Becker et al v. Inland American Real Estate Trust, Inc. et al

Filing 22

MEMORANDUM OPINION AND ORDER Signed by the Honorable Harry D. Leinenweber on 11/18/2013:Defendants' Motion to dismiss Counts I, II and III of Plaintiffs' Complaint 16 is granted with prejudice. Civil case terminated. Mailed notice(wp, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

JAMES BECKER and SASANNA
BECKER, on Behalf of Themselves
and All Others Similarly
Situated,
Plaintiffs,
v.

Case No. 13 C 3128

INLAND AMERICAN REAL ESTATE
TRUST, INC., J. MICHAEL BORDEN,
THOMAS F. GLAVIN, BRENDA G.
GUJRAL, DAVID MAHON, THOMAS F.
MEAGHER, ROBERT D. PARKS, PAULA
SABAN and WILLIAM J.
WIERZBICKI,

Hon. Harry D. Leinenweber

Defendants.

MEMORANDUM OPINION AND ORDER
I.

BACKGROUND

This case involves real estate investment trusts (“REITs”).
A REIT is an entity that combines the capital of many investors to
acquire or invest in commercial real estate; that allows investors
to invest in a real estate portfolio under professional management
through the purchase of shares; that must pay distributions to its
stockholders equal to at least 90% of its income; and is not
typically subject to federal income taxes.

There are essentially

two types of REITs:

those that are traded on an open exchange and

those that are not.

Those that are traded on open exchanges are

liquid similar to equity stocks.

Those that are not traded on

exchanges (“Non-Traded REITs”) are considered generally illiquid,
because sales, other than redemptions, are dependent on a limited
secondary market.
Defendant, Inland American Real Estate Trust, Inc. (“Inland”),
is a Non-Traded REIT, and is organized as a corporation under the
laws of Maryland.

It commenced business on August 1, 2005, with an

initial public offering pursuant to a Prospectus registered with
the Securities and Exchange Commission (the “SEC”).

On January 7,

2009, Inland announced an additional public offering of its shares
pursuant to a Prospectus that was also registered with the SEC.
The 2009 public offering consisted of 5,000,000,000 primary shares
priced at $10.00 per share and a public offering of 380,000,000
shares to be sold through the Inlands’s Distribution Reinvestment
Plan (the “DRP”) priced at $9.50 per share.

Inland’s shareholders

generally have an option, subject to limitations, to receive their
distributions through share purchases under the DRP or in cash.
Under the DRP, shareholders also have the opportunity to purchase
additional shares at a price slightly below the current offering
price to the general public. For example, this offering was priced
at $9.50 per share under the DRP while the price to the general
public was $10.00 per share.
Inland also maintains a Share Repurchase Program (the “SRP”).
This program is designed to provide a limited measure of liquidity
by allowing shareholders, subject to some restrictions, to sell

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shares to Inland at a price either slightly below or equal to their
current offering price to the general public, depending on how long
the shareholder has owned the shares.
obligation

to

repurchase

sufficient funds.

shares

was

Under the SRP, Inland’s
dependant

on

it

having

The amount of money available to fund the SRP

was left to the sole discretion of the Board of Directors.

In

addition, the SRP was subject to suspension or termination if the
Board determined such suspension of termination to be in the
company’s best interests.
The Prospectus cautioned prospective investors, including
shareholders considering investing pursuant to the DRP, that the
stock offering prices were “arbitrarily determined by [the] board
of directors . . . in its sole discretion” based on three factors:
the offering price of other REITS organized by Inland, the range of
offering prices of other REITs that are not publicly traded, and
the

recommendation

Corporation.

of

its

dealer

manager,

Inland

Securities

The Prospectus further warned investors that:

•

You should purchase our common stock only if
you can afford a complete loss of your
investment.

•

You will not have an opportunity to evaluate
our investments before we make them because we
have not identified all of the specific assets
that we will acquire in the future.

•

There is no public market for our shares, the
offering price was arbitrarily established and
you may not be able to sell your shares at a
price that equals or exceeds the [$9.50]
offering price.
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•

There is no market for our shares and no
assurance that one will develop. We do not
expect that our shares will be listed for
trading on a national securities exchange in
the near future. You will not, therefore, be
able to easily resell any shares that you may
purchase in this offering.
Any shares that
you are able to resell may be sold at prices
less than the amount you paid for them.

•

The offering price of our shares may be higher
or lower than the price at which the shares
would trade if they were listed on a national
securities exchange or actively traded by
dealers or marketmakers. Further, there is no
assurance that you will be able to sell any
shares that you purchase in the offering at
prices that equal or exceed the offering
price, if at all. You may lose money on any
sale.

At all relevant times, Inland’s Board of Directors consisted
of nine (9) Directors, Michael Borden, Thomas Glavin, David Mahon,
Thomas Meagher, Paula Saban, William Wierzbicki, Brenda Gujral and
Robert Parks.

A majority of the Board, i.e., Messrs. Borden,

Glavin, Mahon, Meagher, Wierzbicki and Ms. Saban were independent
directors (the “Independent Directors”) with no employment or other
material relationship with Inland or any organization affiliated
with Inland.

In addition to Inland, these nine directors are

Defendants.
In February 2009, the Board announced that it intended to
suspend the SRP until further notice, effective March 30, 2009.
The expressed purpose of the suspension was that it was necessary
for Inland to maintain a healthy cash position for purposes of
maintaining its investment strategy at that particular time.
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In

2010, several third parties made “mini-tender” offers, i.e., offers
for fewer than 5% of the outstanding shares, to acquire a small
percentage of Inland’s outstanding shares at values far below
Inland’s estimate value of the share price.

In response to these

offers, the Board stated its belief that the prices being offered
were less than the potential value of Inland’s shares, although the
Board stated that it did not intend to publish a new estimated
share value until October of that year. On September 21, 2010, the
Board published the estimated per-share value of shares at $8.03.
On March 11, 2011, Inland announced an “Amended and Restated”
SRP that would allow a shareholder to request repurchase shares in
the event of the death of a beneficial owner.

Inland established

the repurchase price at that time to be $7.23 a share, which was
90%

of

Finally,

the
on

most

recent

December

12,

estimated
2012,

estimated share price of $6.93.

per

the

share

Board

value

of

estimated

$8.03.

its

new

In each of the announcements of

share value, the Board advised investors that the estimated value
represented neither fair value according to U.S. Generally Accepted
Accounting Principles nor the amount the shares might be expected
to trade on a national securities exchange.

Further, the Board

emphasized that there were no assurances that a shareholder would
be able to sell his shares at the estimated value.

In addition,

the Board in its December 12, 2012, announcement stated that it was

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adjusting its valuation methodology to what was “currently the most
commonly used valuation method by non-listed REITs.”
On May 7, 2012, Inland announced that it had learned that the
SEC was conducting a non-public, formal, fact-finding investigation
to

determine

whether

there

had

been

violations

of

certain

provisions of federal securities laws regarding business management
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. Inland relayed this
information via its Form 10Q filed with the SEC on May 7, 2012.

It

stated in this filing that the company has been cooperating with
the SEC and no conclusions had been reached.

On November 9, 2012,

Inland announced that in response to a demand by three shareholders
for an investigation into certain claims for breach of fiduciary
duty directed at the Board, the Business Manager and certain
Business Manager Affiliates, the Board authorised the Independent
Directors

to

authorization,

investigate
the

the

claims.

Pursuant

Directors

formed

Independent

to
a

this

Special

Litigation Committee to investigate with assistance of independent
legal counsel, and to make recommendations to the Board after
completion

of

the

investigation.

investigation is ongoing.

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The

Special

Committee

The Plaintiffs allege that they, as existing shareholders of
Inland, purchased additional shares of Inland on or after March 30,
2009 through Inland’s DRP. Prior to acquiring their initial shares
of Inland and prior to purchasing additional shares through the
DRP, each Plaintiff executed a Subscription Agreement in which it
was represented that the shareholder had received the relevant
Prospectus

which

contained

information

as

to

the

terms

and

conditions of the offerings, and restrictions on ownership and
transfer of shares, including the warning information set forth
above.

Nevertheless, Plaintiffs allege in their Complaint that

they purchased these additional shares “at inflated prices that did
not reflect the true value of Inland American.”

They further

allege that the prices charged under the DRP which ranged from
$9.50

down

to

$6.93

a

share,

from

March

30,

2009

through

December 19, 2012, “were inflated and did not reflect the true
value of Inland American shares.”

They further allege that the

shares recently “are believed to have been traded on the secondary
market at approximately $5.65-$6.00 a share.”

They further allege

“Defendants repeatedly advised Inland American shareholders to
reject tender offers by third parties offering to purchase Inland
American shares at prices as low as $4.00 a share and reiterated
Defendants’ claim that the Company’s shares were worth much more.”
They contend that no changes in market fundamentals or Inland’s
business and prospects over time explain this vast divergence

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between Defendants’ purported valuation of Inland American shares
and the price at which the market valued Inland American shares.
Then, incongruously, they allege that “Defendants knew that values
of commercial and residential real estate such as that held by
Inland American’s portfolio had begun to significantly deteriorate
long before Defendants began to lower the price for sales under the
DRP in September 2010.”

Plaintiffs blame this alleged discrepancy

on the Board, charging it with “refusing to inform themselves of
the value of the Company, acting in bad faith and in breach of the
fiduciary duty of loyalty in pricing the Company’s stock for
purposes of DRP sales.” They lastly claim that they were damaged by
paying inflated prices for Inland’s shares pursuant to the DRP.
They allege that they represent a class of purchasers of Inland
stock pursuant to the DRP from March 30, 2009 to the present.

They

allege that under the DRP Inland sold 24,347,096, 22,787,584,
24,855,275, and 26,571,399 shares in 2009, 2010, 2011, and 2012
respectively.
II.
The

Plaintiffs

proceeding:
Director

bring

DISCUSSION
three

counts

in

this

class

action

Count I for breach of fiduciary duty against the

Defendants;

Count

II

for

Constructive

Trust

against

Inland; and Count III for Unjust Enrichment against Inland.

The

Defendants have responded with a Motion to Dismiss pursuant to
Rule 12(b)(6).

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A.

Count I - Breach of Fiduciary Duty

The parties spend considerable time and effort on defining the
extent of the fiduciary duty owned by the Directors to shareholders
under Maryland law.
candor

while

Plaintiffs contend that it includes a duty of

Defendants

contend

that

the

only

duties

owed

shareholders are those set forth in Section 2-405.1 of the Maryland
Corporate and Associations Law, which does not include “candor” or
“disclosure.”
The parties then proceed to dissect the Maryland Supreme Court
case of Shenker v. Laureate Education, Inc., 983 A.2d 408 (Md.
2009).

Shenker involved a “cash-out merger,” which was the forced

sale of shares of dissenting shareholders to an outside buyer. The
court held that in that context the board of directors owed the
common law duty of candor and the duty to maximize the value to the
shareholders.

The court distinguished the fiduciary duty of care

owed by directors when they undertake managerial decisions on
behalf of the corporation and the fiduciary duty they assume after
a decision is made to sell the corporation.

The court cited with

approval Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506
A.2d 173 (Del. 1986), where the Delaware Supreme Court noted that
when the decision to sell the corporation is made, the role of the
Directors changes “from defenders of the corporation bastion to
auctioneers

[charged]

with

getting

the

stockholders at a sale of the company.”

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best

price

for

the

The Maryland court then

held that in the context of the cash-out merger, a duty of candor
existed in addition to those duties enumerated in Section 2-405.1.
It tellingly refrained from holding that in any and every decision
involving directors and shareholders a duty of candor existed.

In

fact, it appears that a fair reading of Shenker is that where
Directors are acting in a managerial capacity, the duties owed are
those contained in Section 2-405.1 and do not include the common
law duty of candor.
Therefore, based on the Court’s “fair reading” of Shenker, the
question is:

in what capacity were the Directors acting when they

established the price charged for shares in the DRP.
clear

that

capacity.

in

that

context

Section 2-401.

they

are

acting

in

a

It seems
managerial

Function of directors states that:

(A)

Management. – The business and affairs of a
corporation shall be managed under the
direction of a board of directors.

(B)

Power of Board. – All powers of the
corporation may be exercised by or under the
authority of the board of directors except as
conferred on or reserved to the stockholder by
law or by the charter or bylaws of the
corporation.

Here it is clear that in managing Inland the Board had the power to
set the price to be charged in both the sale of stock to the public
and the sale of stock to shareholders through the DRP.
remembered

that

Board

members

owe

a

fiduciary

corporation as well as a duty to the shareholders.

It must be

duty

to

the

Certainly the

sale of stock to the public or to shareholders through the DRP is
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intended to raise cash for the corporation so that it may carry out
its strategic plan which depended on a strong cash position in
order to be in a position to purchase commercial real estate when
the opportunity arose.

Certainly if the Board set the price too

high, this would inhibit the sale of stock to both the public and
to the existing shareholders.

If it set the price too low, the

corporation would be denied the benefit that a higher price would
bring.
DRP.

No one forced the Plaintiffs to purchase stock through the

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,

price

that

in

setting

the

share

sale

the

Board

Defendants owed Plaintiffs only the obligations set forth in
Section 2-405.1.
Section

2-405.1,

entitled

“Standard

of

care

required

directors,” states in pertinent part:
(A)

In general. – 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.

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of

Both sides cite the Delaware case of Malone v. Brincat, 722 A.2d 5,
10 (Del 1998), which stands for the proposition that issue is not
whether the board breached its duty of disclosure but whether it
breached its more general duty of loyalty and good faith by
knowingly disseminating to the stockholders false information about
the financial condition of the company.

There is no contention

that the Board knowingly disseminated false information about
Inland’s finances, or that the financials published in the Form 10Q
reports were inaccurate.
Therefore, the issue is whether the alleged inflation of the
share price on the four specific occasions charged by Plaintiffs
would support a finding a breach of the duty of loyalty and good
faith.

The answer is clearly “no.”

Here the Board established an

estimate of share price so that it could raise capital in order to
carry out its strategic plan.

It specifically told the Plaintiffs

(and other putative class members) that the price was an estimate
and could be either higher or lower than the one it set.
could

be

interpreted

as

“knowingly

disseminating

shareholders false information” is beyond cavil.

How this
to

the

The Board has

repeatedly made all of the disclosures required of it by the
Securities Exchange Act of 1934, including quarterly reports on
Form

10Q

which

contains

complete

and

detailed

financial

information. Plaintiffs do not contend in their Complaint that any
part of their financial information was false.

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The mass of detail

available to Plaintiffs from these financial reports certainly made
it possible for Plaintiffs to make their own determination as to a
reasonable

share

value

for

the

company,

or

at

least

make

a

determination that the data did or did not support the Defendants’
share price designation.

Plaintiffs also do not contend in their

Complaint that the Board did not follow the 3 factor test described
supra at page 3 in establishing a share price.
Plaintiffs make reference to a SEC investigation of Inland,
relating

to

business

management

fees,

relationships

affiliates, and determination of property evaluations.

with

Plaintiffs

do not appear to rely on this investigation, and the subsequent
internal investigation authorized by the Board, in making its case
for breach of fiduciary duty.

They could not in any event because

the subject matters of the investigation relate to possible injury
or damage to Inland which would only be raised by way of a
derivative action.

See, Shenker, 983 A 2d. at 423.

To survive a Rule 12(b)(6) Motion to Dismiss, a plaintiff must
plead “enough facts to state a claim to relief that is plausible on
its face.”
(1997).

Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570

The plaintiff must plead factual content that allows the

court to draw the reasonable inference that the defendant is liable
for the misconduct alleged.

Ashcroft v. Iqbal, 556 U.S. 662, 679

(2009). Here Plaintiffs have failed to allege any facts that would
entitle it to relief.

The mere act of a Board, exercising its

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managerial power to establish a price for its stock, even if
obviously wrong, would not amount to a breach of a fiduciary duty
owed to its shareholders.

The Plaintiffs’ theory of liability is

not only implausible but non-existent.

Count I is dismissed.

Counts II and III -- Claims for Constructive
Trust and Unjust Enrichment
In Count II Plaintiffs seek to impose a constructive trust
against Inland on the funds and Count III seeks a claim for unjust
enrichment.

Both of these claims are in equity and rest upon

Plaintiffs’ claim for breach of fiduciary duty, which the Court has
determined did not occur.

A constructive trust is employed by a

court of equity to convert the holder of the legal title to
property into a trust for one whom in good conscience should reap
the benefits of possession of the property.

“This remedy applies

when a defendant has acquired property by fraud, misrepresentation,
or other improper method or where the circumstances render it
inequitable for the party holding the title to retain it.”
v. Wimmer, 414 A.2d 1254 (Md. 1980).
the law of restitution.

Wimmer

Unjust enrichment is based on

A person who has been unjustly enriched at

the expense of another can be required to make restitution to the
other.

It is an equitable remedy and is ordinarily unavailable

where there is a legal remedy such as breach of contract.

“This

rule holds the contract parties to their agreement and prevents a
party who made a bad business decision from asking the court to
restore his expectations.” County Commissioners of Caroline County
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v. J Roland Dashiell & Sons, Inc., 747 A.2d 600, 610 (Md. 2000),
citing Prodromos v. Poulos, 148 Ill. Dec. 345 (1990).

Here

Plaintiffs executed a Subscription Agreement which governed their
stock purchase.

They believe they made a poor decision.

cannot seek a remedy in equity.

They

Accordingly, Counts II and III

are dismissed.
III.

CONCLUSION

For the reasons stated herein, Defendants’ Motion to Dismiss
Counts I, II and III of Plaintiffs’ Complaint is granted with
prejudice.
IT IS SO ORDERED.

Harry D. Leinenweber, Judge
United States District Court
Date:11/18/2013

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