Thomas Medkser v. David J. Feingold , 307 F. App'x 262 ( 2008 )

[DO NOT PUBLISH]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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