintiffs identify that it was

“their” money that was transferred to personal accounts of the defendants since the

defendants’ alleged actions took place after the plaintiffs invested their money,

i.e., after the money had become corporate money indistinguishable from the funds

of all investors. Thus, count 4 may not be brought as a direct claim, and we agree

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with the district court’s conclusion that count 4 may only be maintained as a

derivative suit.

      Because we conclude that count 4 may only be brought as a derivative

claim, we turn next to the district court’s conclusion that, under the circumstances

of this case, only the bankruptcy trustee may bring this claim. Plaintiffs, however,

have made no arguments against this position on appeal, and have thus abandoned

this issue. See United States v. Cunningham, 161 F.3d 1343, 1344 (11th Cir.

1998). We, therefore, affirm the district court’s dismissal of count 4.

                                  CONCLUSION

      For the foregoing reasons, we VACATE the district court’s order granting

judgment on the pleadings in part, AFFIRM the order in part, and REMAND for

further proceedings consistent with this opinion.

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