Opinion
DOCKET NO. A-0163-14T2 DOCKET NO. A-0223-14T2
07-01-2016
HARALAMBOS S. KOSTAKOPOULOS, YASEMIN K. KOSTAKOPOULOS, and ALEXANDER CROKOS, Plaintiffs-Appellants, v. ALMA BANK and EFSTATHIOS VALIOTIS, Defendants-Respondents.
Trent S. Dickey argued the cause for appellants (Sills Cummis & Gross, P.C., attorneys; Mr. Dickey, of counsel; Mr. Dickey and David J. Marck, on the briefs). Eric B. Levine argued the cause for respondent Efstathios Valiotis (Lindabury McCormick Estabrook & Cooper, attorneys; Greg K. Vitali and Mr. Levine, of counsel; Mr. Levine, on the brief). Douglas A. Stevinson argued the cause for respondent Alma Bank (Windels Marx Lane & Mittendorf, LLP, attorneys; Mr. Stevinson, of counsel and on the brief).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION Before Judges Yannotti, Guadagno and Vernoia. On appeal from Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-1952-14. Trent S. Dickey argued the cause for appellants (Sills Cummis & Gross, P.C., attorneys; Mr. Dickey, of counsel; Mr. Dickey and David J. Marck, on the briefs). Eric B. Levine argued the cause for respondent Efstathios Valiotis (Lindabury McCormick Estabrook & Cooper, attorneys; Greg K. Vitali and Mr. Levine, of counsel; Mr. Levine, on the brief). Douglas A. Stevinson argued the cause for respondent Alma Bank (Windels Marx Lane & Mittendorf, LLP, attorneys; Mr. Stevinson, of counsel and on the brief). PER CURIAM
Plaintiffs appeal from an order entered by the Law Division on June 20, 2014, dismissing their complaint with prejudice, and an order entered on August 8, 2014, denying their motion for reconsideration. We affirm in part, reverse in part, and remand for entry of an order stating that plaintiffs' complaint is dismissed without prejudice.
I.
We briefly summarize the relevant facts. Fort Lee Bank (FLB) was founded in 2000, and it began operations in 2001. Plaintiff Haralambos S. Kostakopoulos was a founder, shareholder, director, and chief executive officer of FLB. His wife, plaintiff Yasemin K. Kostakopoulos, was also a founder, shareholder, director, and officer of FLB. Plaintiff Alexander Crokos was a FLB shareholder.
In this opinion, we refer to Haralambos S. Kostakopoulos as "Kostakopoulos."
In 2010, after conducting an investigation of FLB's car-loan portfolio, the Federal Office of Thrift Supervision (OTS) issued a cease and desist order which required FLB to raise its capital ratios. In response to that order, FLB began a search for potential investors or merger partners. The search continued into the spring of 2011, and Alma Bank (Alma) emerged as a potential merger partner. Alma's majority shareholder is defendant Efstathios Valiotis.
In February 2011, FLB and Alma entered into a Mutual Non-Disclosure Agreement (MNDA) regarding Alma's potential investment in FLB. On June 20, 2011, FLB and Alma entered into a non-binding letter of interest (LOI), which set forth the terms upon which Alma would acquire FLB. The LOI required the parties to negotiate in a commercially reasonable manner, established an anticipated purchase price of $3 million, and provided that FLB could continue to operate as a stand-alone entity after the merger.
Thereafter, FLB and Alma entered into a merger agreement, which was approved by FLB's board of directors. The agreement was, however, subject to Alma's review of certain FLB disclosures and approval by Alma's board of directors. On September 16, 2011, a Special Inspector General TARP Informational Subpoena was served upon FLB.
"TARP" is the Troubled Asset Relief Program established by Congress to help stabilize the nation's financial system after the financial crisis of 2008. 52 U.S.C.A. § 5201. --------
FLB notified Alma of the subpoena, and Alma informed FLB that its board of directors would not consider approving the merger agreement until the subpoena was resolved. In the months that followed, FLB took steps to comply with the subpoena. According to plaintiffs, Valiotis and other Alma officers and directors told them that once the subpoena was resolved, Alma would proceed with the merger, and FLB should make all efforts to resolve the subpoena so that the proposed merger could be consummated.
On October 31, 2011, Alma sent a letter to FLB stating that it was ending the negotiations regarding the merger. Even so, plaintiffs claim that Valiotis and other Alma representatives made "private statements" indicating that Alma had a continuing interest in consummating the merger. On November, 14, 2011, the Federal Office of the Comptroller of the Currency (OCC), the successor to the OTS, began another examination of FLB.
In January 2012, FLB reported a Tier 1 capital ratio of 2.23%. The OCC thereafter demanded that FLB increase its capital reserves by May 21, 2012. Plaintiffs notified Alma about these events. According to plaintiffs, Alma's representatives informally expressed their continued interest in pursuing the merger with FLB.
On March 1, 2012, representatives of the OCC and the Federal Deposit Insurance Corporation (FDIC) met with FLB's board of directors. Among other things, the OCC and FDIC representatives indicated that the time for increasing FLB's capital reserves would not be shortened if there was no run on the bank's deposits, and the deadline could be extended in the interests of consummating a pending transaction. In April 2012, Kostakopoulos was interviewed in an effort to resolve the subpoena.
Plaintiffs claim that Renos Kourtides, a member of Alma's board of directors who had been involved in the negotiations with FLB, called Kostakopoulos to wish him good luck in the interview. Kourtides allegedly suggested that Alma would be willing to purchase FLB's TARP debt as part of the proposed merger if this would help resolve the subpoena.
After the interview, Kostakopoulos told Kourtides that the interview had gone well, the subpoena was likely to be resolved shortly, and Alma should be prepared to go forward with the merger. Plaintiffs allege that, in the meantime, Hartford Funding Ltd. Investor Group (Hartford) expressed an interest in providing FLB with a cash infusion of $5 million. Representatives of FLB and Hartford met on April 18, 2012, to discuss the matter, but Kostakopoulos and other persons representing FLB informed Hartford that Alma was still FLB's first choice as a merger partner.
The following day, an Assistant United States Attorney informed FLB that the subpoena was resolved and the investigation had been concluded without any adverse action. On April 20, 2012, Alma informed FLB that it was no longer interested in the proposed merger. FLB then turned to Hartford, and an agreement was reached on a capital restoration plan.
On April 20, 2012, FLB presented that plan to the OCC. The OCC rejected the proposal, denied FLB's request for additional time to make a comprehensive presentation of the proposal, revoked FLB's charter, appointed the FDIC as receiver for the bank, and announced that Alma would be the purchaser of certain FLB assets.
II.
On February 27, 2014, plaintiffs filed a complaint in the Law Division against Alma and Valiotis. They alleged that defendants interfered with their prospective economic advantage by intentionally and without justification, perpetrating a scheme to convince plaintiffs of Alma's continued interest in consummating the merger, while secretly planning to purchase FLB's assets at a significant discount when the OCC closed the bank. Plaintiffs claimed that defendant misused confidential information they had obtained pursuant to the MNDA, and interfered with their ability and opportunity to pursue prospectively beneficial investments.
In addition, plaintiffs asserted a claim of fraud. They alleged that defendants had intentionally made statements to plaintiffs, knowing they were false, in order to perpetrate a scheme of deception. Plaintiffs claimed that defendants had convinced them of Alma's "continuing and unwavering commitment" to completing the merger with FLB, while secretly planning to purchase the bank's assets at a significant discount when the OCC closed the bank. Plaintiffs alleged they reasonably relied upon defendants' representations and statements and did not seek out other prospective investors and transaction partners, thereby incurring a loss of economic opportunities and advantages.
Plaintiffs further claimed that defendants negligently and recklessly perpetrated the aforementioned scheme of deception and misrepresentation. Plaintiffs alleged it was foreseeable they would reasonably rely upon defendants' statements and representations regarding Alma's continuing commitment to consummating the merger. Plaintiffs claimed they suffered economic losses as a result of these negligent misrepresentations.
Moreover, plaintiffs asserted a claim of unjust enrichment. They alleged that, as a result of defendants' fraud, tortious conduct, and negligent actions, Alma was unjustly enriched by "the value to be received by [FLB's] shareholders pursuant to the proposed merger agreement" when compared with "the price Alma Bank paid for acquiring the assets it purchased through the OCC process."
Defendants thereafter filed motions to dismiss the complaint. On June 20, 2014, the judge heard oral argument on the motions, and on that date filed a written order granting the motions and dismissing the complaint with prejudice. In the rider to the order, the judge found that dismissal was warranted because plaintiffs did not have standing to assert the claims in their complaint. The judge reasoned that any injuries suffered by plaintiffs were derivative of injuries suffered by FLB as a corporate entity.
On July 21, 2014, plaintiffs filed a motion for reconsideration, arguing that any dismissal of the complaint should have been without prejudice. Defendants opposed the motion. The judge heard oral argument on August 8, 2014, and entered an order that day denying the motion. The judge determined that the motion had been filed beyond the time required by Rule 4:49-2. Plaintiffs later filed notices of appeal from the trial court's orders of June 20, 2014, and August 8, 2014.
On appeal, plaintiffs argue: (1) the trial court erroneously granted defendants' motions to dismiss even though they had adequately alleged special injuries in support of their direct claims; (2) the court erred by dismissing the complaint because it should have treated the claims as a permissible direct action due to the closely-held nature of FLB; (3) the dismissal for lack of standing should have been without prejudice; and (4) the court erroneously determined that the motion for reconsideration was untimely.
III.
Plaintiffs first argue that the trial court erred by granting defendants' motions to dismiss their complaint for lack of standing. Plaintiffs argue that the judge erroneously determined that their complaint set forth derivative claims of the corporate entity, rather than claims that can be pursued by them directly.
We are convinced, however, that the judge correctly found that plaintiffs did not have standing to assert the claims in their complaint. The court correctly determined that plaintiffs' claims are claims of FLB, the corporate entity, not personal claims that can be pursued directly by individual FLB shareholders.
"A corporation is regarded as an entity separate and distinct from its shareholders. It is a principle of corporation law that '[r]egard for the corporate personality demands that suits to redress corporate injuries which secondarily harm all shareholders alike are brought only by the corporation.'" Strasenburgh v. Straubmuller, 146 N.J. 527, 549 (1996) (citations omitted). New Jersey follows the "American rule," whereby stockholders who suffer injuries to their stock that are the same as all other stockholders "'may not recover for the injury to [their] stock alone, but must seek recovery derivatively in behalf of the corporation." Id. at 550 (citing Cowin v. Bresler, 741 F.2d 410, 414 (D.C. Cir. 1984)).
However, if a particular shareholder suffers an injury distinct from the injuries suffered by other shareholders, a direct suit may be brought under the "special injury" exception. Delray Holding, LLC v. Sofia Design & Dev. at S. Brunswick, LLC, 439 N.J. Super. 502, 510 (App. Div. 2015) (citations omitted). "A special injury occurs 'where there is a wrong suffered by [a] plaintiff that was not suffered by all stockholders generally or where the wrong involves a contractual right of the stockholders, such as the right to vote.'" Strasenburgh, supra, 146 N.J. at 550 (quoting In re Tri-Star Pictures, Inc., 634 A.2d 319, 330 (Del. 1993)).
Here, plaintiffs argue that defendants' alleged wrongful actions "directly prevented" them from exercising their "unique right of control" over FLB, including their ability to arrange another merger or financing infusion for the bank. They maintain that these are special injuries which allow them to assert direct claims against defendants. We disagree. If plaintiffs sustained any monetary losses as a result of FLB's inability to merge with Alma or secure a capital infusion from another merger partner, their losses would be no different from those sustained by the bank's other shareholders.
Plaintiffs further argue that they pleaded sufficient facts to show special injuries because defendants' alleged wrongful acts precluded them from exercising effective majority control of FLB. This contention fails because, as indicated in the complaint, together plaintiffs only held 49.54% of the bank's shares. Thus, plaintiffs could not exercise majority control of FLB.
Plaintiffs also argue that they pleaded sufficient facts to support direct claims because defendants allegedly failed to disclose facts which affected their voting rights as shareholders. In support of this argument, plaintiffs rely upon Tri-Star Pictures, where the court held that an alleged breach of a duty to disclose facts that materially and adversely affect a party's ability to make an informed decision constitutes a "special harm to each uninformed shareholder." Tri-Star Pictures, supra, 634 A.2d at 332.
Plaintiffs' reliance upon Tri-Star Pictures is misplaced. Although we sometimes look to the decisions of the Delaware courts for guidance on corporate issues, we are not bound by those decisions. Canter v. Lakewood of Voorhees, 420 N.J. Super. 508, 517-18 (App. Div. 2011). Furthermore, Tri-Star Pictures involved a dispute between minority and majority shareholders, and a failure to disclose information that amounted to a breach of fiduciary duty. Tri-Star Pictures, supra, 634 A.2d at 331-32. The facts alleged here are not comparable.
We conclude the court correctly found that plaintiffs' claims were derivative claims, which belonged to FLB, and plaintiffs did not have standing to pursue those claims.
IV.
Next, plaintiffs argue that the trial court erred by dismissing their complaint because the court should have treated their claims as a direct rather than derivative under the principles enunciated in Brown v. Brown, 323 N.J. Super. 30 (App. Div.), certif. denied, 162 N.J. 199 (1999). In Brown, we noted that generally a derivative action is one in which an injury or breach of duty to the corporation is a prerequisite to recovery, whereas a direct action is one in which liability is based upon an injury or violation of a duty owed to a particular shareholder. Id. at 36 (citing Principles of Corporate Governance: Analysis and Recommendations, American Law Institute, §§ 7.01(a)-(b) (1992)).
We stated, however, that in the case of a closely-held corporation, the court has the discretion to treat an action raising derivative claims as a direct action if doing so "will not (i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of creditors of the corporation, or (iii) interfere with a fair distribution of the recovery among all interested persons." Ibid. (citing Principles of Corporate Governance, supra, § 7.01(e)).
Assuming that FLB was a closely-held corporation, plaintiffs have not alleged facts which would have allowed the court to treat their derivative claims as a direct action under Brown. FLB had seventeen shareholders. The injuries plaintiffs claim in their complaint are injuries that could be asserted by FLB's other fourteen shareholders. If plaintiffs are permitted to assert these claims, FLB could be subject to a multiplicity of similar actions by other shareholders.
Moreover, allowing plaintiffs to pursue the claims in the complaint could materially prejudice the FDIC, which is FLB's receiver. The FDIC has the responsibility for marshalling FLB's assets and distributing them to the creditors. 12 U.S.C.A. § 1822; Jones v. FDIC, 748 F.2d 1400, 1402 (10th Cir. 1984). Furthermore, if plaintiffs successfully pursue these claims, FLB's other shareholders will not receive any part of any recovery.
We conclude that the motion judge's decision not to treat plaintiffs' derivative claims as a direct action under Brown was a proper exercise of his discretion.
V.
Plaintiffs also argue that the trial court erred by dismissing their complaint with prejudice. Plaintiffs contend the court should not have precluded them from filing an amended complaint, with additional facts.
Whether a dismissal is with or without prejudice is vested in the discretion of the trial court, and is accordingly reviewed for abuse of discretion. James v. Bessemer Processing Co., 155 N.J. 279, 314 (1998). "Although a dismissal for lack of standing may involve considerations similar to those involved in a dismissal for failure to state a claim on which relief can be granted, the two types of dismissals are distinct." Watkins v. Resorts Int'l Hotel & Casino, 124 N.J. 398, 418 (1991).
"A dismissal for lack of standing, like one for lack of jurisdiction, amounts to a refusal by the court to resolve the matter." Ibid. On the other hand, a dismissal for failure to state a claim "occurs only after the court has agreed to resolve the controversy." Ibid. (citation omitted). Generally, a dismissal based on a court's "procedural inability to consider a case will not preclude a subsequent action on the same claim." Id. at 416 (citation omitted).
Standing amounts to a "threshold issue," which "neither depends on nor determines the merits of a plaintiff's claim." Id. at 417 (citing Allen v. Wright, 468 U.S. 737, 750-51, 104 S. Ct. 3315, 3324, 82 L. Ed. 2d 556, 569 (1984)). Rather, it is a "determination of the court's power to hear the case." Id. at 418 (citation omitted). However, a dismissal for lack of standing issued with prejudice, "constitutes an adjudication on the merits as fully and completely as if the order had been entered after trial." Velasquez v. Franz, 123 N.J. 498, 507 (1991) (citation omitted).
Here, the trial court found that plaintiffs lacked standing to assert the specific claims set forth in their complaint. While that determination was conclusive as to the claims and factual assertions in the complaint, the court erred by dismissing the action with prejudice, thereby precluding plaintiffs from filing a new complaint with other factual allegations that might warrant a different conclusion as to plaintiffs' standing.
Plaintiffs assert that, if given the opportunity, they would have filed an amended complaint with additional factual allegations that would establish special injuries necessary for pursuing a direct action against defendants. Plaintiffs state that when FLB failed, Haralambos and Yasemin Kostakopoulos lost their positions with the bank and also suffered harm to their reputations. They assert that they may be subject to certain claims by the FDIC, including claims for losses suffered by the Deposit Insurance Fund. They also assert that Crokos suffered personal damages since a merger of FLB and Hartford would have brought him "substantial, unique benefits."
In response, defendants note that plaintiffs' draft amended complaint, which was submitted to the trial court with the motion for reconsideration, merely set forth the same four causes of action that were asserted in the initial complaint. Defendants argue that the trial court correctly found that plaintiffs did not have standing to pursue those claims and plaintiffs' additional factual allegations would not change that result. Defendants further argue that plaintiffs should be estopped from re-litigating the standing issue.
We need not determine whether the additional facts set forth by plaintiffs would warrant a different conclusion on standing or whether plaintiffs should be estopped from re-litigating the standing issue. We merely hold that the court correctly determined that plaintiffs lacked standing to pursue their claims based on the factual allegations in the initial complaint, and that the court should have dismissed the complaint without prejudice rather than with prejudice.
In view of our decision, we need not consider plaintiffs' argument that the trial court erred by denying their motion for reconsideration.
Affirmed in part, reversed in part, and remanded to the trial court for entry of an amended order stating that plaintiffs' complaint is dismissed without prejudice. We do not retain jurisdiction. I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION