Court Opinion

ID: 40531
Source: CourtListenerOpinion
Date Created: 2010-04-25 20:47:57+00
Date Added: 2024-06-11T09:37:39.897022
License: Public Domain

United States Court of Appeals
                                                                 Fifth Circuit
                                                              F I L E D
                IN THE UNITED STATES COURT OF APPEALS
                                                             December 30, 2005
                        FOR THE FIFTH CIRCUIT
                        _____________________             Charles R. Fulbruge III
                                                                  Clerk
                             No. 05-50902
                           Summary Calendar
                        _____________________

KYLE HOLLAND,

                                                Plaintiff - Appellant,

                               versus

GEXA CORP.; MARCIE ZLOTNICK; KYLE MCDONALD; DAN FOGARTY;
NORMAN GEORGE; STEVEN BETHKE; KIM PETERSON; CAROL JENKINS;
NEIL LEIBMAN

                                          Defendants - Appellees.
_________________________________________________________________

        Appeal from the United States District Court for
          the Western District of Texas, Austin Division
                          No. 1:03-CN-904
_________________________________________________________________

Before JOLLY, DAVIS, and OWEN, Circuit Judges.

PER CURIAM:1

     Kyle Holland brings this appeal seeking review of the district

court’s dismissal without prejudice of his claims of securities and

common law fraud.    Reviewing the district court’s Rule 12(b)(6)

dismissal de novo, and the denial of leave to replead for abuse of

discretion, we affirm the district court’s judgment dismissing the

case essentially for the reasons provided in the magistrate judge’s

     1
        Pursuant to 5TH CIR. R. 47.5, the Court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
thorough and well-reasoned recommendation to dismiss including the

following:2

     1.        Holland has failed sufficiently to plead damages to

support either his claim under Section 10(b) of the Securities and

Exchange Act or his claim under Rule 10b-5.     Further, as correctly

noted below, the facts as pled by Holland show that he lacked

standing to bring either claim as he is neither a purchaser nor

seller    in    connection   with   the   subject   stock   exchange.3

Additionally Holland’s failure specifically to plead the purchase

price he paid for his stock, and that the alleged violations of

Section 10(b) and Rule 10b-5 caused the stock to lose value,

further evince both Holland’s lack of standing and insufficient

pleading as to those claims.4

     2
       Additionally we note that the magistrate judge’s depiction
of the complaint as unclear is a forgiving description of the
pleading involved. The plaintiff’s briefing on appeal, consistent
with the confusion of the complaint, has made our task difficult.
     3
        To cure the standing problem Holland appears to make some
sort of dilution claim.      Yet this Circuit has consistently
recognized a claim of dilution of shareholder’s equity as
insufficient to create standing in these types of securities
claims. See, e.g., Meyers v. Moody, 693 F.2d 1196, 1216 n.16 (5th
Cir. 1983); Sargent v. Genesco, Inc. 492 F.2d 750 (5th Cir. 1974);
Wolf v. Frank, 477 F.2d 467 (5th Cir. 1973) (all finding that
dilution of shareholder’s equity does not, in itself, confer
“purchaser” or “seller” status on a plaintiff seeking to achieve
the required standing in a direct action).
     4
       The failure to plead causation is not surprising as the
allegedly fraudulent transaction Holland contends is the basis for
his Rule 10b-5 claim (the EZUTILITIES transaction on July 1, 2001)
occurred several weeks after Holland purchased the stock in
question (stock purchase occurred on June 10, 2001).

                                    2
     2.      Holland’s attempt to cure his lack of standing, by

contending   that     his    claims    are     somehow   derivative,       was   also

correctly rejected below.           Holland’s pleading, although difficult

to decipher, asserts derivative claims based only on the common law

breach of a fiduciary duty.            The court below correctly noted that

Holland   had   not    pled    a    derivative      claim    under   any    federal

securities law, and even if a claim could be construed to exist, it

certainly was not pled with the particularity required.

     3.      Holland’s claim under Section 12(2) of the Securities

Act of 1933 was also properly dismissed.5                Holland’s claim under

Section 12(a)(2) appears to be that GEXA unlawfully issued the

stock based on allegedly fraudulent private placement memoranda,

when in   actuality     it    was     making    a   public   offering   requiring

registration.    To the extent that Holland is alleging fraud in the

content of the memoranda, he has failed to plead any reliance on

that information that induced his purchase. Further, any claim for

fraud in the memoranda was improperly pled under Section 12(a)(2)

as that section applies only to public offerings.                    See Lewis v.

Fresne, 252 F.3d 352 (5th Cir. 2001) (holding that under Gustafson

v. Alloyd Co., 115 S.Ct. 1061 (1995), Section(a)(2) liability does

not attach unless the fraud occurred in the context of a public

offering). To the extent that Holland claims the private placement

     5
       Section 12(2) was amended in 1995 and renumbered as Section
12(a)(2). We assume, as did the court below, that Holland intended
to assert his claim under the current statute.

                                         3
memoranda were unlawful because the offerings should have been made

through a registered prospectus, his actual claim would be under

Section    12(a)(1),   which     provides   for     rescission   of   sales    of

securities improperly accomplished without registration.                 Holland

has not asserted a claim under section 12(a)(1), nor has he alleged

any facts demonstrating the sale was actually a public offering.

     4.     Finally,    the    court   below,      having   dismissed    all   of

Holland’s federal claims, dismissed his pendent state law claims.6

Federal courts have discretion in determining whether to exercise

supplemental jurisdiction over state law claims even where the

federal claims have been dismissed.               See 28 U.S.C. 1367(c)(3).

Where the federal claims are dismissed before trial, however, the

relevant factors weigh heavily in favor of dismissing the state law

claims.    “Our general rule is to dismiss state claims when the

federal claims to which they are pendent are dismissed.”                      See,

e.g., Parker & Parsley Petroleum Co. v. Dresser Indus., 972 F.2d

580, 585-86 (5th Cir. 1992) (finding the district court abused its

discretion in maintaining supplemental jurisdiction over state law

claims where    the    federal    claims    were    dismissed    early   in    the

litigation).    Consequently, the court did not err in dismissing

Holland’s state law claims.7

     6
      Specifically, these include Holland’s claims for negligence,
negligence per se, common law fraud, statutory fraud under the
Texas Securities Act, conspiracy, and a shareholder derivative
claim for breach of fiduciary duty.
     7
         We note additionally that even were the federal claims not

                                       4
     To   sum   up,   the   district   court   did   not   err   in   granting

defendants’ 12(b)(6) motion, and thus the judgment dismissing

Holland’s claims is

                                                                      AFFIRMED.

dismissed, the lack of clarity in pleading these state law claims
would possibly justify their independent dismissal for failure to
meet the requirements of Rules 8(a) and 9(b). See FED. R. CIV. P.
8(a) (requiring a “short and plain statement of the claim showing
that the pleader is entitled to relief”); FED. R. CIV. P. 9(b)
(imposing more stringent pleading requirements for fraud claims).

                                       5