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Barnes v. Oldner

United States District Court, E.D. Arkansas, Western Division

April 13, 2017




         This case concerns a broken business relationship. James Barnes was the largest shareholder of Ozark Heritage Bank, as well as chairman of the board. He also borrowed large amounts of money from the bank. He is no longer a shareholder and no longer on the board. He has filed bankruptcy. In a far-reaching complaint, he blames the defendants, all of whom are board members, for his resignation as chairman, his departure from the board, the sale of his stock at a price that allegedly was below its fair market value, and his bankruptcy. The present issue is whether he has stated a claim for federal securities fraud. He has not.


         The following facts are taken from the first amended complaint. Ozark Heritage Bank was formed on March 3, 2009 pursuant to the Securities Act of 1933. As part of the initial public offering, the bank issued 537, 566 shares of registered common stock and separate preferred shares. Barnes owned 75, 000 shares of common stock-for which he paid $10.00 per share-and 17, 500 shares of preferred stock upon the close of the initial offering. This made him the largest individual shareholder. He was elected chairman of the board with 9, 800 options.

         J.T. Compton was and still is a member of the board. Barnes alleges that in mid-2012, J.T. Compton wanted to buy his common stock at $10.50 per share. The transaction hinged upon Barnes agreeing to resign from the board by no later than January 15, 2013, or the date he received the funds from the sale. Barnes declined. Then, in early 2013, J.T. Compton convinced a former board member-Carl Cooper-to return. Cooper had threatened to sue the bank during Barnes's tenure as chairman. The board voted to replace Barnes as chairman on April 21, electing J.T. Compton. Defendants Marnie Oldner, Kevin Compton, Nick Roach, and David Dunlap were voting members of the board at the time. On June 18, the board approved a resolution stating that the bank had been successful under Barnes's leadership and that Barnes had been an “untiring champion of the bank.” In July, the board told the Office of the Comptroller that given its healthy financial state, it planned for the first time to issue a dividend on its preferred stock. The bank issued a statement that the book value of common stock was $11.86.

         Barnes had borrowed a significant amount of money from the bank.[1] On August 12, the loan committee renewed a promissory note issued to James Barnes and Associates, Inc., in the principal amount of $597, 555.88. During this time Roach assisted Barnes in preparing his personal cash flow and financial statements. Barnes had also borrowed $250, 000 from J.T. Compton. Several board members co-signed a note with Barnes at Homebank of Arkansas so Barnes could repay him. The loan was secured by Ozark Heritage Bank stock. Barnes alleges that, with the knowledge that certain board members helped him repay Compton, Oldner sought advice on how to neutralize the votes of those board members. Oldner also told the Office of the Comptroller that there were “issues” with Barnes's loans. One of these issues involved the sale of cattle, which Barnes had offered as collateral to secure a loan with the bank. The board reported that Barnes sold the cattle and misappropriated the proceeds. Barnes, however, learned in 2013, that the bank's Farm Service Agency consultant and agricultural lender inspected the cattle, knew they had been sold consistent with the terms of the loan, and reported that information to Oldner and Roach.

         The board issued a resolution on September 17, 2013, which stated in part:

Whereas, recent activity with Mr. Barnes' deposit accounts with the Bank appear to management and the Bank's compliance expert from Bankers Assurance to strongly suggest check kiting . . .
* * *
Because of the sale of OHB-mortgaged collateral, apparent misrepresentation of information on his financial statements both at December 2012 and June 2013, as well as the fact that he has not been forthcoming to the board of directors regarding these matters, and because of the negative impact the public legal action pending against him by another financial institution has on OHB, we regretfully recommend to the Board of Directors that they approve a resolution requesting that James Barnes voluntarily resign his position as Director of Ozark Heritage Bank, N.A. . . .

Document #22-4. Barnes initially refused to voluntarily resign, even though the board told him that federal regulators demanded his removal. Then, J.T. Compton, Oldner, and Roach promised Barnes that they would “work with him” on his loans, if he resigned from the board. The board issued a superseding resolution on October 3, which called for Barnes's resignation by October 18. The superseding resolution replaced the reference to check kiting with “irregular activity.” Id. at 2. Barnes resigned effective on October 18, 2013.

         Barnes alleges that the defendants “forced” him off the board in mid-October. Shortly thereafter, on October 27, J.T. Compton e-mailed Barnes and stated that the bank was being “pressured” by the Office of the Comptroller regarding the status of Barnes's loans. Then, on November 4, J.T. Compton “contacted Barnes, suggesting he would loan Barnes funds to facilitate Compton's undisclosed purchase of Barnes's 75, 000 OHB shares, at $7.50/share . . .” Document #22 at 19, ¶76. Barnes agreed to sell his shares, but the sale was not “closed” until mid-to late 2014 and the shares were not transferred until late 2014. The defendants also pressured Barnes to sell his cattle farm. He sold the farm on December 28 for $1, 650, 000. Prior to that, on December 23, he executed a second mortgage on the farm under the threat of foreclosure. Barnes filed Chapter 12 bankruptcy on March 20, 2015.

         After Barnes was removed from the board, the bank sought a state charter. The bank also converted a substantial number of preferred shares to common stock, diluting the value of common stock to $8.23 per share. In May 2015, the bank issued a notice to shareholders that there would be a meeting to consider a proposal to convert to a state bank, adopt new articles, and change the name of the bank to “Stone Bank.” Those plans were not discussed during the time Barnes was a member of the board or prior to the time he sold his shares to J.T. Compton. By December, Ozark Heritage Bank had become Stone Bank, and J.T. Compton as chairman of the board delivered a notice to shareholders that there would be a meeting for the purpose of considering and voting on a plan of exchange agreement. Pursuant to the agreement, Stone Bancshares, Inc. would acquire all the outstanding common stock of Stone Bank, which would “facilitate future capital infusions.”

         Barnes commenced this action on October 14, 2016. He claims that the defendants concealed plans to secure a state charter, while lying to him and to federal regulators about the status of his loans with the bank so that he would sell his shares to J.T. Compton at a price below fair market value. The amended complaint includes five causes of action: (1) securities fraud in violation of federal law; (2) violation of the Arkansas Deceptive Trade Practices Act; (3) breach of fiduciary duty; (4) securities fraud in violation of Arkansas law; and (5) civil conspiracy.

         Three motions are pending before the Court. The first is a motion to dismiss for failure to state a claim pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) filed by the defendants other than Compton. Document #24. These defendants argue that the federal securities law claim is untimely and the complaint does not state a claim upon which relief can be granted. The second is a motion to dismiss pursuant to Rules 9(b) and 12(b)(6) filed by J.T. Compton making similar arguments. Document #26. The defendants also argue that the Court should decline to exercise supplemental jurisdiction over the remaining state law claims. The third is a motion to strike pursuant to Rule 12(f) filed by Barnes. Document #38. Barnes asks the Court to either strike J.T. Compton's reply, which includes documents outside the pleadings, or to convert the motion to dismiss into one for summary judgment pursuant to Rule 12(d). The Court will address these motions in reverse order. For the following reasons, all three motions are granted.


         Federal Rule of Civil Procedure 12(f) provides that “[t]he court may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” Rule 10(c) states: “A copy of a written instrument that is an exhibit to a pleading is a part of the pleading for all purposes.” Rule 12(d) provides that if on a motion under Rule 12(b)(6) “matters outside the pleading are presented to and not excluded by the court, then the motion must be treated as one for summary judgment under Rule 56.” J.T. Compton has attached documents to his reply to Barnes's response to his motion to dismiss. Document #37-1. He argues that the Court may consider the documents without running afoul of Rule 12(d) because they are referenced in the complaint, evidence the sale of Barnes's OHB shares, and dispute dates alleged in the complaint. Document #37 at 4.

         Documents that a defendant attaches to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff's complaint, are pertinent to his claim, and their authenticity is not questioned. Venture Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7th Cir. 1993) (collecting cases); Arnlund v. Smith, 210 F.Supp.2d 755, 760 (E.D. Va. 2002). See also 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure, § 1327 (3d. ed. 2017) (citing Sinclair Ref. Co. v. Stevens, 123 F.2d 186, 189 (8th Cir. 1941)). Because J.T. Compton attached the documents to the reply brief, rather than the motion to dismiss, the Court will not consider them in ruling on the motion to dismiss. It would be unfair to do so without giving Barnes an opportunity to respond and to dispute the authenticity of the documents. See Divane v. Nextiraone, LLC, No. 02 C 3899, 2002 WL 31433504 at *2 (N.D. Ill. Oct. 30, 2002). The Court will not convert the motion to dismiss to a motion for summary judgment in order to consider documents attached to a reply brief. As a general rule, courts do not address arguments received for the first time in a reply brief. Akeyo v. O'Hanlon, 75 F.3d 370, 374 n.2 (8th Cir. 1996); Cuningkin v. City of Benton, No. 4:05CV01130 JLH, 2007 WL 707343, at *4 (E.D. Ark. March 5, 2007); see also Adams v. City of Manchester, No. 4:11CV1309 TCM, 2012 WL 3242078, at *4 (E.D. Mo. Aug. 7, 2012) (“‘It is well settled that [the Court] do[es] not consider[ ] arguments raised for the first time in a reply brief.'” (quoting K.C. 1986 Ltd. P'ship v. Reede Mfg., 472 F.3d 1009, 1018 n.2 (8th Cir. 2007))). Barnes's motion to strike is granted. Because the Court has excluded the documents, J.T. Compton's motion to dismiss will not be treated as one for summary judgment.


         To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). Although detailed factual allegations are not required, the complaint must set forth “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). The Court accepts as true all of the factual allegations contained in the complaint and draws all reasonable inferences in favor of the nonmoving party. Gorog v. Best Buy Co., Inc., 760 F.3d 787, 792 (8th Cir. 2014). The complaint must contain ...

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