Barnard v. Verizon Communications, Inc.

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 11-1318
_____________
TALBOT BARNARD; DONALD B. BIGGERSTAFF; SUSAN BIGGERSTAFF;
DAVID BOON; GREG BOSER; DEB BOSER; THOMAS BOVET, COL.; MARK
HENDRYCH; ZHENGXU HE FANG; YING FANG; BIN LEE; THOMAS E.
MARTIN; MIDDLEBAR MONASTERY, NON-PROFIT; JERSEY NIETUBYC;
KATHERINE PERINO; BRIAN D. SPENCER; STEPHEN S. SPENCER; CHARLES J.
TURK, KNOWN COLLECTIVELY AS “THE SPENCER COMMITTEE”,
Appellants,
v.
VERIZON COMMUNICATIONS, INC.; J.P. MORGAN CHASE BANK, N.A.,
INDIVIDUALLY AND AS AGENT
_______________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 10-cv-1304)
District Judge: Hon. Gene E.K. Pratter
_______________
Submitted Under Third Circuit LAR 34.1(a)
November 9, 2011
Before: SCIRICA, SMITH, and JORDAN, Circuit Judges.
(Filed: November 14, 2011)
_______________
OPINION OF THE COURT
_______________
JORDAN, Circuit Judge.
Former shareholders of the now-bankrupt corporation Idearc, Inc. (“Appellants”)
appeal an order of the United States District Court for the Eastern District of
Pennsylvania granting separate motions to dismiss filed by Verizon Communications,
Inc. (“Verizon”) and J.P. Morgan Chase Bank, N.A. (“JPMC”) (collectively,
“Appellees”). Appellants argue that the District Court improperly dismissed their
complaint and erroneously declined to consider Appellants‟ then-pending motion for
summary judgment before doing so. For the reasons that follow, we will affirm.1
I. Background
A. Idearc’s Bankruptcy
Appellants are former investors in Idearc, Inc. (“Idearc”), a corporation that was
formed as part of a 2006 spin-off transaction whereby Verizon divested its domestic print
and Internet “Yellow Pages” directory publishing operation and formed Idearc for the
purpose of continuing that operation as a separate business. In connection with the spin-
off, J.P. Morgan Ventures Corporation and Bear, Stearns & Company agreed to exchange
approximately $7 billion in Verizon debt for an equal amount of Idearc debt. JPMC
served as an administrative agent for the debt exchange. In addition to that $7 billion in
debt, Idearc also incurred $2 billion in debt to Verizon as partial consideration for the
1
Appellants have also filed several motions which amount to motions for
summary reversal, as well as a motion “requesting judicial notice of res adjudicata
decision affirming justiciability of post-bankruptcy security holder claims.” (Appellants‟
Oct. 17, 2011 Motion Requesting Judicial Notice.) These motions lack merit and warrant
no further discussion, as we hope will be plain from the discussion which follows.
2
Yellow Pages business and the right to be the exclusive and official publisher of Verizon
print directories.
On March 31, 2009, less than three years after its spin-off from Verizon, Idearc
filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Northern
District of Texas. Appellants, who held shares of Idearc when the Chapter 11 petition
was filed, actively participated in the bankruptcy proceedings. Among other things,
Appellants sought to have Idearc‟s bankruptcy proceedings dismissed on the ground that
the Idearc bankruptcy was part of a scheme orchestrated by Verizon for the purpose of
reducing its liabilities while leaving Idearc‟s shareholders with crushing debt.
The Bankruptcy Court denied Appellants‟ motion to dismiss and ultimately
confirmed Idearc‟s Chapter 11 reorganization plan (the “Plan”), over Appellants‟
objections. Under the Plan, Idearc cancelled its existing common stock – including
shares owned by Appellants – and issued new common stock to its secured and unsecured
creditors. In addition, the Plan established a litigation trust to investigate and pursue any
claims for the benefit of Idearc‟s bankruptcy estate and creditors.2 Following the Plan‟s
confirmation, Appellants filed a notice of appeal3 and motions that, if granted by the
2
The litigation trustee has already filed one such action against Verizon and other
defendants in the United States District Court for the Northern District of Texas. See
U.S. Bank Nat’l Ass’n v. Verizon Commc’ns Inc., No. 10-1842 (N.D. Tex.). That case is
currently pending.
3
The United States District Court for the Northern District of Texas dismissed
Appellants‟ appeal from the Bankruptcy Court‟s final judgment as equitably moot.
Appellants then appealed that decision to the United States Court of Appeals for the Fifth
Circuit, which affirmed the district court‟s order on October 17, 2011. See Spencer ad
3
Bankruptcy Court, would have rescinded the confirmation order or stayed the Plan‟s
implementation. Those motions were denied by the Bankruptcy Court on March 5, 2010.
B. Proceedings in the District Court
Appellants filed this action on March 25, 2010 and subsequently amended their
complaint twice, asserting claims for securities fraud, insider trading, common law fraud,
conversion, a Bivens claim for violation of federal constitutional rights, and a claim
alleging violation of § 206 of the Communications Act, 47 U.S.C. § 206. Verizon and
JPMC each filed a motion to dismiss Appellants‟ second amended complaint. Appellants
opposed those motions and also filed a pre-discovery motion for summary judgment.
After Appellants declined the District Court‟s invitation to file a third amended
complaint, the Court granted Appellees‟ motions and dismissed the second amended
complaint in its entirety. The Court held that the securities fraud, insider trading, and
common law fraud claims did not satisfy the applicable pleading standard; it rejected
Appellants‟ conversion claim as a collateral attack on the Idearc bankruptcy; and it
concluded that there was no legal basis for a claim under Bivens or the Communications
Act. Finding that a curative amendment would be futile, inasmuch as Appellants had
already filed two amended complaints and still failed to present a cognizable claim for
relief, the District Court dismissed the second amended complaint with prejudice. In
light of its ruling on the motions to dismiss, the Court denied Appellants‟ motion for
summary judgment.
hoc Equity Comm. v. Idearc, Inc. (In re Idearc, Inc.), No. 10-10858, 2011 WL 4910019,
at *4 (5th Cir. Oct. 17, 2011).
4
Appellants timely appealed.
II. Discussion4
Appellants argue that the District Court erred in dismissing their securities fraud,
common law fraud, conversion, and Communications Act claims,5 and in failing to
consider their motion for summary judgment before doing so. We address each of those
contentions in turn.
A. Securities Fraud
Appellants allege that Verizon and JPMC violated section 10(b) of the Securities
and Exchange Act, as well as Securities and Exchange Commission Rule 10b-5, by
“planning, orchestrating and accomplishing the spin, listing and public distribution of the
Verizon subsidiary, Idearc, that was defined „insolvent‟ ... when issued ... and ... failing to
4
The District Court had jurisdiction pursuant to 28 U.S.C. § 1331 and 28
U.S.C. § 1367. We have jurisdiction pursuant to 28 U.S.C. § 1291. Our review of a
district court‟s dismissal for failure to state a claim is plenary. Sheridan v. NGK Metals
Corp., 609 F.3d 239, 262 n.27 (3d Cir. 2010). “„Reviewing such an order, we accept as
true all allegations in the plaintiff‟s complaint as well as all reasonable inferences that can
be drawn from them, and we construe them in a light most favorable to the non-
movant.‟” Id. (quoting Monroe v. Beard, 536 F.3d 198, 205 (3d Cir. 2008)). Our task in
doing so is to determine whether “the facts alleged in the complaint are sufficient to show
that the plaintiff has a „plausible claim for relief.‟” Fowler v. UPMC Shadyside, 578 F.3d
203, 211 (3d Cir. 2009) (quoting Ashcroft v. Iqbal, 129 S. Ct. 1937, 1950 (2009)).
However, while our review of an order dismissing a complaint is plenary, the decision to
do so with prejudice is reviewed for abuse of discretion. Anderson v. Ayling, 396 F.3d
265, 271 (3d Cir. 2005).
5
To limit the issues on appeal, Appellants have “agree[d] to the dismissal” of the
insider trading and Bivens claims and have acknowledged that their assertion that they
have a “Shareholder Direct Right of Action” is “not a separate cause of action, but is an
allegation that the Decree in Bankruptcy affirmatively authorized . . . third-party direct
action lawsuits against Verizon, including shareholder suits.” (Appellants‟ Opening Br.
at 3.)
5
disclose in applicable registration statements their true intent, which was ... to simply off-
load debt, and transfer ownership of debt directly . . . from Verizon to the banks.” (J.A.
at 58.) In particular, Appellants aver that Verizon and JPMC intentionally
misrepresented Idearc‟s solvency by creating an “„illusion‟ of permanence” through the
exclusive publishing agreement Verizon and Idearc entered into, through paying an initial
dividend, and through withholding their “affirmative intent to permit a near term
recapitalization.” (Id. (emphasis omitted).) This, according to Appellants, created a
“fraud upon the market artificially inflating the market for ... shares of Idearc.” (J.A. at
59.)
To pursue a private right of action under section 10(b) and Rule 10b-5, a plaintiff
must allege (1) a material misrepresentation or omission; (2) scienter; (3) a connection
with the purchase or sale of a security; (4) reliance on the misrepresentation or omission;
(5) economic loss; and (6) a causal connection between the material misrepresentation or
omission and the loss. McCabe v. Ernst & Young, LLP, 494 F.3d 418, 424 (3d Cir.
2007). In doing so, the plaintiff must comply with the Private Securities Litigation
Reform Act of 1995 (the “PSLRA”), which “imposes two exacting and distinct pleading
requirements for securities fraud actions.” In re Aetna, Inc. Sec. Litig., 617 F.3d 272, 277
(3d Cir. 2010). First, a complaint alleging that the defendant is liable by virtue of a
material misrepresentation or omission must “specify each statement alleged to have been
misleading, the reason or reasons why the statement is misleading, and, if an allegation
regarding the statement or omission is made on information and belief, the complaint
shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-
6
4(b)(1). Second, a complaint must “state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind.” Id. § 78u-4(b)(2)(A).
We agree with the District Court that Appellants‟ second amended complaint fails
to state an actionable securities fraud claim under those standards. The pleading does not
provide any facts from which one could ascertain whether either JPMC or Verizon, or
both, made any actionable misrepresentations or omissions at all.6 The closest it comes
to doing so is its reference to Verizon‟s 2007 annual statement (which Appellants read to
indicate that Verizon felt Idearc might be subject to recapitalization) and Idearc‟s 2006
prospectus (which allegedly omitted information concerning a tax sharing agreement).
However, Appellants‟ reference to these statements fails to indicate how, if at all, the
statements could be interpreted as material misrepresentations or omissions. As a result,
the allegations fall far short of the particularized pleading required by the PSLRA. See
15 U.S.C. § 78u-4(b)(1). The second amended complaint also contains no allegations
from which reliance and economic loss can be established because there is no indication
as to how, when, or why Appellants purchased or sold Idearc stock. There is thus no way
to ascertain how any misrepresentation or omission impacted Appellants‟ decisions to
6
Correspondingly, the complaint fails to ascribe any given statement to either
defendant particularly. Cf. Winer Family Trust v. Queen, 503 F.3d 319, 335-36 (3d Cir.
2007) (“The PSLRA requires plaintiffs to specify the role of each defendant,
demonstrating each defendant‟s involvement in misstatements and omissions.”).
7
purchase or sell securities. Accordingly, the District Court appropriately dismissed
Appellants‟ securities fraud claim.7
B. Common Law Fraud
Appellants‟ common law fraud claim, rooted in the same factual allegations as
their securities fraud claim, alleges that the spin-off was a massive fraud perpetrated by
Verizon and JPMC to offload Verizon‟s debt onto Idearc. “„[T]o establish common law
fraud [under Pennsylvania law], a plaintiff must prove: (1) misrepresentation of a
material fact; (2) scienter; (3) intention by the declarant to induce action; (4) justifiable
reliance by the party defrauded upon the misrepresentation; and (5) damage to the party
defrauded as a proximate result.‟”8 Hunt v. U.S. Tobacco Co., 538 F.3d 217, 225 n.13
(3d Cir. 2008) (quoting Colaizzi v. Beck, 895 A.2d 36, 39 (Pa. Super. Ct. 2006)).
7
Unlike Appellants‟ complaint, which appears to plead a securities fraud claim
arising from a material misrepresentation or omission, Appellants‟ briefing suggests that
their basis for relief is instead grounded in the fact that Idearc stock was a false security
that should “not have been marketed at all.” (Appellants‟ Br. at 9.) However, while the
Fifth Circuit has arguably countenanced a “fraud created the market” theory, see Shores
v. Sklar, 647 F.2d 462, 468-70 (5th Cir. 1981) (concluding the plaintiff could state a
claim if he could show that “(1) the defendants knowingly conspired to bring securities
onto the market which were not entitled to be marketed, intending to defraud purchasers,
(2) [the plaintiff] reasonably relied on the [securities‟] availability on the market as an
indication of their apparent genuineness, and (3) as a result of the scheme to defraud, [the
plaintiff] suffered a loss” (internal footnote omitted)), overruled on other grounds as
recognized in Regents of Univ. of Cal. v. Credit Suisse First Boston (USA), Inc., 482 F.3d
372, 392 (5th Cir. 2007), we have emphatically rejected that theory, see Malack v. BDO
Seidman, LLP, 617 F.3d 743, 756 (3d Cir. 2010) (“The fraud-created-the-market theory
lacks a basis in common sense, probability, or any of the other reasons commonly
provided for [it].”).
8
Appellants brought this action in Pennsylvania and assume that their state-law
claims are subject to Pennsylvania law. See Felder v. Casey, 487 U.S. 131, 151 (1988)
(explaining that a federal court exercising supplemental jurisdiction over a state-law
8
As the elements of the tort and the factual allegations giving rise to the claim
demonstrate, Appellants‟ common law fraud claim is substantially similar to Appellants‟
securities fraud claim under section 10(b) and Rule 10b-5.9 Moreover, while not
identical to the pleading requirements applicable to federal securities fraud claims,
common law fraud claims brought in federal court require the pleader to “state with
particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b). As explained
above, Appellants‟ factual averments of securities fraud are not sufficient to state a claim,
and Appellants‟ common law fraud claim fails for much the same reason. It is simply
inadequate to meet the applicable pleading standard. See GFL Advantage Fund, Ltd. v.
Colkitt, 272 F.3d 189, 214 (3d Cir. 2001) (observing the similarities between federal
securities fraud claims and Pennsylvania common law fraud claims, and holding that the
plaintiff‟s “common law fraud claims fail for the same reasons his federal securities
claims fail”).
C. Conversion
Appellants allege that JPMC converted Appellants‟ Idearc shares to their own
shares by receiving Idearc‟s shares through the Plan. As best can be gleaned from their
claim should apply the forum state‟s substantive law). Neither side has contested that
choice of law, and we accept it for purposes of our analysis.
9
The count in which Appellants‟ fraud claim appears is titled “Common Law
Fraud and Undue Influence Claims,” (J.A. at 62), and Appellants‟ briefing suggests that
Appellants consider undue influence to be a distinct claim for relief. (See Appellants‟
Opening Br. at 24.) However, as the District Court correctly observed, undue influence is
generally a defense to a claim. Moreover, the relief Appellants evidently seek – reversing
the pre-bankruptcy debt exchange – would inappropriately conflict with the Bankruptcy
Court‟s order approving the Plan insofar as it assigned any claims to a litigation trust for
the benefit of Idearc‟s bankruptcy estate and creditors.
9
pleadings, Appellants believe that JPMC achieved this by exerting illicit influence on the
Bankruptcy Court to allow JPMC to become “simultaneously both a secured and an
„unsecured‟ creditor” in order to receive an equity interest in Idearc under the Plan. (J.A.
at 65.) Appellants‟ conversion claim is thus – as the District Court characterized it –
essentially a collateral attack on the final judgment of the Bankruptcy Court, and the
District Court correctly dismissed it. See Chem. Leaman Tank Lines, Inc. v. Aetna Cas.
& Sur. Co., 177 F.3d 210, 219 (3d Cir. 1999) (explaining the general rule that a final
judgment has res judicata effect and may not be attacked collaterally).
D. Communications Act
Appellants allege that Verizon‟s allegedly fraudulent spin-off transaction violated
§ 206 of the Communications Act. Section 206 provides a basis for liability where a
common carrier injures another by an act or omission that violates the portion of the
Communications Act regulating common carriers. 47 U.S.C. § 206. Appellants claim
that Verizon must be subject to liability under the Communications Act because the
Idearc spin-off was a scheme that enabled Verizon to unlawfully acquire money which
was then used to obtain federal licenses for Verizon‟s network.10 This theory of liability
is a painful stretch. Appellants‟ dressing up yet another version of their inadequate fraud
10
Indeed, the only reference Appellants‟ complaint makes to any specific
provision of the Communications Act besides § 206 states that the “debt off-loading spin
transactions were necessary, integral and inseparable from the federal licensing and
authority granted pursuant to the Federal Telecommunications Act [47 U.S.C. § 214] for
building of Verizon‟s new and expanded systems in the Northeastern United States . . . as
without the ridding of the debt, the building could not have occurred.” (J.A. at 67.)
Appellants further assert in their briefing that “general fraud in the conduct of one‟s
communications business can result in loss of license.” (Appellants‟ Opening Br. at 28.)
10
claim in Communications Act clothing does not make it cognizable. We agree with the
District Court that their allegations do not provide a basis for recovery under the
Communications Act.
E. Dismissal With Prejudice
Ordinarily, a plaintiff must be afforded an opportunity to amend his or her
complaint when it is dismissed for failure to state a claim. Phillips v. Cnty. of Allegheny,
515 F.3d 224, 245 (3d Cir. 2008). However, a curative amendment need not be afforded
where it “would be inequitable or futile.” Id. The District Court rightly concluded that a
curative amendment would be futile in this case. Even after filing two amended
complaints and being expressly invited by the District Court to file a third amended
complaint, Appellants presented only claims that were well below the governing pleading
standards. Under these circumstances, the District Court‟s determination that a curative
amendment would be futile was not an abuse of discretion.11
III. Conclusion
For the foregoing reasons, we will affirm the judgment of the District Court.
11
Nor did the District Court err in denying Appellants‟ motion for summary
judgment in light of the disposition of Appellees‟ motions to dismiss. Once the District
Court determined that Appellants‟ complaint failed to state legally cognizable claims,
Appellants‟ motion for summary judgment was moot.
11