Bovee v. Lyndonville Savings Bank & Trust

Bovee v. Lyndonville Savings Bank & Trust Co. (2001-346); 174 Vt. 507;
811 A.2d 143

[Filed 19-Aug-2002]

                                 ENTRY ORDER

                      SUPREME COURT DOCKET NO. 2001-346

                               MAY TERM, 2002


  Madeline R. Bovee, et al.	       }	APPEALED FROM:
                                       }
                                       }
       v.	                       }	Caledonia Superior Court
                                       }	
  Lyndonville Savings                  }
  Bank & Trust, et al.	               }
                                       }	DOCKET NO. 357-11-00 Cacv

                                                Trial Judge: Alan W. Cheever 

             In the above-entitled cause, the Clerk will enter:

       Plaintiff shareholders of Lyndonville Savings Bank & Trust Company
  appeal from a superior court judgment dismissing their complaint against
  the bank and several of its officers and  directors.  Plaintiffs contend
  the trial court erroneously: (1) failed to address their breach of contract
  claim; (2) failed to address their civil conspiracy claim; (3) ruled that
  they lacked standing to bring a direct action against the bank; and (4)
  found that they had failed to state a derivative claim against the bank. 
  We affirm.

       This case is one of several resulting from the recent troubles of
  Lyndonville Savings. In December 1993, plaintiff Roger Lussier was
  convicted in federal district court on a variety of criminal charges,
  including bank fraud, money laundering, and receipt of illegal commissions,
  committed during his tenure as the bank's president and chairman of the
  board. Lussier was sentenced to a prison term of forty-six months, ordered
  to pay a fine of $100,000, and ordered to pay restitution of over $426,000.
   
       In September 1995,  following Roger Lussier's conviction, the bank
  filed a civil suit in federal district court against Lussier and his wife
  Evelyn, seeking immediate payment of the restitution award, damages based
  on Roger Lussier's status as an officer and director of a bank in the
  Federal Reserve System, and recovery under several state law theories,
  including breach of fiduciary duty and fraudulent conveyance of certain
  bank shares to Evelyn Lussier.  In February 1996, the district court
  dismissed Evelyn Lussier as a defendant based on her agreement with the
  bank to reverse the allegedly fraudulent conveyance by returning the stock
  to its pre-transfer status.  In July 1997, the bank abandoned that portion
  of the complaint based on Roger Lussier's status as a federal bank officer
  because the bank was not a member of the Federal Reserve. Trial proceeded
  on the remaining claims, resulting in a judgment for the bank on the state
  law claims totaling over $8 million.  The district court denied a
  subsequent motion to set aside the judgment for lack of subject matter
  jurisdiction, but the Second Circuit Court of Appeals vacated and
  dismissed, holding that federal law 

 

  did not entitle the bank to seek a separate civil judgment on the
  restitution award, and that - since the bank had abandoned its claim based
  on Federal Reserve membership - the district court lacked pendent
  jurisdiction over the state law claims.  Lyndonville Sav. Bank & Trust Co.
  v. Lussier, 211 F.3d 697, 703-05 (2d Cir. 2000).

       In June 2000, following dismissal of the federal action, the bank
  filed a new civil suit against Roger Lussier in Caledonia Superior Court,
  seeking, inter alia, an attachment of the bank shares transferred back to
  Roger as part of the agreement dismissing Evelyn Lussier from the federal
  action.  The trial court granted Evelyn Lussier's motion to intervene in
  the new lawsuit, noting that her earlier agreement reversing the transfer
  of stock in return for her dismissal from the federal action was void due
  to the district court's lack of subject matter jurisdiction, and ordered
  the bank to issue new certificates reflecting the percentage of the
  Lussiers' ownership interests as of 1995.

       Shortly thereafter, plaintiffs - comprised of various bank
  shareholders including Roger and Evelyn Lussier - filed this action against
  the bank and several of its officers and directors. (FN1.)  The amended
  complaint alleged that defendants had: erroneously failed to prosecute bad
  faith actions against its various insurance companies, instead blaming the
  losses on Roger Lussier; filed the federal lawsuit against Roger and Evelyn
  Lussier knowing that there was no reasonable basis for the assertion of
  federal jurisdiction or the fraudulent conveyance claim; engaged in lending
  practices that did not comport with federal regulations; and failed to
  provide them with requested information on bank operations and expenses
  related to the federal litigation.  Based on these allegations, the
  complaint stated claims for breach of contract, which "depriv[ed] them of
  the full value of their investment"; negligence in failing to provide
  information to plaintiffs, and in failing adequately to supervise bank
  officers, resulting in "pecuniary loss"; breach of an affirmative duty to
  "discharge their responsibilities in regard to [the bank's] conduct of its
  banking and corporate business"; violation of the Vermont Securities Act;
  wrongful deprivation of Evelyn Lussier's ownership interest in her stock;
  and a shareholder derivative claim based on defendants' alleged failure
  adequately to discharge their duties to the bank. 

       Defendants moved to dismiss the complaint, asserting that plaintiffs
  lacked standing to bring direct claims against the bank, and that the
  derivative claim was procedurally barred.  The trial court agreed, granted
  the motion to dismiss, and entered judgment for defendants.  This appeal
  followed.

        
       Plaintiffs contend the court erred in failing specifically to address
  the breach of contract claim, and in concluding that plaintiffs lack
  standing to state a direct claim for breach of contract against the bank.
  The general principles governing shareholder suits are well settled.  In a
  derivative suit, the shareholder sues on behalf of the corporation for harm
  done to the corporation; in a direct action, 

 

  the shareholder brings suit individually, or on behalf of a class of
  shareholders, for injuries done to them in their individual capacities. 
  Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 351 (Del. 1988); see Lash v.
  Lash Furniture Co. of Barre, Inc., 130 Vt. 517, 522, 296 A.2d 207, 211
  (1972) (shareholder derivative action is one brought in the interest of
  corporation).  To have standing to sue individually, the shareholder must
  allege an injury separate and distinct from other shareholders, or a wrong
  involving a contractual right of the shareholder that exists independently
  of any right of the corporation.  Kramer, 546 A.2d  at 351.    

       Here, plaintiffs' complaint alleged that the bank committed a breach
  of contract by violating  "agreements between plaintiffs as shareholders of
  the bank," thereby depriving them of information necessary to make informed
  decisions about their investments in the bank, and "depriving them of the
  full value of their investment." The claim is patently derivative.
  "[A]ctions charging 'mismanagement which depress[] the value of stock
  [allege] a wrong to the corporation,  i.e., the stockholders collectively,
  to be enforced by derivative action." Id. at 353 (citation omitted);  see
  also Strougo v. Bassini, 282 F.3d 162, 174 (2d Cir. 2002) (shareholders
  lack standing to sue directly for loss in share value resulting from
  mismanagement); Strasenburgh v. Straubmuller, 683 A.2d 818, 829 (N.J. 1996)
  ("Shareholders cannot sue for injuries arising from the diminution in value
  of their shareholdings resulting from wrongs allegedly done to their
  corporations.") (citation omitted).  Although plaintiffs attempt to
  characterize the claim as a separate and distinct injury arising from a
  breach of their "agreement" - and implied good faith covenants therein -
  with the bank (presumably referring to the corporate charter, bylaws, and
  similar  general corporate instruments), plaintiffs have not alleged or
  shown that the bank breached any contractual right separate from that of
  all other shareholders of the corporation.  Therefore,  the claim is
  derivative in nature.  See Lipman v. Batterson, 738 N.E.2d 623, 627-28
  (Ill. App. Ct. 2000) (where alleged breach of contract results in wrong to
  corporation, action is derivative).  Plaintiffs' corollary claim concerning
  the bank's alleged failure to provide information necessary to make
  informed decisions about their investments similarly fails to establish
  harm distinct from other shareholders, and also fails adequately to allege
  what investment decisions were affected or how plaintiffs were thereby
  harmed.  See V.R.C.P. 8(a) (complaint must set forth plain statement
  showing that pleader is entitled to relief); Limoge v. People's Trust Co.,
  168 Vt. 265, 274,  719 A.2d 888, 893 (1998)  (pleading must give fair
  notice of claim and grounds upon which it rests).  Finally, although the
  court did not address the breach of contract count separately from the
  other claims, its conclusion that plaintiffs failed to demonstrate a
  distinct injury sufficient to establish standing was plainly meant to apply
  to all of plaintiffs' claims.  We therefore discern no error in this
  regard.        
        
       Plaintiffs also assert that the court erred in dismissing the balance
  of their claims on the ground that they lacked standing.  The claims for
  negligence and what plaintiffs styled "voluntary assumption of a duty" were
  premised on allegations that defendants failed to exercise reasonable care
  in communicating information to plaintiffs, in supervising bank employees,
  officers and agents to ensure that they acted in conformity with statutory,
  regulatory, and other norms, and in discharging their responsibilities over
  banking and corporate business.  Apart from the alleged impact  on
  plaintiffs' investment and the value of their shares, which affected all
  shareholders, plaintiffs' complaint fails adequately to allege or
  demonstrate any separate and discrete injury entitling 

 

  them to bring a direct action.  Kramer, 546 A.2d  at 351.  Although
  plaintiffs argue on appeal that they suffered direct injury through
  "dilution" of their voting rights resulting from the federal order
  requiring  re-issuance of the Lussiers' stock to the bank, see, e.g., In re
  Tri-Star Pictures, Inc. Litig., 634 A.2d 319, 330 (Del. 1993) (claim of
  stock dilution and corresponding reduction in voting power may state 
  individual claim), the complaint did not allege any impact on voting rights
  except with respect to Evelyn Lussier in Count V.  Hence, we discern no
  error in the court's dismissal of the claims for negligence and voluntary
  assumption of a duty. (FN2)      

          Although the specific claim for wrongful deprivation of Evelyn
  Lussier's ownership interest in her stock during the period of the federal
  lawsuit appears to satisfy the direct injury requirement, defendants argued
  correctly at trial that the claim was waived.  Lussier voluntarily entered
  into an agreement to reconvey the stock to the bank in return for dismissal
  of the fraudulent conveyance count from the federal lawsuit, and raised no
  issue on appeal from the federal judgment concerning the agreement or the
  fraudulent conveyance claim. The fact that the judgment was ultimately
  reversed, and the settlement effectively voided, does not undermine the
  validity of the waiver.  Having voluntarily relinquished ownership of the
  stock,  she cannot now predicate claims against the bank for wrongful
  deprivation of the stock. See Russell v. Atkins, 165 Vt. 176, 180, 679 A.2d 333, 336 (1996) (plaintiffs bound by settlement of suit, barring subsequent
  claim).  

       Plaintiffs further contend that the court erroneously failed to
  address their civil conspiracy claim.  Although they alleged six separate
  counts in their amended complaint,  plaintiffs did not set forth a claim
  for "civil conspiracy."  Plaintiffs cite language from a single paragraph
  in the complaint alleging that defendants acted "as part of a common design
  or plan."  While the allegation might have been sufficient to satisfy our
  notice pleading rules (an issue we need not decide), plaintiffs did not
  move to amend the complaint to state such a claim, did not refer to such a
  claim in opposing the motion to dismiss, and raised the issue for the first
  time only on appeal.  We conclude, therefore, that the court did not err in
  failing to address the purported claim in its order granting the motion to
  dismiss.  See Limoge, 168 Vt. at 274, 719 A.2d  at 893 (upholding court's
  refusal to address claim that bank violated covenant of good faith and fair
  dealing where there was no mention of claim in complaint, nor any request
  to amend the complaint, and claim was raised for first time in motion for
  summary judgment).
   
       Finally, plaintiffs contend the court erred in dismissing their
  derivative claim.  The trial court correctly ruled, however, that
  plaintiffs failed to meet the threshold requirement of 11A V.S.A. §
  7.40(b), requiring that a derivative complaint "allege with particularity
  the demand made, if any,  to obtain action by the board of directors and
  either that the demand was refused or ignored or why he or she did not make
  the demand."  Plaintiffs have not alleged or demonstrated either compliance
  with this requirement, or reasons for their failure to comply. Accordingly,
  the derivative claim was properly dismissed.   See, e.g., Albers v. Edelson
  Tech. Partners, 31 P.3d 821, 828-29 (Ariz. Ct. App. 

 

  2001) (failure to comply with statutory demand requirement compels
  dismissal of  shareholder derivative suit). 

       Affirmed.  
     


                                       BY THE COURT:


                                       _______________________________________
                                       Jeffrey L. Amestoy, Chief Justice

                                       _______________________________________
                                       John A. Dooley, Associate Justice

                                       _______________________________________
                                       James L. Morse, Associate Justice

                                       _______________________________________
                                       Denise R. Johnson, Associate Justice

                                       _______________________________________
                                       Marilyn S. Skoglund, Associate Justice


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                                  Footnotes


FN1.  Plaintiffs also filed a separate action against the attorneys who had
  represented the bank in the federal civil action.  Caledonia Superior
  Court, Docket No. 358-11-00 Cacv.  The trial court granted the defendants'
  motion to dismiss the action based on lack of standing.   Plaintiffs have
  filed a separate appeal from the judgment of dismissal.  Vermont Supreme
  Court, Docket No. 2001-347.

FN2.  Plaintiffs have not briefed or challenged the court's dismissal of
  their claim predicated on an alleged violation of the Vermont Securities
  Act.