Olive et al v. Retail Properties of America, Inc. formerly known as Inland Western Retail Real Estate Trust et al
Filing
59
MEMORANDUM Opinion and Order:For the reasons discussed, the Individual Defendants and RPAIs motions to dismiss are granted. See Sadler, R. 80; Babin, R. 33; Schnierson, R. 35; Olive, R. 27; Jeffers, R. 48. Ameriprise's motion to dismiss is also granted. Jeffers, R. 47. The Sadler, Babin, Schnierson, and Olive cases are dismissed with prejudice. Counts I, II, IV, and VII of the Jeffers complaint are dismissed with prejudice. Counts III, V, and VI of Jeffers are dismissed without prejudice. The Jeffers Plaintiffs may file an amended complaint as to Counts III, V, and VI by July 10, 2014, should they be able to cure the deficiencies identified above. All motions for class certification are denied as moot. 7 Civil case terminated. Signed by the Honorable Thomas M. Durkin on 6/10/2014:Mailed notice(srn, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
LARRY SADLER, AS TRUSTEE OF THE
LARRY R. SADLER IRREVOCABLE TRUST,
individually and on behalf of all
others similarly situated,
)
)
)
)
)
Plaintiff,
)
)
v.
)
)
RETAIL PROPERTIES OF AMERICA, INC., et al., )
)
Defendants.
)
-------------------------------------------------------------- )
)
CHARLES BABIN, et al., on behalf of
themselves and all others similarly situated, )
)
Plaintiff,
)
)
v.
)
)
RETAIL PROPERTIES OF AMERICA, INC., et al., )
)
Defendants.
)
-------------------------------------------------------------- )
RON R. SCHNIERSON, individually and on
)
behalf of all others similarly situated,
)
)
Plaintiff,
)
)
v.
)
)
RETAIL PROPERTIES OF AMERICA, INC., et al., )
)
Defendants.
)
-------------------------------------------------------------- )
No. 12 C 5882
Judge Thomas M. Durkin
No. 12 C 6433
No. 12 C 6743
LOIS A. OLIVE LIVING TRUST DTD 6/25/02,
et al., individually and on behalf of all )
others similarly situated,
)
)
)
)
Plaintiff,
)
)
v.
)
)
RETAIL PROPERTIES OF AMERICA, INC., et al., )
)
Defendants.
)
-------------------------------------------------------------- )
)
FRANK JEFFERS, on his own behalf of and
on behalf of all those similarly situated,
)
)
Plaintiff,
)
)
v.
)
)
RETAIL PROPERTIES OF AMERICA, INC., et al., )
)
Defendants.
)
No. 12 C 8091
No. 12 C 8522
MEMORANDUM OPINION AND ORDER 1
This is a securities fraud action consisting of five related, individually-filed
putative class actions (Sadler, 12 C 5882; Babin, 12 C 6433; Schnierson, 12 C 6743;
Olive, 12 C 8091; Jeffers, 12 C 8522) against Retail Properties of America, Inc.
All citations include the particular case docket that contains the document, the
document’s record number, and the corresponding page or paragraph—e.g., the
Sadler complaint will be cited as “Sadler¸ R. 1 ¶ __.”
1
2
(“RPAI”), formerly known as Inland Western Real Estate Trust (“Inland Western”); 2
and certain officers and directors of RPAI: Angela M. Aman, Kenneth H. Beard,
Frank A. Catalano, Jr., Shane C. Garrison, Paul R. Gauvreau, Gerald M. Gorski,
Steven P. Grimes, Brenda G. Gujral, Richard P. Imperiale, James W. Kleifges,
Kenneth E. Masick, and Barbara A. Murphy (collectively, the “Individual
Defendants”). 3 The Jeffers case also includes counts against Ameriprise Financial
Services, Inc. (“Ameriprise”). Each of the cases arises out of the Individual
Defendants’ management and administration of RPAI, in addition to Ameriprise’s
role in procuring the sale of RPAI shares to its customers. The Defendants have
each filed motions to dismiss. See Sadler, R. 80; Babin, R. 33; Schnierson, R. 35;
Olive, R. 27; Jeffers, R. 47; R. 48. For the following reasons, the motions are
granted, and the cases are dismissed.
The Court will refer to the company as “Inland Western” for all factual allegations
prior to its name change to RPAI on March 8, 2012. The Court will refer to the
company as “RPAI” for all factual allegations after that date and all references to
the company as a defendant in this case.
2
The individual defendants listed in each complaint vary. The differences do not
affect the Court’s analysis, so the Court will collectively refer to the group when
referring to each complaint regardless of whether an individual is named in the
particular complaint.
3
3
BACKGROUND 4
I.
The Parties
RPAI, formerly known as Inland Western, is a Maryland corporation that
operates as a real estate investment trust (“REIT”). Sadler, R.1 ¶¶ 1-2, 12-13. It is
one of the largest owners and operators of shopping centers in the United States,
which includes stores such as Target, Best Buy, HomeDepot, and Kohl’s. Id. ¶¶ 2,
12, 28. At all relevant times, RPAI’s Board consisted of either eight or nine
directors: Beard, Catalano, Gauvreau, Gorski, Grimes, Gujral, 5 Imperiale, Masick,
and Murphy. Babin R.1 ¶¶ 12-20. Seven members of the Board were independent
directors: Beard, Catalano, Gauvreau, Gorski, Imperiale, Masick, and Murphy.
Olive, R. 1 ¶¶ 20-26.
As an REIT, RPAI combines the capital of many investors to own and operate
income-producing real estate locations. Sadler, R.1 ¶ 13. Prior to the public offering
on April 5, 2012, when RPAI became listed on the New York Stock Exchange (the
“2012 Offering,” discussed below), “Inland Western was a public unlisted REIT,
The Court may consider RPAI’s prospectuses and other relevant SEC and publiclyfiled documents in its ruling on the motion to dismiss, even if they are not referred
to in the complaints. See Garden City Emps.’ Ret. Sys. v. Anixter Int’l, Inc., No. 09 C
5641, 2011 WL 1303387, at *8 (N.D. Ill. Mar. 31, 2011); Seidel v. Byron, 405 B.R.
277, 284-85 (N.D. Ill. 2009); Abrams v. Van Kampen Funds, Inc., No. 01 C 7538,
2002 WL 1160171, at *2 (N.D. Ill. May 30, 2002); see also Wigod v. Wells Fargo
Bank, N.A., 673 F.3d 547, 556 (7th Cir. 2012) (stating that a court may “consider
public documents and reports of administrative bodies that are proper subjects for
judicial notice, though caution is necessary, of course”).
4
Babin alleges that Gujral resigned as a director, effective May 31, 2012. Babin, R.
4 ¶ 18.
4
5
meaning that, (1) it was public because it was registered with the SEC, could sell to
the investing public rather than only to ‘qualified investors,’ and was required to file
reports with the SEC; and (2) it was unlisted because its securities were not listed
on a national stock exchange.” Id. ¶ 14. These types of shares are referred to as
“non-traded REITs.” Jeffers, R. 21 ¶ 10. Generally, an investor in non-traded REITs
will look to hold the shares for a certain term (according to the complaints, for five
to seven years), with the expectation that that the shares will eventually be listed
on a national securities exchange. Id. If the investor seeks to sell the non-traded
REITs before the term of investment expires, the person must resell his shares to
the REIT’s sponsor or through the secondary market which lacks a definite price
point. Id. ¶ 11.
Ameriprise is a nationwide financial planner, advisor, and broker dealer of
securities operating under the regulations of the Financial Industry Regulatory
Authority (“FINRA”). Id. ¶ 45. It employs financial planners across the country who
charge fees for investing the money of its clients. Id. ¶¶ 18-19. Jeffers alleges that
Inland Western, and later RPAI, paid certain compensation to Ameriprise in return
for Ameriprise “pushing” investors to invest in the Inland Western REIT in 2004
and 2005, as discussed below. Id. ¶¶ 14, 26. The Jeffers Plaintiffs further allege that
Ameriprise’s clients have purchased approximately $1.1 billion of Inland Western
stock. Id. ¶ 71.
The Plaintiffs are shareholders of RPAI who purchased their shares
sometime between 2004 and 2012. Some allege that they purchased shares in either
5
2004, 2005, or both years. 6 See Sadler, R. 1 ¶ 11; Schnierson, R. 1 ¶ 11; Olive, R. 1 ¶
12; Jeffers, R. 21 ¶ 37. Others contend that they purchased shares through RPAI’s
Distribution Reinvestment Program (“DRP”) sometime before April 5, 2012. See
Sadler, R. 1 ¶ 11; Babin, R. 4 ¶ 59. This means they received additional shares of
the company’s stock instead of receiving a distribution. The Jeffers Plaintiffs were
“advised or counseled by Ameriprise” to purchase shares of the REIT. Jeffers, R. 21
¶ 57.
II.
The Factual Allegations
RPAI, through two public offerings (one in 2004, the other in 2005) and a
merger in 2007, issued 459,484,000 shares of “common stock” at $10.00 per share.
Sadler, R.1 ¶ 29. This resulted in gross proceeds, including consideration from the
merger, of $4,595,193,000. Id. As of December 31, 2011, RPAI had also issued
shares through its DRP, which included 77,126,000 shares at prices from $6.85 to
$10.00 per share resulting in gross proceeds of $719,799,000. Id. Additionally, from
2004 to the end of 2011, RPAI repurchased a total of 43,823,000 shares through its
Share Repurchase Program (“SRP”) at prices ranging from $9.25 to $10.00 per
share, for a total cost of $432,487,000. Id. According to the Plaintiffs, as of
December 31, 2011, RPAI had total shares outstanding of 483,822,000 and had
realized total net offering proceeds of $4,882,572,000. Id. The Plaintiffs as a whole
Each of the cases includes a motion for class certification. For convenience, the
Court will refer to all of the named plaintiffs and the proposed classes as the
“Plaintiffs.” When it is necessary to distinguish between cases and classes, the
Court will refer to those plaintiffs with the case name first—e.g., the Sadler
Plaintiffs.
6
6
allege that they purchased Inland Western stock outright sometime in 2004 or
2005, or through the DRP.
Inland Western began having cash problems in 2008 and early 2009,
eventually defaulting on six mortgage loans totaling $54,900,000 in May 2009. Id. ¶
32. As a result, the Board voted to suspend the SRP, effective November 19, 2008.
Id. ¶¶ 29, 31. In March 2009, Inland Western slashed its dividends by 90%. Id. ¶ 31.
At that point, the only way for shareholders to sell their shares was in an allegedly
“extremely thinly traded secondary market” or to accept the “occasional tender
offer” from other companies. Id. ¶ 33.
On November 29, 2009, Inland Western transferred a portfolio of entities that
owned 55 investment properties into “IW JV, a wholly-owned subsidiary of Inland
Western.” Id. ¶ 36. Inland Western then sought additional capital of $50 million
from Inland Equity, a related party, in connection with a $625 million debt
refinancing transaction involving J.P. Morgan Chase Bank. Id. ¶ 37. Inland Equity
received a 23% non-controlling interest in IW JV from the deal. Id.
On December 21, 2009, CMG Acquisition Co., LLC (“CMG”), 7 an unaffiliated
third party, submitted a mini-tender offer 8 to Inland Western’s stockholders,
offering $1.50 per share. Jeffers, R. 21 ¶ 65. Inland Western recommended that its
Any affiliate company of CMG Acquisition—e.g., CMG Partners—will also be
referred to as “CMG.”
7
A mini-tender offer is an offer to purchase less than 5% of a company’s issued
stock directly from current investors.
8
7
stockholders reject the offer because it was “substantially below [its] December 31,
2009 estimated value of $6.85 per share.” Id. ¶¶ 66-67. Inland Western confirmed
its $6.85 “estimated value” for the shares in its Form 8-K filing with the SEC
approximately one month later on January 15, 2010, though it noted that the
“estimated value may not reflect the actual market value of [the] shares on any
given date.” Id. ¶ 67; Sadler, R. 1 ¶ 33.
Inland Western issued an SEC Form DEF 14A proxy statement 9 on
December 8, 2010, informing shareholders of a special meeting being held on
February 24, 2011, and asking them to “approve an amendment and restatement of
the Company’s charter in conjunction with the initial listing of the Company’s
common stock.” Sadler, R. 1 ¶ 41. In an effort to create liquidity for the stock,
Inland Western stated that it intended to pursue an “initial listing of [its] existing
stock within the next 12 months” and that “an exchange listing [would] better
prepare the Company for future growth.” Id. ¶ 42. The Plaintiffs allege that Inland
Western was struggling with its outstanding debt and facing pressure from its
creditors and, thus, “looked to the listing as a means to avoid default and multiple
foreclosures.” Id. ¶ 43.
The proxy statement also described what it called the “phased-in liquidity
program” and a “Class B stock dividend grant” in which each share existing prior to
An SEC Form DEF 14A is a form under Section 14(a) of the Securities Exchange
Act of 1934 that that must be filed with the SEC when a shareholder vote on a
particular issue is required.
8
9
the 2012 Offering would be split into four shares. Id. ¶ 44. The Proxy Statement
included the following information:
Q. How many shares of stock will I own after the implementation of the
phased-in liquidity program?
A. The number of shares that you will own will depend on the type of
phased-in liquidity program that we implement. As an example, assume that you
currently own 100 shares of our common stock. The following diagrams illustrate
what would occur if we implemented the phased-in liquidity program that we
currently anticipate.
Phased-In Liquidity Program:
Shares Owned After Phased-In Liquidity Program:
9
Id. ¶ 44. Shareholders were further informed that the program would have “no
effect” on their proportional interest in Inland Western because it would affect all
holders in the same manner. Id. ¶¶ 44-45.
Inland Western filed another SEC Form DEF 14A proxy supplement with the
SEC in January 4, 2011, which discussed the potential of a reverse stock split. Id. ¶
46. This stock split was a part of Inland Western’s recapitalization plan (the
“Recapitalization”). Jeffers, R. 21 ¶ 70. The reverse stock split would be at a 10-to-1
ratio and affect all shareholders equally. Id. Its intended purpose was to reduce
Inland Western’s outstanding shares as of December 1, 2010, from 486,345,479 to
48,634,547.9. Sadler, R. 1 ¶ 46. Additionally, the supplement stated that the split
would have “no effect” on the aggregate value of the shareholder’s shares of common
stock. Id. The supplement included the following illustrative example of the split:
Q. How many shares of stock would I own after the implementation of a reverse
stock split and the phased-in liquidity program?
A. The number of shares that you would own will depend on the size of the reverse
stock split and the type of phased-in liquidity program that we implement. As
an example, assume that you currently own 1,000 shares of our common stock and
assume that these shares are worth $6.85 per share. The following diagrams
illustrate what would occur if we implemented a 10 to one reverse stock split and
the phased-in liquidity program that we currently anticipate.
Step 1: Reverse Stock Split:
10
Step 2: Phased-In Liquidity Program:
Shares Owned After Reverse Stock Split and Phased-In Liquidity Program:
Id. ¶ 47. According to the Plaintiffs, based on that information, Ameriprise “applied
a valuation of $17.375 to [Inland Western’s] shares in its communications with
clients based on the representations of Inland REIT and the Inland REIT Board.”
Jeffers, R. 21 ¶ 71.
Inland Western filed another Form 8-K with the SEC on February 7, 2011,
amending its credit agreements with KeyBank National Association and JPMorgan
11
Chase Bank, N.A., “to provide a senior secured credit facility in the aggregate
amount of $585 million.” Sadler, R. 1 ¶ 49. In a Form S-11 Registration Statement
(the “Registration Statement”) filed a week later on February 14, Inland Western
explained that “more than 5% of the net proceeds of [the] offering [were] intended to
be used to repay amounts owed” to the underwriters, id. ¶ 50, $210 million of the
net proceeds of the offering were to pay down its “senior secured revolving line of
credit,” and the remaining net proceeds would be for “general corporate and
working capital purposes.” Id. ¶ 51. Stockholders approved the amendment and
restatement of Inland Western’s charter at the meeting on February 24. According
to the Jeffers complaint, “94.8% of Inland Western’s stockholders voted in favor of
the Recapitalization and pursuing a public listing of [Inland Western’s] shares.”
Jeffers, R. 21 ¶ 71.
On March 1, 2011 the SEC sent a letter to Inland Western requesting more
detail regarding the Registration Statement. Sadler, R. 1 ¶¶ 54-55. In response,
Inland Western filed a Form S-11/A on April 29, 2011, in which it again described
the Recapitalization and provided additional details regarding its plan to satisfy its
debt. Id. ¶¶ 54-57.
On May 27, 2011, CMG made a second mini-tender offer of $3.00 per share to
Inland Western’s shareholders; Inland Western again recommended that its
shareholders reject the offer. Id. ¶ 58. Inland Western increased the estimated
value of its shares from $6.85 to $6.95 (before taking into account the reverse stock
split) in another Form 8K filed with the SEC on June 20, 2011, though it noted that
12
“[n]o independent appraisals [of the shares] were obtained.” Id. ¶ 59. CMG made a
third mini-tender offer on October 27, 2011, for $3.50 per share. Id. ¶ 60. 10 Inland
Western recommended for a third time that its shareholders reject the offer,
“pointing out that in the thinly-traded secondary market, trades had been reported
in the range of $4.08 and $6.00 per share.” Id. The letter stated in part:
We are aware that you may have received an unsolicited mini-tender offer by
CMG Partners (“CMG”) dated October 27, 2011 to purchase up to 1,000,000
shares of Inland Western Retail Real Estate Trust, Inc. (“Inland Western”) for a
price of $3.50 per share, less the amount of any distributions paid to you on or
after December 12, 2011. CMG and its offer are not affiliated with Inland
Western.
The Inland Western Board of Directors has unanimously determined that the offer
is not in the best interests of the stockholders, as the Board of Directors believes
that the value of Inland Western shares exceeds the offer price. Although each
stockholder has his or her individual liquidity needs and must evaluate the offer
accordingly, the Board of Directors does not recommend or endorse CMG’s
mini-tender offer and suggests that stockholders reject the offer and not tender
their shares pursuant to the offer. If you wish to reject the offer and retain your
shares, no action is necessary.
Schnierson, R. 1 ¶ 39 (emphasis in original).
Inland Western sent another letter to its shareholders on February 28, 2012,
explaining that shares could be purchased through the DRP on or after March 31,
2012, for $5.75 per share. Sadler, R. 1 ¶ 63. On March 6, 2012, Inland Western filed
a “presentation” in a Form FWP, 11 entitled “Anticipated NYSE Listing &
The mini-tender offers from December 21, 2009; May 27, 2011; and October 27,
2011, will be referred to collectively as the “mini-tender offers.”
10
An FWP is a filing under Securities Act Rules 163/433 of Free Writing
Prospectuses.
13
11
Concurrent Equity Offering,” which explained the 2012 Offering and the results of
the reverse stock split:
In preparation for a potential listing, the Company will effectuate a reverse
stock split and a stock dividend to existing shareholders.
Rationale:
•
The rationale for the reverse stock split is to reduce the amount of
shares outstanding and reset the price per share. On a stand-alone
basis, the reverse stock split will have no impact on the aggregate
value of the Company or any individual shareholder’s percentage
ownership of the Company’s common stock.
•
The rationale for the stock dividend is to provide for the Company’s
phased-in liquidity program, which has been designed to assist in the
creation of an orderly and liquid trading market for our shares postlisting.
o All of our shares of common stock will be converted
into listed shares within 18 months of the initial listing.
Reverse stock split
A reverse stock split is a combination of all of our outstanding shares of
common stock into a fewer number of shares.
This will affect all shareholders in the same manner - on a stand-alone
basis, the reverse stock split will have no effect on the aggregate value of
the Company, your proportional ownership interest in the Company, your
voting rights, your right to receive dividends (if and when declared), the
total amount of your dividends (if and when declared), or your rights upon
liquidation.
Example:
10 to one reverse stock split
= 100,000/10
100,000 shares Common Stock
482MM shares outstanding
= .0207% ownership
10,000 shares Common Stock
48.2MM shares outstanding
= .0207% ownership
Id. ¶ 64 (underlining in original). The filing also described the expectation to
become a company with “liquidity for its shareholders,” “greater potential for access
14
to multiple sources of capital,” and “an expanded ability to prudently grow the
Company and potentially create additional shareholder value over time.” Id.
Inland Western changed its name to RPAI two days later on March 8, 2012.
Id. ¶ 65. On March 20, 2012, RPAI followed through with the 10-to-1 reverse split,
paying “a stock dividend of Class B-1 through B-3 common stock” on March 21. Id.
¶¶ 66-67. All of this was announced in RPAI’s amended Registration Statement
filed on March 23, 2012. Id. ¶ 68. The statement also revealed that the price per
share for the 31,800,000 shares of Class A Common Stock offered in the 2012
Offering would be between $10.00 and $12.00, which was below the $17.125
estimated value that was presented to the shareholders before the February 24,
2011 vote. Id. ¶ 69. The shareholders were subsequently informed that 100% of the
net proceeds from the 2012 Offering would be used to pay down RPAI’s debt and
repurchase its full interest in IW JV. Id. ¶ 70. On March 29, 2012, RPAI
recommended that its shareholders reject another tender offer made by CMG on
March 16, 2012, this time for $3.00 per share, a reduction of $0.50 per share from
its last mini tender offer on October 27, 2011. Id. ¶ 71. The Plaintiffs allege that on
March 21, 2012, contrary to the information in the amended Registration Statement
from March 23, 2012, RPAI and the Individual Defendants represented to
Ameriprise that “’there was no material change in the REIT’s financial condition
and essentially agreed it was reasonable for Ameriprise to use the $17.375 value” of
the shares when presenting the 2012 Offering to its clients. Jeffers, R. 21 ¶ 71
(internal quotation marks omitted).
15
RPAI filed a prospectus with the SEC on April 5, 2012, which included an
offering price of $8.00 per share, $2.00 to $4.00 less than what it had listed in its
March 23 amended Registration Statement and approximately $9.00 less than the
$17.125 price discussed in its January 4, 2011 proxy supplement. Sadler, R. 1 ¶ 72;
Jeffers, R. 21 ¶ 73. The Plaintiffs allege that as a result of the $8.00 value in the
2012 Offering, “[t]he combined investments totaling $4,595,193,000 collected by
Inland Western through two public offerings . . . and a merger consummated in
2007, were . . . worth only $1,470,461,760—a loss of over $3 billion.” Sadler, R. 1 ¶
74. RPAI explained the $8.00 per share public offering price in a Form 8-K filed on
April 12, 2012, as follows:
9. How was the public offering price of $8.00 per share determined?
The offering was marketed to the investing public. RPAI launched its public
offering on March 23, 2012 and met with potential investors across the
country to solicit interest for the public offering leading up to the pricing of the
public offering on April 4, 2012. In connection with the pricing of the public
offering, the underwriters engaged in a book building process, pursuant to
which they solicited indications of interest from potential investors.
Interested investors provided the underwriters with an indication of the
number(s) of shares and price(s) at which they would be interested in
participating in the offering. The pricing of the public offering was agreed
upon by RPAI and the underwriters based on the indications of interest that
were received from potential investors. The ultimate offering price represented
a price at which RPAI believed it could successfully complete the offering in a
manner that achieved its goals in pursuing the concurrent public offering and
listing of its Class A Common Stock.
10. Why did the public offering price differ from the estimated pershare value as of March 31, 2011?
The processes by which the public offering price and the estimated pershare value were determined were significantly different, as noted above.
Differences would be expected as a result of the fact that the public offering
represented the market’s current valuation of the acquisition of a noncontrolling interest in a newly listed public company by dispersed investors.
Furthermore, as noted at the time the estimated per-share value was first
16
published, this number was “only an estimate and may not reflect the actual
value of our shares of common stock or the price that a third party may be
willing to pay to acquire our shares.” Lastly, the public offering price also
reflected the impact of the recent reverse split and stock dividend. The estimated
per-share value as of March 31, 2011 had not reflected these transactions.
Id. ¶ 75.
The Plaintiffs allege that as a result of the 2012 Offering, “investors, some of
whom had originally bought into the REIT at prices as high as $10 per share saw a
decline in value of more than 70% when taking into account that the actual split
adjusted value of the stock is less than $3 per share.” Jeffers, R. 21 ¶ 75. In other
words, the Plaintiffs allege that RPAI, “which had been selling pre-split shares to
its own shareholders for $6.95 a share as late as February 2012[,] was forced to
acknowledge that on the open market its shares could fetch less than half [of] what
[it] had been charging for them—a mere $3.20 a share.” Babin, R. 4 ¶ 53.
On May 8, 2012, RPAI informed its shareholders in a letter that there was a
pending SEC investigation. 12 Schnierson, R. 1 ¶ 46. The letter said:
The Company has learned that the SEC is conducting a non-public, formal, factfinding investigation to determine whether there have been violations of certain
provisions of the federal securities laws regarding the business manager fees,
property management fees, transactions with affiliates, timing and amount of
distributions paid to investors, determination of property impairments, and any
decision regarding whether the Company might become a self-administered
REIT. The Company has not been accused of any wrongdoing by the SEC.
Id.
The Court has not been informed of any updates or further developments
regarding the SEC investigation.
17
12
III.
Procedural Posture
The Plaintiffs filed lawsuits complaining of the losses they allege to have
sustained as a result of the events previously described. The Sadler case was the
first case filed, which occurred on July 26, 2012. The Babin case was filed on
October 14, 2012, the Schnierson case on October 22, the Olive case on October 10,
and the Jeffers case on October 23. Judge Joan B. Gottschall determined that the
four subsequently-filed cases were related to the Sadler case, and thus, they were
all reassigned to her. Sadler, R. 78 at 3. The cases were later transferred to the
undersigned Judge. Id., R. 72. Counsel for RPAI and the Individual Defendants
filed a motion to dismiss on April 19, 2013, addressing each of the five cases. E.g.,
id., R. 80. Counsel for Ameriprise, which is only a defendant in the Jeffers case, also
filed a motion to dismiss. Jeffers, R. 47.
LEGAL STANDARD
A Rule 12(b)(6) motion challenges the sufficiency of the complaint. See, e.g.,
Hallinan v. Fraternal Order of Police of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th
Cir. 2009). A complaint must provide “a short and plain statement of the claim
showing that the pleader is entitled to relief,” Fed. R. Civ. P. 8(a)(2), sufficient to
provide defendant with “fair notice” of the claim and the basis for it. Bell Atl. Corp.
v. Twombly, 550 U.S. 544, 555 (2007). This standard “demands more than an
unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009). While “detailed factual allegations” are not required, “labels
and conclusions, and a formulaic recitation of the elements of a cause of action will
18
not do.” Twombly, 550 U.S. at 555. The complaint must “contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”
Ashcroft, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570). “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.”
Mann v. Vogel, 707 F.3d 872, 877 (7th Cir. 2013) (quoting Iqbal, 556 U.S. at 678). In
applying this standard, the Court accepts all well-pleaded facts as true and draws
all reasonable inferences in favor of the non-moving party. Mann, 707 F.3d at 877.
Additionally, claims sounding in fraud are subject to a more stringent
pleading requirement. Federal Rule of Civil Procedure 9(b) requires plaintiffs
alleging fraud to state “with particularity” the circumstances constituting fraud. See
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (noting that
plaintiffs in securities fraud cases must “state with particularity both the facts
constituting the alleged violation, and the facts evidencing scienter, i.e., the
defendant’s intention ‘to deceive, manipulate, or defraud’” (quoting Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193 (1976))). “In other words, Plaintiffs need[] to plead
‘the identity of the person who made the misrepresentation, the time, place[,] and
content of the misrepresentation, and the method by which the misrepresentation
was communicated to the [Plaintiffs].’” Gandhi v. Sitara Capital Mgmt., LLC, 721
F.3d 865, 870 (7th Cir. 2013) (quoting Windy City Metal Fabricators & Supply, Inc.
v. CIT Tech. Fin. Servs., Inc., 536 F.3d 663, 668 (7th Cir. 2008)) (second and third
alternations in Gandhi). This encompasses the “‘who, what, when, where, and how’
19
of the fraud, although the exact level of particularity that is required will
necessarily differ based on the facts of the case.” AnchorBank, FSB v. Hofer, 649
F.3d 610, 615 (7th Cir. 2011) (quoting Pirelli Armstrong Tire Corp. Retiree Med.
Benefits Trust v. Walgreen Co., 631 F.3d 436, 441-42 (7th Cir. 2011)).
ANALYSIS 13
The five complaints contain a number allegations concerning why the
Plaintiffs are entitled to relief. These claims include breach of fiduciary duty, aiding
and abetting a breach of fiduciary duty, unjust enrichment, a violation of the Illinois
Securities Law of 1953 (“ISL”), violation of certain FINRA regulations, and a
request for the imposition of a constructive trust. The Court will address each group
of claims in turn. In doing so, the Court will apply Maryland law to the breach of
fiduciary duty, aiding and abetting, unjust enrichment, and constructive trust
claims against RPAI and the Individual Defendants because RPAI is incorporated
and operates in Maryland, and that is essentially where the claims against it
allegedly occurred. The Court will apply Illinois law to the claims against
Ameriprise for similar reasons. The parties do not dispute these choice of law
decisions.
RPAI and the Individual Defendants divide the cases into three categories:
Sadler—the “Listing Complaint”-; Babin—the “DRP Complaint”; and Olive,
Schnierson, and Jeffers—the “Mini-Tender Complaints.” When appropriate, the
Court will apply overlapping reasoning from one group to the other.
13
20
I.
Breach of Fiduciary Duty
A.
Individual Defendants: Sadler – Count I; Babin – Count I;
Schnierson – Count I; Olive – Count I; Jeffers – Count I
Each of the five cases includes a count for breach of fiduciary duty against the
Individual Defendants. The complaints include allegations that the Individual
Defendants “caus[ed] or allow[ed] [RPAI] to disseminate materially misleading and
inaccurate information to its shareholders,” Jeffers, R. 21 ¶ 96; “failed to exercise
due care to prevent the disastrous Recapitalization and 2012 Offering which
substantially diluted the value of the pre-2012 Offer holdings,” Sadler, R. 1 ¶ 94;
and “set[] the price at which RPAI sold shares to existing shareholders pursuant to
the DRP at an inflated level,” Babin, R. 1 ¶ 69.
Section 2-401(a) of the Maryland Corporations and Associations Article states
that “[t]he business and affairs of a corporation shall be managed under the
direction of a board of directors.” Md. Code Ann., Corps. & Ass’ns § 2-401(a). Section
2-405.1, entitled “Standard of care required of directors,” describes the duty of care
directors and officers owe when undertaking those managerial decisions. It
provides:
(a) A director shall perform his duties as a director, including his
duties as a member of a committee of the board on which he serves:
(1) In good faith;
(2) In a manner he reasonably believes to be in the best interests
of the corporation; and
(3) With the care that an ordinarily prudent person in a like
position would use under similar circumstances.
21
§ 2-405.1(a); see Shenker v. Laureate Educ., Inc., 983 A.2d 408, 419 (Md. 2009).
Additionally, in Shenker, the Maryland Supreme Court held for the first time since
the codification of § 2-405.1 that corporate directors may owe additional fiduciary
duties to shareholders when the directors are acting outside the scope of their
managerial duties, including the duties of candor and maximization of shareholder
value. 983 A.2d at 419-20. An example of when directors are acting outside the
scope of managerial duties is when they are “negotiating the price that shareholders
will receive for their shares in a cash-out merger transaction.” Id. at 414. In that
situation, the corporate directors “remain directly liable to the shareholders for any
breach of fiduciary duty,” as opposed to when a claim is brought pursuant to the
duties set forth in § 2-405.1(a). Id (emphasis added).
Claims that are brought pursuant to the duties codified in § 2-405.1(a) belong
to the corporation and may only be brought in a derivative action. See § 2-405.1(g)
(“Limitation on enforceability. — Nothing in this section creates a duty of any
director of a corporation enforceable otherwise than by the corporation or in the
right of the corporation.”); Shenker, 983 A.2d at 424. Thus, only claims based on
fiduciary duties not codified in § 2-405.1(a), as well as claims that allege harms that
are separate and distinct from any to the corporation, may be brought in a direct
cause of action against corporate directors. Additionally, if a claim is based on a
duty found § 2-405.1(a), then the business judgment rule applies, and corporate
directors are afforded a presumption of reasonableness in their actions. See 222
405.1(e) (“Presumption of satisfaction. — An act of a director of a corporation is
presumed to satisfy the standards of [§ 2-405.1(a)]). On the other hand, if a common
law fiduciary duty forms the basis of a shareholder’s claim—one not codified in § 2405.1(a)—then the business judgment rule does not apply.
The Individual Defendants describe a number of reasons why the breach of
fiduciary duty claims against them should be dismissed, including that they did not
owe certain fiduciary duties to the Plaintiffs, the Plaintiffs lack standing, the claims
are barred under § 2-405.1(g), and the complaints fail to rebut the presumption that
their actions were reasonable under the business judgment rule. Courts have
dismissed breach of fiduciary claims under Maryland law for all of these reasons.
See, e.g., Allyn v. CNL Lifestyle Props., Inc., No. 13-cv-132, 2013 WL 6439383, at *36 (M.D. Fla. Nov. 27, 2013) (dismissing the claims because the plaintiff failed to
rebut the business judgment rule); Becker v. Inland Am. Real Estate Trust, Inc., No.
13 C 3128, 2013 WL 6068793, at *4-6 (N.D. Ill. Nov. 18, 2013) (concluding that only
the duties in § 2-405.1(a) applied and dismissing the case because the plaintiff
failed to rebut the business judgment rule); Seidl v. Am. Century Cos., 713 F. Supp.
2d 249, 261-62 (S.D.N.Y. 2010) (dismissing the claims because the plaintiff lacked
standing to bring a direct suit against the corporate directors). The courts’ divergent
paths are due to the relative recency of Shenker, undeniably the seminal case on
Maryland breach of fiduciary duty claims. The Court here will address what
fiduciary duties were owed to the Plaintiffs, whether the Plaintiffs have standing to
bring the claims, and finally, when applicable, whether the Plaintiffs have set forth
23
sufficient allegations to overcome the business judgment rule as codified in § 2405.1(e).
1. Fiduciary Duties Owed to the Plaintiffs
Each of the five complaints refers to the duty to “maximize shareholder
value” or the duty of “candor.” See Sadler, R. 1 ¶ 94; Babin, R. 4 ¶¶ 68-69;
Schnierson, R. 1 ¶ 49; Olive, R. 1 ¶ 69: Jeffers, R. 21 ¶ 96. Neither of these duties is
codified in § 2-405.1(a). See Shenker, 983 A.2d at 420-22. The Individual Defendants
contend that the transactions at issue here did not implicate these additional
duties. There is no debate that the Plaintiffs allegations do not arise from a change
of control or cash-out merger transaction, which was the factual event underlying
the Shenker decision. Indeed, most of the courts that have interpreted Shenker have
held that the duties outside § 2-405.1(a) only arise in a “change of control”
transaction. See Stender v. Caldwell, No. 07-cv-02503-REB-MJW, 2010 WL
1930260, at *4 (D. Colo. May 12, 2010) (explaining that Shenker arises in “a very
narrow context—specifically, that of a cash-out merger when the decision to sell the
corporation already has been made”); Consortium Atl. Realty Trust, Inc. v. Plumbers
& Pipefitters Nat’l Pension Fund, No. 365879-V, 2013 WL 605865, at *6 (Md. Cir.
Ct. Feb. 5, 2013) (“Shenker is limited, until the Court of Appeals says otherwise, to
‘a cash-out merger when the decision to sell the corporation has already been
made.’” (quoting J. HANKS, MARYLAND CORPORATION LAW § 6.6A at 192 (2012
Supplement)); In re Nationwide Health Props., Inc., S’holder Litig., No. 24-C-11001476, 2011 WL 10603183, at *7 (Md. Cir. Ct. May 27, 2011) (“This Court has
24
found no support in Shenker, or in any of the other authorities cited by Plaintiffs, to
impose the duty to maximize shareholder value outside of a ‘cash-out’ or change of
control situation—that is, a change of control merger that effectively eliminates the
shareholders’ interests in the target company.”).
The court in Becker examined the reasoning behind the Shenker decision,
stating the relevant question was whether the director defendants were “acting in a
managerial capacity” when establishing the price per share to be sold. Becker, No.
2013 WL 6068793, at *4. If they were acting in a managerial capacity, then only the
duties under 2-405.1(a) applied. The court went on to determine that § 2-405.1(a)
applied. See id. (“The Prospectus made it perfectly clear that the price set by the
Board was at best an estimate; that the real value could be higher or lower than the
established price. It would appear, therefore, that in setting the share sale price the
Board Defendants owed Plaintiffs only the obligations set forth in § 2-405.1.”).
The Plaintiffs’ rely on Parish v. Maryland & Virginia Milk Producers
Association, Inc., 242 A.2d 512, 539 (Md. 1968), to argue that a duty of disclosure
and candor was implicated in the transactions at issue here. But Parish was
decided long before the codification of § 2-405.1 and before Shenker—the standard
for breach of fiduciary claims under Maryland law—was decided. As such, the only
duties the Individual Defendants owed to the Plaintiffs in circumstances that did
not include a “change of control” are those elucidated in § 2-405.1, i.e., the duties of
good faith, loyalty, and care. See, e.g., Hohenstein v. Behringer Harvard Reit I, Inc.,
No. 3:12-CV-4842-G, 2014 WL 1265949, at *5 (N.D. Tex. Mar. 27, 2014) (“To date,
25
Shenker’s holding has been limited to its narrow set of circumstances, and courts
have not imposed a fiduciary duty of candor in other situations.”). The complaints
do not allege a change of control situation here, so only the duties set forth in §
405.1(a), which are subject to the business judgment, apply.
2. Standing
The Individual Defendants also maintain that the Plaintiffs lack standing to
bring these claims because the duties in § 2-405.1(a) are only enforceable “by the
corporation or in the right of the corporation.” § 2-405.1(g). They argue that the
claims are barred because the Plaintiffs brought this as an individual action, as
opposed to a derivative action on behalf of the corporation. Few courts have decided
a motion to dismiss on the ground that the claim is barred under § 2-405.1(g),
instead choosing to focus on the allegations in light of the presumption of
reasonableness afforded to the actions of corporate directors. Compare Seidl, 713 F.
Supp. 2d at 256-57 (dismissing the breach of fiduciary duty claim because it
belonged to the corporation, pursuant to § 2-405.1(g)), with Allyn, 2013 WL
6439383, at *3-6 (dismissing the claim because the plaintiff’s failed to provide
factual allegations rebutting the business judgment rule); and Becker, 2013 WL
6068793, at *4-6 (same). In fact, in Jolly Roger Fund LP v. Sizeler Property
Investors, Inc., No. Civ. RDB 05-841, 2005 WL 2989343, at *4-6 (D. Md. Nov. 3,
2005), a case involving a direct suit against the company and its directors, the court
did not even address § 2-405.1(g), only looking to whether the shareholders had
suffered a direct injury and then concluding they had not. This was similar to the
26
approach taken in Danielewicz v. Arnold, 769 A.2d 274, 282-83 (Md. Ct. Spec. App.
2001), a case involving a lawsuit brought individually and derivatively, in which the
court of special appeals affirmed the trial court’s dismissal of the breach of fiduciary
duty claims without addressing § 2-405.1 at all—let alone § 2-405.1(g).
The Plaintiffs contend they have standing despite the application of § 2405.1(g) because shareholders may bring a direct suit when the harm they suffered
is separate and distinct from any harm to the corporation. See Mona v. Mona Elec.
Group, Inc., 934 A.2d 450, (Md. Ct. Spec. App. 2007) (“A shareholder may bring a
direct action . . . [when] he has suffered ‘an injury that is separate and distinct from
any injury suffered either directly by the corporation or derivatively by the
stockholder because of the injury to the corporation.’” (quoting James J. Hanks, Jr.,
Maryland Corporation Law 183 (Aspen 2005)). Their argument is essentially that a
“direct injury” claim circumvents the application of § 2-405.1(g). In support, they
primarily rely on one particular passage in Shenker:
In contrast to a derivative action, a shareholder may bring a direct
action, either individually or as a representative of a class, against
alleged corporate wrongdoers when the shareholder suffers the harm
directly or a duty is owed directly to the shareholder, though such
harm also may be a violation of a duty owing to the corporation.
Shenker, 983 A.2d at 424.
That quote is taken out of context. The Shenker court definitively held that §
2-405.1(g) “plainly means that, to the extent § 2-405.1 creates duties on directors
such as the duty of care contained in § 2-405.1(a), those duties are enforceable only
by the corporation or through a shareholders’ derivative action.” Shenker, 983 A.2d
27
at 426. Put simply, if a suit is based on duties contained in § 2.405.1(a), it does not
matter whether the Plaintiffs suffered a direct injury; the claims can only be
brought through a derivative suit. The Plaintiffs have not provided this Court with
any authority since Shenker demonstrating that a direct claim predominates over
the application of § 2-405.1(g), and the Court has been unable to find any.
Situations may be imagined where a plaintiff suffers a direct injury as a result of a
breach of a fiduciary duty codified in § 2-405.1(a). For example, a corporate director
who engages in self-dealing—a breach of the duty of loyalty—that results in the
dilution of a shareholder’s voting power. See Shenker, 983 A.2d at 424 (“Where the
rights attendant to stock ownership are adversely affected, shareholders generally
are entitled to sue directly, and any monetary relief granted goes to the
shareholder.”). But under present Maryland law, the application of § 2-405.1(g)
trumps any allegation that a shareholder suffered a direct injury, and a direct
action in those circumstances is not proper. 14
The Court has already determined that the duties of candor and
maximization of share value were not owed to the Plaintiffs, so the only fiduciary
duty claims remaining were required to be brought by RPAI or derivatively on its
behalf. See Seidl, 713 F. Supp. 2d at 256-57 (citing § 2-405.1(g)). They were not. The
Even if allegations of a direct injury could circumvent the application of § 2405.1(g), the Plaintiffs have not sufficiently alleged a direct injury here, so the
argument would still fail. See Danielewiz, 769 A.2d at 283 (“Generally, . . . a
stockholder cannot maintain an action at law against an officer or director of the
corporation to recover damages for fraud, embezzlement, or other breach of trust
which depreciated the capital stock or rendered it valueless.”).
28
14
Plaintiffs’ breach of fiduciary duty claims are therefore dismissed for lack of
standing.
3. Business Judgment Rule § 2-405.1(e)
Although the breach of fiduciary claims fail for the reasons stated earlier, the
Court will nonetheless address the Individual Defendants’ additional argument that
the Plaintiffs have not alleged facts to overcome the business judgment rule, as
codified in § 2-405.1(e). See generally Stanziale v. Nachtomi, 416 F.3d 229, 238 (3rd
Cir. 2005) (explaining that a plaintiff “must plead around the business judgment
rule”). The business judgment rule insulates most business decisions made by
corporate directors from judicial review. Boland v. Boland, 31 A.3d 529, 548 (Md.
2011). The Delaware Supreme Court has described it as follows:
It is a presumption that in making a business decision the directors of
a corporation acted on an informed basis, in good faith[,] and in the
honest belief that the action taken was in the best interests of the
company. Absent an abuse of discretion, that judgment will be
respected by the courts. The burden is on the party challenging the
decision to establish facts rebutting the presumption.
Id. (quoting Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)); see generally Asarco
LLC v. Ams. Mining Corp., 396 B.R. 278, 405 (S.D. Tex. 2008) (explaining that the
business judgment rule consists of four elements: “(1) a business decision; (2)
disinterestedness and independence; (3) due care; and (4) good faith”). In Becker and
Allyn, the courts dismissed fiduciary duty claims brought against corporate
directors because the facts alleged did not overcome the business judgment rule. See
Allyn, 2013 WL 6439383, at *3-6; Becker, 2013 WL 6068793, at *4-6. Those cases
29
involved allegations similar to those alleged here—including, that the directors
inflated the share price, knowingly disseminated false information, and improperly
managed the company. See, e.g., Sadler, R. 1 ¶ 94; Babin, R. 1 ¶ 69; Schneirson, R. 1
¶ 49; Olive, R. 1 ¶ 69; Jeffers, R. 21 ¶ 96. Thus, the reasoning those courts employed
is applicable.
Just as in Becker and Allyn, the business judgment rule applies here because
the Plaintiffs have alleged a violation of duties protected by § 2-405.1(e). The Sadler
Plaintiffs allege that the Individual Defendants breached their “duties and
obligations of ordinary care by, among other things, offering investments in the
Inland Western REIT without having obtained a fairness opinion; failing to
discontinue the disastrous Recapitalization and 2012 Offering when it became
apparent that such an offering would substantially damage the pre-2012 Offering
shareholders; and materially diluting the investment value of the pre-2012 Offering
shares of the REIT.” Sadler, R. 1 ¶¶ 95-96. The Babin Plaintiffs allege that the
Individual Defendants breached their fiduciary duties of “due care, loyalty, good
faith, and candor” by “making misstatements and omissions of fact concerning the
true value of RPAI shares sold to RPAI’s existing shareholders pursuant to the
DRP, and by setting the price at which RPAI sold shares to existing shareholders
pursuant to the DRP at an inflated level . . . .” Babin, R. 4 ¶¶ 68-69. Additionally,
the Schnierson, Olive, and Jeffers Plaintiffs allege that the “Individual Defendants
violated their fiduciary duties of care, loyalty, and good faith by causing or allowing
[RPAI] to disseminate materially misleading and inaccurate information to
30
stockholders through, inter alia, SEC filings and other public statements and
disclosures . . . .” Schnierson, R. 1 ¶ 49; Olive, R. 1 ¶ 69; Jeffers, R. 21 ¶ 96. 15
The Becker and Allyn courts acknowledged the business judgment rule’s
relevance. “Maryland law presumes that a director of a corporation satisfies the
standards of § 2-405.1(a) and immunizes a director who performs his or her duties
in accordance with the standards provided in § 2-405.1(a) from liability.” Allyn,
2013 WL 6439383, at *4 (citing § 2-405.1(c), (e)). “The burden is on the party
challenging the decision to establish facts rebutting the presumption that the
directors acted reasonably and in the best interests of the corporation.” Bender v.
Schwartz, 917 A.2d 142, 153 (Md. App. 2007) (quoting Aronson, 473 A.2d at 812)
(internal quotation marks omitted). Neither “mere suspicions” nor “conclusory
terms” will suffice. Bender, 917 A.2d at 151-53.
Using that standard, the Becker court examined “whether the alleged
inflation of the share price on the four occasions charged by Plaintiffs would support
a finding of a breach of the duty of loyalty and good faith.” Becker, 2013 WL
6068793, at *5. The court concluded it did not because the board of directors set the
price as an estimate, meaning it could be higher or lower, and “repeatedly made all
of the disclosures required of it by the Securities Exchange Act of 1934, including
quarterly reports . . . contain[ing] complete and detailed financial information.” Id.
This was the same conclusion reached in Allyn, which acknowledged that the facts
None of the parties explicitly allege what misstatements and omissions of fact
were made or what materially misleading and inaccurate information was
conveyed, let alone when or under what circumstances this occurred.
31
15
presented were “strikingly similar” to those in Becker. Allyn, 2013 WL 6439383, at
*5. The same conclusion is required here, as the shareholders were all cautioned
that the shares prices were estimates and all required SEC filings were made.
The Plaintiffs’ complaints do not contain factual allegations that are
“sufficient to rebut the presumption that the [Individual Defendants] acted in good
faith, in a manner they reasonably believed to be in the best interests of the
corporation, and with the care that an ordinarily prudent person in a like position
would use under similar circumstances.” See Allyn, 2013 WL 6439383, at *4; see
also Becker, 2013 WL 6068793, at *4-5. Initially, the Babin Plaintiffs find fault with
the $6.85 to $10.00 DRP share price, but these are generalized “suspicions” that the
price of shares in the DRP was inflated. See, e.g., Hohenstein, 2014 WL 1265949, at
*6 (“The plaintiffs insist that the DRP pricing was still somehow reckless and
misleading, but the court—along with other courts that have considered similar
offerings—disagrees. The plaintiffs have alleged nothing more than ‘mere
suspicions.’”) (internal citations omitted). They have not provided the Court with
allegations sufficient to support a conclusion that this estimated price was not in
line with what an ordinarily prudent person would have used in a like position and
under similar circumstances. The same goes for the Sadler Plaintiffs’ allegations
that the 2012 Offering price was too low and that the Recapitalization was not in
RPAI’s best interests. The Jeffers, Olive, and Schnierson Plaintiffs contend that
certain information was “misleading and inaccurate”; however, the gravamen of this
contention is that they now find fault with the Individual Defendants’
32
recommendation that the Plaintiffs reject the mini-tender offers. Again, this is an
issue regarding share valuation. Each of these allegations involves an inherent
difficulty in ascertaining the true value of unlisted REIT shares. That is why RPAI
included numerous disclaimers in all of its correspondence with its shareholders
regarding its estimated value, including the following illustrative example taken
directly from the Babin complaint:
The estimated value was determined by the use of a combination of
different indicators and an internal assessment of value utilizing a
common means of valuation under the direct capitalization method as
of December 31, 2009. No independent appraisals were obtained. As
there is no established public trading market for our shares of common
stock, this estimated value may not reflect the actual market value of
your shares on any given date; and there can be no assurances that
stockholders would receive $6.85 per share for their shares if any such
market did exist, that the estimated value reflects the price or prices at
which our common stock would or could trade if it were listed on a
national stock exchange or included for quotation on a national system,
or that stockholders will be able to receive such amount for their
shares at any time in the future.
Babin, R. 1 ¶ 39 (January 27, 2010 letter to the shareholders in a Form 8-K filed
with the SEC) (emphasis added).
Numerous courts have expressed criticism of the type of Monday-morning
quarterbacking the Plaintiffs engage in—i.e., calculating the value of shares of
common stock in an unlisted REIT at a later point in time. The court in Apple
REITS explained:
As Defendants note, the nine different metrics by which Plaintiffs
claim that the REITS’ actual value can be ascertained each produce
different results, underscoring the impossibility of calculating the
REITs’ value, or any other investment’s value, with empirical
certainty.
33
These realities and inherent difficulties in ascertaining the value of
REIT shares necessarily means that investment valuations “can only
fairly be characterized as subjective opinions.”
In re Apple REITS Litig. (“Apple REITS”), No. 11-CV-2919 KAM, 2013 WL 1386202,
at *14 (E.D.N.Y. Apr. 3, 2013) (quoting In re Barclays Bank PLC Sec. Litig., No. 09
Civ. 1989, 2011 WL 31548, at *8 (S.D.N.Y. Jan. 5, 2011)). Pointing to a given share’s
price on a nationally-traded market that differs from an estimated value at an
earlier point in time does not by itself demonstrate a violation of a defendant’s
fiduciary duty. The Plaintiffs must put forth a factual allegation that demonstrates
the
Individual
Defendants’
conduct
regarding
the
2012
Offering,
the
Recapitalization, the DRP, or the mini-tender offers and the corresponding
estimated values assigned to the shares was so intentionally improper or grossly
negligent that an ordinary, prudent person in their position would not have in such
a manner. See Miller v. U.S. Foodservice, Inc., 361 F. Supp. 2d 470, 477 (D. Md.
2005) (explaining that the business judgment rule “can be overcome by allegations
of gross negligence”); see also Werbowsky v. Collomb, 766 A.2d 123, 144 (Md. 2001)
(“[Directors] enjoy the benefit and protection of the business judgment rule, and
their control of corporate affairs should not be impinged based on non-specific or
speculative allegations of wrongdoing.”). Even then, however, “obviously wrong”
estimations on value still might not rise to the level of a breach of fiduciary duty.
See Becker, 2013 WL 6068793, at *5
34
The Plaintiffs can avoid the business judgment rule by “show[ing] either that
the board or committee’s investigation or decision was not conducted independently
and in good faith, or that it was not within the realm of sound business judgment.”
Boland, 31 A.3d at 549 (quoting Bender, 917 A.2d at 152). Yet, the complaints
provide no factual allegations demonstrating that the Individual Defendants were
not acting in the best interests of the corporation or that they acted on an
uninformed basis. For example, the allegations demonstrate the Individual
Defendants received the mini-tender offers, considered them, and rejected them
based on the “the use of a combination of different indicators and an internal
assessment of value utilizing a common means of valuation under the direct
capitalization method[.]” See, e.g., Schnierson, R. 1 ¶ 37. This was reasonable
despite any allegation that an “independent appraisal” was never taken. See, e.g.,
id. The Plaintiffs have not directed the Court to any requirement that RPAI obtain
an independent appraisal, and the Form 8-Ks even disclosed that none ever
occurred. Even the Olive and Schnierson Plaintiffs concede in their response that
the Individual Defendants “indisputably had all information necessary” to make a
valuation of the REIT shares. Sadler, R. 84 at 11.
Furthermore, there is no plausible allegation that the Individual Defendants
personally benefited from an inadequate offering price, a 10-to-1 reverse stock split,
or an inflated DRP price. It was in the best interests of everyone—i.e., the company,
the Board members, and the shareholders—for the shares to be sold at a higher
rate, but not at a rate that overvalued the company. There are no allegations that
35
demonstrate the Individual Defendants and the Plaintiffs did not have a
commonality of interest regarding the value of the shares. Nor do the mini-tender
offers themselves establish that the Individual Defendants breached their fiduciary
duties of care. See Allyn, 2013 WL 6439383, at *4 (“The mere facts that secondary
market transactions in CLP shares occurred at prices below $9.50 and that CMG
Partners offered CLP shareholders $4.50 and $4.75 per share in two mini-tender
offers do not themselves establish that the Director Defendants breached their
fiduciary duties of care.”). The Becker court said it best: “The mere act of a Board,
exercising its managerial power to establish a price for its stock, even if obviously
wrong, would not amount to a breach of fiduciary duty owed to its shareholders. The
Plaintiffs’ theory of liability is not only implausible but non-existent.” Becker, 2013
WL 6068793, at *5 (emphasis added). This Court finds that conclusion applicable
here.
Moreover, like in Becker, there is no allegation that the Individual
Defendants failed to make all of the required disclosures, including those required
by the Securities Exchange Act of 1934. See id. The five complaints and their
attachments make clear that numerous required regulatory filings were made on
behalf of RPAI, as well as numerous communications with shareholders.
Additionally, all of those documents included a qualifier that the stated values were
“estimated values” and that the “estimated value may not reflect the actual market
value of [the] shares on any given date.” See, e.g., Jeffers, R. 21 ¶¶ 66-67. This
information cuts directly against the Plaintiffs’ fiduciary duty claims because it
36
demonstrates that the Individual Defendants had adequate information to consider
and did consider it, the Individual Defendants satisfied their disclosure obligations,
and the Plaintiffs easily could have used the information they received to make
their own adequate assessment of the stock price. The fact the Plaintiffs regret
having bought or held on to their shares in light of the numerous disclosures cannot
be the basis for a breach of fiduciary duty claim.
Several of the complaints raise an additional issue, alleging that the
Individual Defendants “misrepresented the value of the Inland REIT’s shares in
tender offers in order to dissuade shareholders from tendering.” See Olive, R. 1 ¶ 69.
It is alleged that, in doing so, they “placed their own individualistic motivations and
objectives above their collective duty to act in good faith and with reasonable skill
and prudence.” Id.; see Sadler, R. 84 at 11 (arguing in their response brief that
certain directors had special relationships with the Inland Group or its affiliates).
This allegation that touches upon the duty of loyalty, which encompasses two
related, albeit separate requirements: (1) corporate directors must decide matters
independently when exercising their judgment, and (2) directors are generally not
permitted to have a “material personal interest” in a transaction. Hudson v. Prime
Retail, Inc., No. 24-C-03-5806, 2004 WL 1982383, at *11 (Md. Cir. Ct. Apr. 1, 2004)).
The Plaintiffs contend that they have alleged facts sufficient to overcome the
business judgment rule because they can show “that a majority of [the] board that
approved the transaction in dispute was interested and/or lacked independence.”
Sadler, R. 84 at 9 (quoting Orman v. Cullman, 794 A.2d 5, 23 (Del. Ch. 2002)).
37
The Plaintiffs’ allegations on this point are insufficient for a number of
reasons. First, the Plaintiffs allege that the Individual Defendants “ha[d] a
substantial interest in keeping the Company independent” and recommending that
the shareholders reject the mini-tender offers, presumably so they could continue to
receive compensation for being corporate officers or directors. Olive, R. 1 ¶ 53. Of
course, corporate officers and directors are often compensated for their services or
role within a corporation, including through director fees and stock options.
However, conclusory allegations that a corporate director has an interest in a
transaction and is not independent simply because he receives compensation for his
board services and might not be retained if there is a change in management are
not enough to make a plausible allegation of interest. Werbowsky, 766 A.2d at 139
(“[I]nterest or dependence may not be found merely from the fact that directors are
paid for their services or on speculative, non-specific allegations that they acted in
order to secure their retention as directors.”).
The duty of loyalty also focuses on whether the board was interested in the
outcome of a transaction or lacked the independence to objectively assess the
transaction. See Orman, 794 A.2d at 22-23. If all shareholders, including the
directors who own shares, equally benefit from a transaction, there is no prohibited
director “interest” in a transaction. See id. at 29-30 (stating that “a director is
considered interested when he will receive a personal financial benefit from a
transaction that is not equally shared by the stockholders”). Accordingly, the
allegation that the Individual Defendants could “monetize a large quantity of
38
Company stock” as a result of the 2012 Offering and Recapitalization is likewise
insufficient to show a lack of disinterest because all shareholders received the same
added liquidity for their shares—i.e., everyone now had shares that were listed on
the NYSE, an established open market. See R. 84 at 3. The benefit to the director
shareholders from the 2012 Offering and Recapitalization was the same as that
received by all shareholders generally.
RPAI had a relationship with the Inland Group, which the Plaintiffs allege
resulted in “certain lucrative transactions” between the parties involving over
$15,000,000 between 2009 and 2011 alone. Olive, R. 1 ¶ 54. These transactions
purportedly included RPAI leasing office space from “an Inland Group affiliate,” as
well as an “ongoing service arrangement” that includes “an Inland Group affiliate
serving as a registered investment advisor[] to [RPAI] in exchange for a monthly fee
of up to one percent per annum of the aggregate fair value of [RPAI’s] assets
invested; an Inland Group affiliate providing loan servicing; and an Inland Group
affiliate providing legal services.” Id. The Plaintiffs further allege that non-parties
Daniel Goodwin and Robert D. Parks, and Defendant Brenda Gujral 16 are
“significant shareholders and/or principals of the Inland Group or holder of
directorships and are executive officers of the Inland Group”; that Goodwin owned
5% of RPAI’s shares; and that Parks and Gujral were at one point on RPAI’s board.
Id. But even if Parks and Gujral alone could be considered interested parties or as
For clarity, the Court is specifically addressing the allegations in the Olive
complaint, yet Gujral is only named as a defendant in the Babin case.
39
16
lacking independence during their time on the board, that conflict does not
necessarily translate to the other board members. See Orman, 794 A.2d at 27.
Furthermore, Parks and Goodwin are not defendants in this case, and the Plaintiffs
need to present factual allegations that other members of the board were either (1)
“self-dealing” or (2) controlled by or beholden to another party. Id. 23-24. They have
not done so, as “naked assertions” that parties had a business relationship will not
overcome the presumption of a director’s independence. See id. at 27. This becomes
apparent when the allegations set forth here are compared to the allegations in
cases where the court has found either board interest in a transaction or complete
lack of independence.
In Hollinger International, Inc. v. Hollinger Inc., No. 04 C 698, 2005 WL
589000, at *28-29 (N.D. Ill Mar. 11, 2005), the court denied the motion to dismiss
because the plaintiff alleged that the controlling shareholders “personally dictated”
the corporate director’s compensation as a CEO of another company and paid him
over $3,100,000 in “incentive payments” even though the other company had lost
$68,000,000. In Seidel v. Byron, 405 B.R. 277, 290-91 (N.D. Ill. 2009), the
defendants were serving as directors of multiple related entities “to whom they
owed conflicting fiduciary duties” and were operating one of the entities solely to
benefit another. In Ad Hoc Community of Equity Holders of Tectonic Network, Inc.
v. Wolford, 554 F. Supp. 2d 538, 558-59 (Del. 2008), the complaint primarily alleged
that the defendant was a majority shareholder in each of the companies involved in
the transactions, and therefore, the defendant was on both sides of the deals. In
40
each of these cases, there were detailed allegations that could legitimately support a
conclusion that the voting board members were improperly biased in some way.
None of these scenarios is present here. So again, even assuming Goodwin, Parks,
and Gujral could be considered “interested” (and discounting the fact Goodwin was
never a board member), the “particularized facts” alleged do not support a
“reasonable inference” that any of the three individuals were controlling
shareholders of RPAI who applied wielding pressure to the other board members or
that any of the Individual Defendants were beholden to another through a close
personal, family, or business relationship such that the board’s independence was
ever in question.
The Court is mindful that “[t]he totality of the complaint’s allegations need
only support a reasonable doubt of business judgment protection, not a judicial
finding that the directors’ actions are not protected by the business judgment rule.”
Westmoreland Cnty. Emp. Ret. Sys. v. Parkinson, 727 F.3d 719, 726 (7th Cir. 2013)
(quoting In re Abbott Labs. Derivative S’holders Litig., 325 F.3d 795, 809 (7th Cir.
2001)) (alteration in Westmoreland and internal quotation marks omitted).
Nevertheless, the Plaintiffs’ breach of fiduciary duty claims are alternatively
dismissed because their factual allegations do not provide enough detail to
overcome the presumption of reasonableness afforded to the Individual Defendants’
actions under the business judgment rule.
41
4. Schnierson – Counts III & IV
The Schnierson complaint contains a count for “Abuse of Control” and
another
for
“Gross
Mismanagement”
against
the
Individual
Defendants.
Schnierson, R. 1 ¶¶53-60. The Plaintiffs do not provide any basis for these counts to
stand as independent causes of action. Rather, they claim the Individual
Defendants “abused their positions of authority” and “breached their duties of due
care, diligence, and candor” in their management and administration of RPAI. Id.
¶¶ 54, 60. These additional conclusory allegations are unhelpful because they are
just another way of describing how the Individual Defendants allegedly breached
their fiduciary duties. See E. Trading Co. v. Refco, Inc., 229 F.3d 617, 623 (7th Cir.
2000) (explaining that “[t]here is nothing to be gained by multiplying the number of
torts” and that “[l]aw should be kept as simple as possible”). Characterizing Counts
III and IV of the Schnierson complaint as something other than a breach of
fiduciary duty does not change the underlying legal theory. They are therefore
dismissed for the same reasons the counts explicitly labeled “breach of fiduciary”
are dismissed.
B.
Ameriprise: Jeffers – Count II
The Jeffers Plaintiffs’ complaint borrows much of its language for this count
against Ameriprise from the breach of fiduciary duty count against the Individual
Defendants. Compare Jeffers, R. 21 ¶¶ 98-100, with id. ¶¶ 95-96. It is difficult to
determine exactly what they are alleging, especially considering (1) that the counts
are based on different states’ laws—the Individual Defendants counts are brought
42
under Maryland common and statutory law; this count under Illinois common law;
and (2) that the complaint often conflates what it considers to be a “duty” with what
is in actuality a “breach” of the duty. 17 Nevertheless, to state a claim for breach of
fiduciary duty under Illinois law, a plaintiff must allege three elements: (1) “that a
fiduciary duty exists”; (2) “that the fiduciary duty was breached”; and (3) “that such
breach proximately caused the injury of which the plaintiff complaints.” Neade v.
Portes, 739 N.E.2d 496, 502 (Ill. 2000). The Plaintiffs allege that Ameriprise owed
the Plaintiffs the duties of care, loyalty, and good faith; that Ameriprise breached
those duties by disseminat[ing] materially misleading and inaccurate information,”
“failing to disclose hidden fees it was earning,” and “failing to perform the required
due diligence” required; and that as a result, the Plaintiffs were damaged. Jeffers,
R. 21 ¶¶ 17, 100.
Some of those allegations directly implicate Rule 9, which requires fraud
claims to be pled “with particularity.” See Tellabs, Inc., 551 U.S. at 313. The
Plaintiffs allege that Ameriprise:
•
“conveyed inconsistent and misleading statements regarding the
expected investment returns.”
•
“engaged in further deceit in an attempt to manipulate the value of
the shares held by its customers.”
The Jeffers complaint alleges that Ameriprise had a duty to disseminate accurate,
truthful, and complete information; a duty to perform “due diligence,” and fiduciary
duties of care, loyalty, and good faith. Jeffers, R. 23 ¶¶ 98-100. In actuality, the
allegations regarding a failure to disseminate information and perform due
diligence are how Ameriprise allegedly violated its fiduciary duties of care, loyalty,
and good faith—i.e., they are not independent duties upon which a cause of action is
based.
43
17
•
“engaged in Account Statement Identifier Deception (ASID). ASID
occurs when an account statement identifier is either added or
removed to mislead the investor[.]”
•
created a scheme to “deceive a client into believing that they
actually began with a lesser amount, thus creating the impression
that the losses suffered by REIT were less than what they actually
were.”
•
“engaged in further intentional deception willful ignorance when it
allowed Inland Western to recalculate the value of its shares.”
Jeffers, R. 21 ¶¶ 23, 85, 86, 91, 92. Thus, Count II is more than just a basic fiduciary
duty claim, as it states that Ameriprise “had a duty to disseminate accurate,
truthful, and complete information to Plaintiff and the proposed classes,” Jeffers, R.
21 ¶ 98, which is in essence a common-law fraud claim. See Cohen v. Am. Sec. Ins.
Co., 735 F.3d 601, 615 (7th Cir. 2013) (“In Illinois, as elsewhere, the elements of a
common-law fraud claim are: ‘(1) a false statement of material fact; (2) defendant’s
knowledge that the statement was false; (3) defendant’s intent that the statement
induce the plaintiff to act; (4) plaintiff’s reliance upon the truth of the statement;
and (5) plaintiff’s damages resulting from reliance on the statement.’” (quoting
Connick v. Suzuki Motor Co., 675 N.E.2d 584, 591 (Ill. 1996)). This does not
necessarily convert the claim(s) into a federal securities fraud claim, however, as
Ameriprise contends. Jeffers, R. 47-1 at 10; see Baxi v. Ennis Knupp & Assoc., No.
10 C 6364, 2011 WL 3898034, at *5-12 (N.D. Ill. Sept. 2, 2011) (dismissing claims
for breach of fiduciary duty and fraudulent inducement under Illinois law, in
addition to a separate claim for violation of Section 10(b) of the Securities Exchange
Act of 1934). It simply means that the allegations containing averments in fraud in
44
Count II of the Jeffers complaint must meet the heightened pleading requirements
of Rule 9(b). See Gandhi, LLC, 689 F. Supp. 2d at 1013.
Ameriprise argues that the count should be dismissed because the allegations
do not satisfy the required elements for a breach of fiduciary duty claim. The Court
begins its analysis by looking to the first element, the existence of a fiduciary duty.
Whether a party owes a fiduciary duty to another depends on the relationship
between the parties. A fiduciary relationship is shown when a party establishes
“facts showing an antecedent relationship that gives rise to trust and confidence
reposed in another.” Khan v. Deutsche Bank AG, 978 N.E.2d 1020, 1041 (Ill. 2012).
Ameriprise contends that it did not owe any fiduciary duties to the Plaintiffs
because it could only make investment decisions on the Plaintiffs’ behalf with the
Plaintiffs’ approval, Jeffers, R. 47-1 at 4, but this argument ignores the essence of
the Jeffers complaint. The complaint alleges that the Plaintiffs paid “syndication
management” fees for Ameriprise’s services, in addition to a 1% non-accountable
“due diligence” fee and commissions “ranging from 7% to 9% for selling the [RPAI
stock],” and Ameriprise provided various materials to the plaintiffs in order to
educate them and “encourage them to invest . . . money in certain financial
products.” Jeffers, R. 21 ¶¶ 17-32, 80-81. Taking these allegations as true and
drawing all inferences in favor of the Plaintiffs, the transactions at issue were more
than an “ordinary arm’s length business transaction” between sophisticated
businessmen; a trusting relationship between the parties was arguably formed. But
see Maguire v. Holcomb, 523 N.E.2d 688, 691 (Ill. App. Ct. 5th Dist. 1988)
45
(concluding that no fiduciary relationship existed between the parties because the
defendant did not “accept[] plaintiffs’ trust and confidence” and it “was no more
than an ordinary arm’s-length business transaction”). Ameriprise cites certain cases
discussing the “narrow” duty owed to a customer who holds a nondiscretionary
account with a broker-dealer. See Jeffers, R. 60 at 3 (citing, e.g., ADM Investor
Servs., Inc. v. Collins, No. 05 1823, 2006 WL 224095, at *6-7 (N.D. Ill. Jan. 26,
2006); Refco, Inc. v. Troika Inv. Ltd, 702 F. Supp. 684, 687 (N.D. Ill. 1988); First
Am. Discount Corp. v. Jacobs, 756 N.E.2d 273, 284-85 (Ill. App. Ct. 1st Dist. 2001);
Index Futures Grp., Inc. v. Ross, 557 N.E.2d 344, 348 (Ill. App. Ct. 1st Dist. 1990)).
The Plaintiffs’ allegations nevertheless illustrate that Ameriprise played a
significant role in the Plaintiffs’ decision to purchase shares of RPAI. Thus, the
Plaintiffs have made sufficient factual allegations that could support the existence
of a fiduciary relationship between Ameriprise and the Plaintiffs. See Khan, 978
N.E.2d at 1041 (describing allegations supporting a conclusion that the “defendants
had superior knowledge and influence over [the plaintiff] and that he relied on them
to give him sound investment and tax advice”).
As to the second element of a breach of fiduciary duty claim, the Plaintiffs
have adequately alleged numerous breaches. The allegation that Ameriprise failed
to disclose its relationship with RPAI and that it failed to perform due diligence
checks on the soundness of investing in RPAI would each qualify as a breach of a
fiduciary duty owed to the Plaintiffs.
46
The third element of a breach of fiduciary claim, i.e., whether the breach
alleged proximately caused any damage to the Plaintiffs, is where the complaint is
wanting. As the Seventh Circuit has stated, “‘Loss causation’ is an exotic name—
perhaps an unhappy one—for the standard rule of tort law that the plaintiff must
allege and prove that, but for the defendant’s wrongdoing, the plaintiff would not
have incurred the harm of which he complains.” Bastian v. Petren Res. Corp., 892
F.2d 680, 685 (7th Cir. 1990) (internal citation omitted). Although “loss causation”
is more often applied to statutory fraud claims, it is still relevant to common law
tort claims relating to any investment decision. The Plaintiffs have alleged
numerous breaches—some sounding in negligence, others in fraud—yet they fail to
connect any of the breaches to any damages. Cf. id. (“But [the plaintiffs] suggest no
reason why the investment was wiped out. They have alleged the cause of their
entering into the transaction in which they lost money but not the cause of the
transaction’s turning out to be a losing one.”). If Ameriprise failed to disclose a
conflict of interest—e.g., that it was earning fees from RPAI (a negligence claim),
there still needs to be some allegation building a bridge between the breach and the
harm alleged to have occurred. See Huang v. Brenson, 7 N.E.2d 729, 739 (Ill. App.
Ct. 1st Dist. 2014) (“The existence of an undisclosed conflict of interest only satisfies
the breach element, but not the causation element, of a breach of fiduciary duty.”).
If Ameriprise engaged in Account Statement Identifier Deception (“ASID”) to
mislead investors (a fraud claim), 18 the question as to whether the plaintiffs were
18
The Jeffers Plaintiffs allege that “ASID occurs when an account statement
47
harmed by that breach still remains. Furthermore, even if Ameriprise acted
negligently by failing to conduct a due diligence check on the viability of RPAI as an
investment, which negligently or intentionally led to Ameriprise disseminating
materially misleading and inaccurate information, the Plaintiffs must still link that
breach to some particular harm to them. See Erica P. John Fund, Inc. v.
Halliburton Co., ___ U.S. ___, 131 S. Ct. 2179, 2183 (2011) (noting that plaintiffs
“must demonstrate [in claims involving securities fraud] that the defendant’s
deceptive conduct caused their claimed economic loss”); Lutkauskas v. Ricker, 998
N.E.2d 549, 560 (Ill. App. Ct. 1st Dist. 2013) (dismissing the case because the
Plaintiffs failed to allege damages supporting their negligence claim for breach of
fiduciary duty).
Here, the Plaintiffs have not alleged that they would not have bought RPAI
shares “but for” the information they received from Ameriprise, nor have they
alleged that they refrained from buying stock in another company because of their
RPAI investment. In fact, they do not provide any allegations supporting the
causation element. See Jeffers, R. 21 ¶¶ 97-100. Nowhere in the Jeffers complaint do
the Plaintiffs make any allegation (1) that their conduct would have been different
had Ameriprise’s alleged breaches not occurred; (2) that anything related to the
RPAI share price or how many shares they own would be different; or (3) that their
identifier is either added or removed to mislead the investor as to the true nature of
the valuation of the purchase price of their investments.” Jeffers, R. 21 ¶ 86; see id.
¶¶ 87-89.
48
financial position would be not be same. Without anything remotely related to those
allegations, the proximate cause element cannot be satisfied.
Because the Jeffers Plaintiffs have not sufficiently alleged that any breaches
by Ameriprise were the proximate cause of any damages they might have suffered,
Count II of their complaint is dismissed without prejudice. 19 This ruling does not
mean Ameriprise owed the Plaintiffs all of the duties alleged. See Miller v. Harris¸
985 N.E.2d 671, 679 (Ill. App. Ct. 2d Dist. 2013) (stating that the court does not
determine at the motion to dismiss stage whether a fiduciary duty exists, only
whether the well-pleaded factual allegations could support that determination). The
Court further notes that the breaches sounding in fraud (illustrated above) are
required to be pled “with particularity.” Those allegations are also insufficiently
pled, as further discussed in Section IV.A.
II.
Aiding & Abetting (RPAI): Schnierson – Count III; Olive – Count
III; Jeffers – Count IV
The Plaintiffs allege a claim against RPAI for aiding and abetting a breach of
fiduciary duty by the Individual Defendants. “[A]iding and abetting is a theory for
holding the person who aids and abets liable for the tort itself[.]” Hefferman v. Bass,
467 F.3d 596, 601 (7th Cir. 2006). The theory is expressly recognized under
Maryland law. Alleco Inc. v. Harry & Jeanette Weinberg Found., Inc., 665 A.2d
The damages alleged also might not be sufficient (for any of the claims). The
Court may take judicial notice of RPAI’s closing stock price on the New York Stock
Exchange, which was $15.18 on June 9, 2014, so it is possible that the Plaintiffs
may not have even suffered any losses. See Retail Properties of America, Inc.,
http://www.nasdaq.com/symbol/rpai (last visited June 9, 2014). Ameriprise did not
develop this argument, however, so the Court expresses no opinion as to its merits.
49
19
1038, 1049 (Md. 1995). RPAI argues that it is a legal impossibility for RPAI to aid
and abet a breach of fiduciary duty by directors and officers because a corporation
acts through its agent and, therefore, cannot “aid” or “abet” itself. Sadler, R. 81 at
40. One court has explicitly recognized the validity of that argument, at least when
the conduct of the corporate officer was within the scope of his employment. See
Tong v. Dunn, No. 11 CVS 1522, 2012 WL 944581, at *6 (N.C. Super. 2012). The
Plaintiffs cite Wasserman v. Kay, 14 A.3d 1193, 1221 n.14 (Md. Ct. Spec. App. 2009),
in support of their argument that a corporation can aid and abet a tort committed
by its officers when the corporate officer has an independent personal stake in
achieving the desired illegal objective. See Sadler, R. 84 at 14. But the Court need
not address whether there is an exception to the doctrine regarding aiding and
abetting by a corporation, or even whether such an exception would apply here. The
law is clear: a claim for aiding and abetting a breach of fiduciary fails as a matter of
law where there has been no underlying breach of fiduciary duty. Apple REIT’s,
2013 WL 1386202, at *19 (citing Lerner v. Fleet Bank, N.A., 459 F.3d 273, 292 (2d
Cir. 2006)); Schandler v. N.Y. Life Ins. Co., No. 09 Civ. 10463, 2011 WL 1642574, at
*13 (S.D.N.Y. Apr. 26, 2011). The Court dismissed the Plaintiffs’ claims for breach
of fiduciary duty, so it is required to dismiss their aiding and abetting claims as
well.
50
III.
Unjust Enrichment
A.
RPAI & Individual Defendants: Sadler – Count II; Babin –
Count III; Schnierson – Count II; Olive – Count II; Jeffers
– Count III
Each complaint contains a count for unjust enrichment against RPAI and/or
the Individual Defendants. Unjust enrichment is a form of restitution, meant to
“occup[y] the crucial ground between its much-studied neighbors, tort and contract.
Restitution deals with nonbargained benefits; tort law with nonbargained harms;
contract law with bargained benefits and harms.” Alternatives Unlimited, Inc. v.
New Balt. City Bd. of Sch. Comm’rs, 843 A.2d 252, 274 (Md. Ct. Spec. App. 2004).
Its purpose is not to compensate the plaintiff but rather to “forc[e] the defendant to
disgorge benefits that it would be unjust for him to keep.” Slick v. Reinecker, 839
A.2d 784, 797 (Md. Ct. Spec. App. 2003). Under Maryland law, a claim for unjust
enrichment consists of three elements: “(1) a benefit conferred upon the defendant
by the plaintiff; (2) an appreciation or knowledge by the defendant of the benefit;
and (3) the acceptance or retention by the defendant of the benefit under such
circumstances as to make it inequitable for the defendant to retain the benefit
without the payment of its value.” Hill v. Cross Country Settlements, LLC, 936 A.2d
343, 351 (Md. 2007) (quoting Berry & Gold, P.A. v. Berry, 757 A.2d 113 (Md. 2000)).
The RPAI and the Individual Defendants contend, first, that Maryland law
prohibits a claim for unjust enrichment “where the subject matter of the claim is
covered by an express contract between the parties.” Sadler, R. 81 at 41 (citing
Cnty. Comm’rs of Caroline Cnty. v. J. Roland Dashiell & Sons, Inc., 747 A.2d 600,
51
607 (Md. 2000)). Accordingly, they argue that unjust enrichment is unavailable here
because the Plaintiffs signed a subscription agreement, and thus, their claim is
governed by a contact. The RPAI and the Individual Defendants also argue that the
Plaintiffs have not sufficiently alleged the required elements of a claim for
restitution.
Unjust enrichment “is an equitable remedy and is ordinarily unavailable
where there is a legal remedy such as breach of contract.” Becker, 2013 WL
6068793, at *5. Parties may plead alternative theories, but they may not include a
count for unjust enrichment when there is an express contract governing the
relationship of the parties. Cohen, 735 F.3d at 615. At least three courts have
addressed unjust enrichment claims where the plaintiffs executed subscription
agreements to purchase shares, just as the Plaintiffs must have done here, see, e.g.,
Jeffers, R. 21 ¶¶ 77, 112 (“Ameriprise required Plaintiff and the proposed class . . .
to sign uniform subscription agreements . . . .”)—otherwise they could not allege to
be owners of RPAI shares. Each court dismissed the unjust enrichment claims. See
Allyn, 2013 WL 6439383, at *6-7; Becker, 2013 WL 6068793, at *5; Apple REITS,
2013 WL 1386202, at *20. Only Apple REITS was decided before the Plaintiffs filed
their response (or was included in the Defendant’s brief). Nonetheless, the Plaintiffs
have made no attempt to distinguish this case from the Apple REITs decision on
this issue. While the case is not dispositive, none of the Plaintiffs in any of the five
response briefs even refer to Apple REITS when discussing why their unjust
enrichment claims should survive the Defendants’ motion. Instead, they either
52
argue that the subscription agreements are not properly before the Court, contend
that the subscription agreements are not relevant, or ignore the unjust enrichment
claim altogether. See Sadler, R. 83 at 15; R 84 at 15; R. 85 at 15; Babin, R. 36 at 1415. With no rationale for why the cases were incorrectly decided, the Court finds the
Allyn, Becker, and Apple REITS decisions and their reasoning persuasive, and will
follow suit. See generally Gonzalez-Servin v. Ford Motor Co., 662 F.3d 931, 934 (7th
Cir. 2011) (explaining that parties should not ignore authority that is directly
applicable to an issue before a court). The Plaintiffs’ unjust enrichment claims
against RPAI and the Individual Defendants are therefore dismissed with
prejudice.
Even if the Court does not consider the subscription agreements, the unjust
enrichment claims would still not survive the Defendants’ motions. The Plaintiffs
must allege that they conferred a benefit upon the Defendants. See Dolan v.
McQuaide, 79 A.3d 394, 401 (Md. Ct. Spec. App. 2013). They have not done so. The
Sadler Plaintiffs find fault with the reverse stock split and the price the Defendants
set for the 2012 Offering. Neither of the situations involved the Plaintiffs conferring
a specific benefit upon the Defendants. It is also an open question as to whether
anyone actually benefitted from the transactions. Similarly, the Schnierson, Olive,
and Jeffers Plaintiffs denounce the Defendants’ conduct regarding the mini-tender
offers. But again, no benefit was conferred upon the Defendants in that situation.
The same goes for the Babin Plaintiffs who believe they paid too much for RPAI
shares through the DRP. As previously explained, there is no plausible allegation
53
that the price was “too much.” And the fact the DRP price affected the company, the
Individual Defendants, and the shareholders equally belies the Plaintiff’s argument
that RPAI or the Individual Defendants benefitted at their expense—which is what
unjust enrichment is designed to remedy. There is no established rule for what
satisfies each element of an unjust enrichment claim or when such enrichment
claim will succeed. Hill, 936 A.2d at 351 (citing Daniel Friedmann, Restitution of
Benefits Obtained Through the Appropriation of Property or the Commission of a
Wrong, 80 COLUM. L. REV. 504, 504-05 (1980)). But any argument here that the
Defendants “reap[ed] significant benefits at Plaintiffs’ expense,” Sadler, R. 84 at 15,
is not supported by the allegations in the complaints. The Plaintiffs’ unjust
enrichment claims are dismissed with prejudice on this ground as well.
B.
Ameriprise: Jeffers – Count III
To state an unjust enrichment claim under Illinois law, “a plaintiff must
allege that the defendant has unjustly retained a benefit to the plaintiff’s detriment,
and that defendant’s retention of the benefit violates the fundamental principles of
justice, equity, and good conscience.” Siegel v. Shell Oil Co., 612 F.3d 932, 937 (7th
Cir. 2010) (citing HPI Health Care Serv., Inc. v. Mt. Vernon Hosp., Inc., 545 N.E.2d
672, 679 (Ill. 1989)). The parties dispute whether unjust enrichment is a standalone claim, but that is immaterial at this point. In Clearly v. Philip Morris, Inc.,
656 F.3d 511, 517 (7th Cir. 2011), the Seventh Circuit stated:
What makes the retention of the benefit unjust is often due to some
improper conduct by the defendant. . . . So, if an unjust enrichment
claim rests on the same improper conduct alleged in another claim,
54
then the unjust enrichment claim will be tied to this related claim—
and, of course, unjust enrichment will stand or fall will the related
claim. (citing Ass’n Benefit Servs. v. Caremark Rx, Inc., 493 F.3d 841,
855 (7th Cir. 2007)) (emphasis added).
Here, the Plaintiffs’ claim for unjust enrichment against Ameriprise stands or falls
with the claim for breach of fiduciary duty in Count II of the Jeffers complaint. The
Court has already determined that claim is insufficiently pled; thus, the claim for
unjust enrichment must fail as well. Count III of the Jeffers complaint is dismissed
without prejudice, subject to the Plaintiffs’ ability to cure the deficiencies identified
in Count II.
IV.
Constructive Trust (RPAI): Babin – Count II
The Babin Plaintiffs seek the imposition of a constructive trust against RPAI,
alleging that RPAI wrongfully took their funds as a result of selling shares through
the DRP at an inflated rate. Babin, R. 4 ¶¶ 71-73. This claim fails, however, because
a constructive trust is a form of an equitable remedy, not an independent cause of
action. Lyon v. Campbell, 33 Fed. Appx. 659, 663 (4th Cir. 2002) (applying
Maryland law and explaining that “[a] constructive trust is an equitable remedy,
not a cause of action in and of itself”). A constructive trust can only be imposed
when a defendant has acquired property by “fraud, misrepresentation, or [some]
other improper method, or where the circumstances render it inequitable for the
party holding the title to retain it.” Wimmer v. Wimmer, 414 A.2d 1254, 1258 (1980);
accord Porter v. Zuromski, 6 A.3d 372, 376 (Md. Ct. Spec. App. 2010). As the court
in Washington Suburban Sanitary Commission v. Utilities, Inc. of Maryland
55
explained, “The constructive trust, like its counterpart remedies at law, is a remedy
for unjust enrichment. The remedy is no longer limited to misconduct cases; it
redresses unjust enrichment, not wrongdoing.” 775 A.2d 1178, 1188 (Md. 2001)
(quoting DAN B. DOBBS, LAW
OF
REMEDIES § 4.3(2), at 597 (2d ed. 1993)) (internal
quotation marks omitted). Here, the Court has already concluded that the Babin
Plaintiffs’ claims for breach of fiduciary duty and unjust enrichment cannot succeed.
Without any claims justifying the need for a constructive trust, any count seeking
such an equitable remedy automatically fails. Count II of the Babin complaint is
dismissed with prejudice.
V.
Violation of Illinois Securities Law of 1953
“The purpose of the [ISL] is to protect innocent persons who might be induced
to invest their money in speculative enterprises over which they have little control.”
Carpenter v. Exelon Enters. Co., LLC, 927 N.E.2d 768, 772 (Ill. App. Ct. 1st Dist.
2010). Illinois courts have held that the “law is paternalistic and is to be liberally
construed to better protect the public from deceit and fraud in the sale of securities.”
Carpenter, 927 N.E.2d at 772. Nonetheless, claims arising out of the ISL that
“contain[] averments of fraud” are subject to Rule 9(b)’s heightened pleading
requirements. Gandhi, LLC, 689 F. Supp. 2d at 1013.
A.
Ameriprise: Jeffers – Count V
The Jeffers Plaintiffs allege that Ameriprise violated the ISL in a number of
ways, including “(1) manipulated documents to disguise the true losses in the REIT
shares; (2) failed to perform required due diligence into the value and risks of the
56
REIT shares; and (3) omitted material facts and distributed “[private placement
memorandums], 20 offering brochures and other sales materials which contained
misrepresentations about the risks and value of the REIT.” Jeffers, R. 52 at 9; see R.
21 ¶¶ 106-25. Ameriprise argues that Count V should be dismissed because the
claim is barred by the ISL five-year statute of repose in 815 ILCS 5/13(D)(2); the
allegations are insufficient to meet Rule 9(b)’s “particularity” requirement; and the
Plaintiffs did not provide adequate notice of the claim, as required by 815 ILCS
5/13(B). See Jeffers, R. 47
Looking to Ameriprise’s statute of repose argument, the ISL provides:
No action shall be brought for relief under this Section . . . after 3 years
from the date of sale; provided, that if the party bringing the action
neither knew nor in the exercise of reasonable diligence should have
known of any alleged violation . . . , the 3 year period provided herein
shall begin to run upon the earlier of:
(1) the date upon which the party bringing the action has actual
knowledge of the alleged violation of this Act; or
(2) the date upon which the party bringing the action has notice of
facts which in the exercise of reasonable diligence would lead to actual
knowledge of the alleged violation of this Act.
815 ILCS 5/13(D). Counts have held that Section 5/13(D)(2), while not explicitly
clear on its face, means that the three year statute of limitations may be tolled an
additional two years from “the date the plaintiff knew or should have known of the
violation but in no event [shall a suit be filed] more than five years from the date of
A private placement memorandum, also known as a PPM, is a document that
contains relevant disclosures about purchasing shares of a company so that the
investor can evaluate the risks of a particular investment decision.
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20
the sale.” Wanless v. Burke, 625 N.E.2d 386, 388 (Ill. App. Ct. 3d Dist. 1993) (citing
815 ILCS 5/13(D)). Thus, a party must file an action for a violation of the ISL within
five years of when the violation occurred or the action is time-barred, regardless of
when the party discovered the violation. See Klein v. George G. Kerasotes Corp., 500
F.3d 669, 671 (7th Cir. 2007) (“[T]he total period of repose expires five years after
the violation, no matter when it was discovered.” (citing 815 ILCS 5/13(D)(2))); see
also Stone v. Doerge, No. 02 C 1450, 2004 WL 3019173, at *4 (N.D. Ill. Dec. 28,
2004) (“Plaintiff’s [claims] . . . are based upon Defendants’ allegedly fraudulent sale
of securities, thus they are governed by the three year statute of limitations period
and a five year statute of repose set forth in the Illinois Securities Act, 815 ILCS
5/13(D).” (citing Tregenza v. Lehman Bros., Inc., 678 N.E.2d 14, 14-15 (Ill. App. Ct.
1st Dist. 1997))).
The Jeffers complaint alleges that the Plaintiff class purchased shares
through Ameriprise at $10.00 per share between March 2004 and September 2005.
Jeffers, R. 21 ¶ 37. The complaint was not filed until 2012, seven years after the
proposed class purchased their shares. To counter this stark fact, the Plaintiffs
argue that their complaint contains allegations that Ameriprise solicited and sold
shares of the REIT all the way up to 2012, that between 2009 and 2012 Ameriprise
engaged in Account Statement Identifier Deception (ASID), and that members of
the class continued to reinvest their dividends to acquire additional shares of the
REIT. Jeffers, R. 52 at 11. But a careful reading of the complaint demonstrates that
the Plaintiff class does not allege that anyone in the class purchased stock any time
58
after 2005—i.e., they do not connect their own personal investing activity to
anything related to Ameriprise after the sales in 2004 and 2005. Compare Jeffers,
R. 21 ¶ 37 (Plaintiff initially purchased 8,460 interests of [RPAI] at $10.00 per
share.”), with id. ¶ 82 (“Ameriprise customers were induced into purchasing . . .
shares of the REIT from 2004 to 2012.”) (emphasis added). The Plaintiff class even
concedes that “any alleged securities law violations relating to the initial stock
purchase may be time-barred.” Sadler, R. 83 at 3. Count V is therefore dismissed
without prejudice.
Alternatively, Count V must be dismissed because it is insufficiently pled. In
response to Ameriprise’s particularity argument, the Plaintiffs direct the Court to a
number of older cases that were all decided before the Seventh Circuit’s mandate
that allegations of fraud describe the “who, what, where, when and how.” See
Jeffers, R. 60 at 8-9; cf. AnchorBank, 649 F.3d at 615. The Plaintiffs do not,
however, explain how or where the allegations in their complaint address the
pertinent requirements of a fraud-based claim. The complaint alleges that
Ameriprise included “false and omitted statements” in the brochures, private
placement memorandums, and company-sponsored information it disseminated,
Jeffers, R. 21 at 115-121, but it does not state precisely what statements were false,
or how or why they were false. Similarly, the complaint alleges that Ameriprise was
to perform “due diligence” checks of RPAI—i.e., an evaluation of the company’s
performance and assets—but it does not explain when they were to occur or how
comprehensive they were supposed to be, or even why the failure to do so is
59
fraudulent. Accordingly, these conclusory allegations are insufficient under Rule
9(b).
The Sadler plaintiffs can refile Count V if they can establish they purchased
shares of RPAI through Ameriprise sometime after July 26, 2007—within the
previous five years of them filing their complaint. The Plaintiffs will also need to
satisfy the particularity deficiencies discussed here.
B.
Individual Defendants: Jeffers – Count VI
The Jeffers Plaintiffs allege that the Individual Defendants violated the ISL
through “misrepresentations made in conjunction with the sale of the Inland REIT”
and because they “were complicit in the fraud perpetrated by . . . Ameriprise and
aided the issuance of fraudulent information both on its own behalf and in
assistance to . . . Ameriprise.” Jeffers, R. 21 ¶¶ 127-28. This count is dismissed
because it is time-barred, as discussed above. See § V.A. Additionally, these
allegations fall well short of what is required under the “with particularity”
standard. See AnchorBank, 649 F.3d at 615. The Plaintiffs discuss a number of
RPAI documents in their complaint. But the Plaintiffs do not put the Individual
Defendants on notice of what particular “misrepresentations” they made or
“fraudulent information” they disseminated, when it occurred, how it occurred, or
where it occurred. The Plaintiffs contend they set forth the “bare bones” of a claim,
but without any specific factual allegations detailing the fraud complained of, the
Plaintiffs’ claim in Count VI cannot stand. It is also dismissed without prejudice but
60
may be refiled in the event the Plaintiffs are able to provide specific facts
supporting their claim.
VI.
Violation of FINRA Regulations (Ameriprise): Jeffers – Count VII
The Plaintiffs allege that Ameriprise wilfully violated certain FINRA
regulations21 by “misleading investors, falsely representing the product to its
registered representatives who in turn falsely represented the product to investors,
especially with respect to the risks associated with the highly speculative real
estate private placement.” Jeffers, R. 21 ¶¶ 135-36. They claim that Ameriprise
ignored certain FINRA “regulations and rules,” including NASD Notice 03-71,
FINRA Notice 09-09, and FINRA Notice 10-22. Id. ¶¶ 133-34. Ameriprise contends
that this claim should be dismissed because there is no private right of action for a
violation of FINRA rules or regulations. Jeffers, R. 47-1 at 14. In support, it directs
the Court to Richman v. Goldman Sachs Group, Inc., 868 F. Supp. 2d 261, 275 n.5
(S.D.N.Y. 2012); Brady v. Calyon Sec., 406 F. Supp. 2d 307, 312 (S.D.N.Y. 2005);
Witt v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 602 F. Supp. 867, 869 (W.D. Pa.
1985); and Emmons v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 532 F. Supp.
480, 483 (S.D. Ohio 1982). Each of these cases rejected a private cause of action
based on an alleged violation of this type of rule—i.e., one involving the sale of
securities.
FINRA was formerly known as the National Association of Securities Dealers,
Inc. (“NASD”).
61
21
The Plaintiffs contend these cases are in contrast to Buttrey v. Merrill Lynch
Pierce, Fenner & Smith, Inc., 410 F.2d 135, 144 (7th Cir. 1969), which held that
“parties may be liable for violations of the [Securities] Act and [SEC] Rule 10b-5 as
long as they engage in fraudulent activity ‘in connection with’ the sale or purchase
of securities or in a fraudulent ‘course of business.’” Buttrey has never been
explicitly overruled, so there could be a private claim for relief in some
circumstances. See Wehrs v. Benson York Grp., No. 07 C 3312, 2008 WL 753916, at
*4 n.5 (N.D. Ill. Mar. 18, 2008) (“The Seventh Circuit has found that although not
every violation of Exchange rules is per se actionable, a violation of Rule 405 can, in
some cases, create a private claim for relief. More recently, however, other courts
have found no private right of action under Rule 405.”) (internal citations omitted).
However, numerous courts have questioned the validity of Buttrey, and the more
recent trend is against allowing a private right of action. See, e.g., Spicer v. Chi. Bd.
or Options Exch., Inc., 977 F.2d 255, 264 (7th Cir. 1992) (“Only one discernible line
of cases, starting with Buttrey, could possibly constitute a ‘routine and consistent’
recognition of an implied remedy . . . .” (emphasis in original); Pyle v. White, 796 F.
Supp. 380, 385 (N.D. Ind. 1992) (“The weight of more recent authority is against
implying a cause of action under NASD suitability and NYSE know-your-customer
rules.”). In addition, Buttrey did not address the specific FINRA regulations the
Plaintiffs allege that Ameriprise violated here, so its overall application is limited.
The burden is on the Plaintiffs to establish that there is an implied private
right of action in the regulations, see Buttrey, 410 F.2d at 142; Sanders v. John
62
Nuveen & Co., 554 F.2d 790, 797 (7th Cir. 1977); yet, the most recent case the
Plaintiffs cite in support of their argument is Cook v. Goldman, Sachs & Co., 726 F.
Supp. 151, 156 (S.D. Tex. 1989)—a twenty-five year old case from a different district
interpreting NASD Rule 405(q). In light of this information, the Court is not
persuaded that a private right of action flows from a violation of the FINRA
regulations and rules at issue here. Count VII of the Jeffers complaint is dismissed
with prejudice.
CONCLUSION
For the reasons discussed, the Individual Defendants’ and RPAI’s motions to
dismiss are granted. See Sadler, R. 80; Babin, R. 33; Schnierson, R. 35; Olive, R. 27;
Jeffers, R. 48. Ameriprise’s motion to dismiss is also granted. Jeffers, R. 47. The
Sadler, Babin, Schnierson, and Olive cases are dismissed with prejudice. Counts I,
II, IV, and VII of the Jeffers complaint are dismissed with prejudice. Counts III, V,
and VI of Jeffers are dismissed without prejudice. The Jeffers Plaintiffs may file an
amended complaint as to Counts III, V, and VI by July 10, 2014, should they be able
to cure the deficiencies identified above. All motions for class certification are
denied as moot.
ENTERED:
______________________________
Honorable Thomas M. Durkin
United States District Judge
Dated: June 10, 2014
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