In re Apple REITs Litigation
Filing
131
MEMORANDUM AND ORDER: For the reasons discussed in the attached Memorandum and Order, Defendants' motions 104 , 105 , and 115 to dismiss the Amended Consolidated Class Action Complaint 82 with prejudice are granted in their entirety. The Clerk of the Court is respectfully directed to enter judgment in favor of (1) defendants Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc., and Apple REIT Ten, Inc.; (2) defendants Glenn W. Bunting, Kent W. C olton, Michael S. Waters, Robert M. Wiley, Bruce H. Matson, Garnett Hill, Jr., Anthony Francis "Chip" Keating, Ronald A. Rosenfeld, David J. Adams, and Lisa B. Kern, Glade M. Knight, Bryan Peery, Apple Fund Management, LLC, Apple Suites Rea lty Group Inc., Apple Eight Advisors, Inc., Apple Nine Advisors, Inc., and Apple Ten Advisors, Inc.; and (3) defendants David Lerner and David Lerner Associates, Inc., and to close this case. Ordered by Judge Kiyo A. Matsumoto on 4/3/2013. (Beauchamp, Peter)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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IN RE APPLE REITs LITIGATION
MEMORANDUM & ORDER
11-CV-2919 (KAM)
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MATSUMOTO, United States District Judge:
Putative class plaintiffs Stanley and Debra Kronberg,
Marvin Bendavid, Laura Berger, Barbara Shefsky, and William
Murray (“individual plaintiffs”) commenced this Consolidated
Class Action pursuant to the Private Securities Litigation
Reform Act, 15 U.S.C. § 77a et seq. (“PSLRA”) and Federal Rule
of Civil Procedure 23 on behalf of themselves and others
similarly situated (all plaintiffs, collectively, “Proposed
Class Plaintiffs”) against defendants alleging claims under
section 11, 15 U.S.C. § 77k (“section 11”), section 12(a)(2), 15
U.S.C. § 77l(a)(2) (“section 12(a)(2)”), and section 15, 15
U.S.C. § 77o (“section 15”), of the Securities Act of 1933
(“Securities Act”); common law breach of fiduciary duty, unjust
enrichment, and negligence; the Connecticut Uniform Securities
Act; and the Florida Securities Investor Protection Act.
generally ECF No. 82, Amended Consolidated Class Action
Complaint (“Compl.”).)
(See
Presently before the court are three motions to
dismiss by (1) defendants Apple REIT Six, Inc., Apple REIT
Seven, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc., and
Apple REIT Ten, Inc. (collectively, the “Apple REITs”); (2)
defendants Glenn W. Bunting, Kent W. Colton, Michael S. Waters,
Robert M. Wiley, Bruce H. Matson, Garnett Hill, Jr., Anthony
Francis “Chip” Keating, Ronald A. Rosenfeld, David J. Adams, and
Lisa B. Kern, Glade M. Knight, Bryan Peery (collectively, the
“Apple Individuals”), Apple Fund Management, LLC, Apple Suites
Realty Group Inc., Apple Eight Advisors, Inc., Apple Nine
Advisors, Inc., and Apple Ten Advisors, Inc. (collectively, the
“Apple Affiliates”), (collectively, “Apple Individuals &
Affiliates”); and (3) defendants David Lerner and David Lerner
Associates, Inc. (“DLA”) (collectively, “DLA Defendants”) (all
defendants, collectively, “Defendants”).
(See ECF No. 104, Mot.
to Dismiss for Failure to State a Claim by Apple REITs; ECF No.
105, Mot. to Dismiss for Failure to State a Claim by Apple
Affiliates; ECF No. 115, Mot. to Dismiss for Failure to State a
Claim by DLA Defendants.)
For the reasons set forth below,
Defendants’ motions to dismiss the Complaint are granted.
BACKGROUND
I.
Procedural History
On June 17, 2011, Nancy Kowalski filed a complaint in
this district.
(See ECF No. 1, Compl.); Kowalski v. Apple REIT
2
Ten, Inc., et al, 11-CV-2919 (E.D.N.Y.).
On June 20, 2011,
Stanley and Debra Kronberg filed a class action complaint (and
an amended class action complaint on October 20, 2011) against
the DLA Defendants in the United States District Court for the
District of New Jersey.
Kronberg v. David Lerner Associates,
Inc., et al., 11-CV-3558 (D.N.J.).
On June 28, 2011, Marvin
Leff filed a complaint in this district against the same
defendants named in Kowalski’s complaint.
(See ECF No. 9,
Notice of Related Case entered June 28, 2011); Leff v. Apple
REIT Ten, Inc., et al., 11-CV-3094 (E.D.N.Y.).
On November 9,
2011, the District of New Jersey granted the DLA Defendants’
motion to transfer the Kronberg action to this district for
consolidated proceedings with the other two actions.
Upon
stipulation of the parties on December 13, 2011, the court
ordered that these three cases be consolidated into one action
in this district.
(See ECF No. 78, Stipulation and Order.)
Subsequently, on February 17, 2012, plaintiffs filed the instant
Complaint.
II.
The Parties
A.
Plaintiffs
Plaintiffs are six individuals who, based on DLA
Defendants’ solicitations, invested in real estate investment
3
trusts (“REITs”),1 specifically, REIT Six, REIT Seven, REIT
Eight, REIT Nine, and/or REIT Ten, which have been operated or
sold by Defendants.
(Compl. ¶¶ 4-5, 15-19.)
Plaintiffs bring this putative class-action lawsuit on
behalf of themselves and a Proposed Class of all others who have
purchased shares in Apple REITs Six, Seven, Eight, Nine, and
Ten, which were offered and sold by Defendants.
(Id. ¶ 14.)
(Id. ¶ 58.).
Additionally, the Kronberg individual plaintiffs
allege claims on behalf of themselves and a proposed New Jersey
subclass consisting of all other New Jersey residents who have
purchased any of the Apple REITs’ shares that were offered and
sold by the DLA Defendants; the Bendavid and Shefsky individual
Plaintiffs allege claims on behalf of themselves and a proposed
New York subclass consisting of all other New York residents who
have purchased any of the Apple REITs’ shares that were offered
and sold by the DLA Defendants; individual plaintiff Berger
alleges claims on behalf of herself and a proposed Connecticut
1
As Plaintiffs explain, a REIT
is an entity that owns and operates incomeproducing real estate and distributes the
income to investors. REITs pool the capital of
numerous investors to purchase a portfolio of
properties the typical investor might not be
able to buy individually. To qualify as a
REIT, a company must have most of its assets
and income tied to a real estate investment and
must distribute at least 90% of its taxable
income to shareholders annually in the form of
dividends.
(Compl. ¶ 71.)
4
Subclass consisting of all other Connecticut residents who have
purchased any of the Apple REITs’ shares that were offered and
sold by the DLA Defendants; individual plaintiff Murray brings
this lawsuit on behalf of himself and a Proposed Florida
Subclass consisting of all other Florida residents who have
acquired any of the Apple REITs’ shares that were offered and
sold by DLA Defendants.
B.
(Id. ¶¶ 59-62.)
Defendants
The Apple REITs are non-traded public companies
subject to Securities and Exchange Commission (“SEC”) reporting,
that offer and sell non-traded security interests, primarily in
hotel revenues.2
(Id. ¶ 73; see also id. ¶¶ 28-32.)
All of the
Apple REITs’ shares have been SEC-registered, and the shares are
nearly illiquid because they are not traded on any public
securities exchange.
(Id. ¶ 73.)
As of February 17, 2012,
REITs Six through Nine are operating but have closed to new
investors, and REIT Ten is still open to new investors.3
(Id. ¶
73; see id. ¶¶ 28-32, 74.)
The Apple Affiliates are four corporations and one
limited liability company “that provide property management
2
“The Apple REITs all invest primarily in Marriot and Hilton
extended stay and limited service hotels. (One exception was Apple REIT
Nine’s acquisition in 2009 of . . . land . . . .)” (Compl. ¶ 75.)
3
When REIT Six closed to new investors, REIT Seven opened; when
REIT Seven closed to new investors, REIT eight opened; and so on, up to REIT
Ten. (See Compl. ¶ 73.)
5
acquisition, advisory, operational and managerial services to
the Apple REITs.”4
(Id. ¶ 5.)
Glade M. Knight is the founder, Chairman, and Chief
Executive Officer of all of the Apple REITs, is the sole owner
of Apple Suites Realty Group, Apple Eight Advisors, Apple Nine
Advisors, and Apple Ten Advisors, and is the indirect owner of
Apple Fund Management.
(Id. ¶¶ 5, 28-33, 72, 96.)
Knight has
signed the SEC registration statements for REITs Eight through
Ten, and has signed various SEC forms with respect to Apple REIT
Nine.
(Id. ¶ 33.)
Bryan Peery, the Executive Vice President and Chief
Financial Officer of all of the Apple REITs, has signed the SEC
registration statements for REITs Eight through Ten and has
signed various SEC forms with respect to REIT Nine.
(Id. ¶ 39.)
At the time the Complaint was filed, each of the Apple
REIT Individuals had been a director of at least one of the
Apple REITs.
(Id. ¶¶ 40-50.)
Each REIT Individual has been
named in the SEC registration statement or post-effective
amendments of REITs Eight, Nine, or Ten.
4
(Id. ¶¶ 40-50.)
Specifically, the Apple Suites Realty Group provides brokerage
services for all of the Apple REITs; Apple Eight Advisors, Apple Nine
Advisors, and Apple Ten Advisors appraise and propose property for the REITs
to purchase, advise on REIT investments, and manage day-to-day operations of
their respectively named Apple REITs; and Apple Fund Management (a subsidiary
of REIT Six) supplies staffing services for all of the other Apple REIT
Affiliates, “which have no employees.” (Compl. ¶¶ 34-38, 96).
6
David Lerner (“Lerner”) is the founder, president, and
controlling owner of the private brokerage firm DLA, a
registrant with the SEC and a member of the Financial Industry
Regulatory Authority (“FINRA”).
(Id. ¶¶ 20, 26.)
DLA has
“served as [the] best efforts underwriter and exclusive selling
agent” of the Apple REITs.5
(Id. ¶ 72; see also id. ¶¶ 5, 21,
83.)
C.
Plaintiffs’ Complaint
1.
Factual Allegations
Plaintiffs allege the following pertinent facts, which
the courts accepts as true for purposes of Defendants’ motions.
“The offerings in which Plaintiffs invested were
structured as ‘blind pool’ offerings, in which Plaintiffs
committed their money before knowing what properties the REITs
would purchase with the net offering proceeds.”
(Id. ¶ 6.)
After the DLA Defendants sold the first 5% of each of the REITs’
shares for $10.50, they sold the rest of the shares at a fixed
price of $11 per share.
(Id. ¶¶ 8, 77.)
Until sometime in
February 2012, all of the REITs consistently paid the Plaintiffs
monthly distributions equal to, on an annualized basis,
approximately 7%-8% of their principal investments.
79.)
(Id. ¶¶ 8,
Plaintiffs believed that until approximately May 2011, the
5
For all of the REITs’ offerings, the DLA Defendants entered into
an “Agency Agreement” with the Apple REITs, which “engaged DLA [Defendants]
to solicit purchasers for shares in the Apple REITs.” (Compl. ¶ 187.)
7
REITs “were performing sufficiently well to justify payment of
dividends of 7% to 8%,” and that Plaintiffs had a good chance of
recovering their principal at the end of the investments’ terms.
(Id. ¶ 8.)
Through the DLA Defendants’ “Dividend Reinvestment
Plan” (“DRIP”), many of the REITs’ investors reinvested their
distributions to acquire additional shares of open Apple REITs
at the fixed price of $11 per share.
(Id. ¶ 80; see id. ¶ 87.)
The DLA Defendants are alleged to have encouraged its investors
“to invest in multiple REITs.”
(Id. ¶ 87.)
Investors of the REITs have had the limited right to
redeem their shares, and, if done within three years of their
initial investment, investors would receive 92% of their
principal investment.
(Id. ¶ 81.)
After three years, investors
could redeem their shares for the full $11 purchase price.
¶ 81.)
(Id.
Redemptions after three years “were limited to 3% to 5%
of the weighted average number of shares outstanding during the
12-month period immediately prior to the date of redemption.”
(Id. ¶ 81.)
Hence, “if a substantial number” of investors “were
to seek redemption at or about the same time, only a small
fraction [of investors] would be eligible.”
(Id. ¶ 81.)
Because REITs are not publicly traded, Plaintiffs (1)
anticipated “hold[ing] their shares for a five to seven year
term, with the understanding that” the DLA Defendants would
eventually “seek to list the shares on a national securities
8
exchange”; (2) relied “on the sale of properties or listing for
the return of their principal”; and (3) relied “on the
disclosures made by [the DLA Defendants] for information about
the value of the REITs’ shares.”6
(Id. ¶ 3.)
In May 2011, FINRA filed a complaint against the DLA
Defendants.7
(Compl. ¶ 9.)
After that lawsuit became public,
6
Before the conclusion of the REITs’ terms, investors seeking to
sell their shares are alleged to have resold them either to the DLA
Defendants or “in an inefficient secondary market, usually at severe
discounts.” (Compl. ¶ 3.) Thus, Plaintiffs were disinclined to sell their
shares before the conclusion of the REITs’ terms. (See id.)
7
On October 23, 2012, Plaintiffs filed a letter informing the
court that, on October 22, 2012, DLA Defendants and FINRA agreed to a
settlement of FINRA’s complaint. (ECF No. 126, Pls. Ltr. at 1.) In that
letter, Plaintiffs urge the court to take judicial notice of the settlement,
which was attached as an exhibit to the letter. (Id.; ECF No. 126-1,
Settlement.) On October 26, 2012, DLA Defendants filed a letter in
opposition to Plaintiffs’ request, arguing that the settlement is irrelevant
to this case because it does not constitute an adjudication of FINRA’s
complaint, and DLA Defendants specifically consented to the entry of findings
as part of the settlement “without admitting or denying the allegations” of
the complaint. (ECF. No. 127, DLA Opp. Ltr. at 1; Settlement.) On October
31, 2012, Apple REIT Defendants filed a letter joining in DLA Defendants’
letter, and also noting that no Apple REIT Defendant was a party to the FINRA
action. (ECF No. 128, Apple REITs Opp. Ltr.) On November 1, 2012,
Plaintiffs filed a response to DLA Defendants’ letter, citing cases in which
district courts have held that “[t]here is no absolute rule barring a private
plaintiff from relying on government pleadings and proceedings in order to
meet the Rule 9(b) and PSLRA thresholds.” (ECF No. 129, Pls. Response Ltr.
at 1 (quoting SEC v. Lee, 720 F. Supp. 2d 305, 340 (S.D.N.Y. 2010) (emphasis
added)).)
Notwithstanding Plaintiffs’ assertions, because DLA Defendants’
settlement with FINRA “was the result of private bargaining, and there was no
hearing or rulings or any form of decision on the merits,” it is immaterial
to the instant motion. Lipsky v. Commonwealth United Corp., 551 F.2d 887,
894 (2d Cir. 1976). Defendants have not specifically moved to strike
references to the FINRA pleadings from the Complaint. Rather, the DLA
Defendants oppose the court taking judicial notice of the FINRA settlement as
additional pleading of Plaintiffs’ allegations. Cf. In re Platinum &
Palladium Commodities Litig., 828 F. Supp. 2d 588, 593 (S.D.N.Y. 2011)
(“[C]ourts in this Circuit have found repeatedly . . . that references
to . . . administrative proceedings that did not result in an adjudication on
the merits or legal or permissible findings of fact are, as a matter of law,
immaterial.” (internal quotation marks omitted)); see also id. (collecting
cases). Indeed, one of the cases cited by Plaintiffs notes that “a consent
judgment that does not involve any admissions and that results in . . .
9
“[r]edemption requests for all of the Apple REITs increased
significantly, and the Apple REITs [have, as of February 17,
2012, ceased] granting 100% of the requests.”
(Id. ¶ 171.)
“Despite the significant increase in the number of requests” for
redemption, in or about October 2011 or February 2012, “REITs
Six, Seven, and Eight announced plans to further limit the
number of redemption requests that [would] be granted, dropping
the . . . 3% to 5% limit down to 2% of the weighted average of
outstanding units during the 12-month period immediately prior
to the date of redemption.”
(Id. ¶ 172; see also id. ¶ 81.)
Following the filing of FINRA’s complaint against DLA
Defendants, Plaintiffs claim to have determined first that the
Defendants “misrepresented the investment objectives of the
Apple REITs, the dividend payment policy of the Apple REITs, and
the value of their Apple REIT investments.”
(Id. ¶ 10.)
All of
the Apple REITs’ stated investment objectives included
“maximiz[ing] shareholder value by achieving long-term growth in
cash distributions to [their] shareholders,” “acquiring incomeproducing real estate,” and “maximiz[ing] current and long-term
net income and the value of [their] assets.”
76.)
(Id. ¶¶ 6, 10,
Nevertheless, Plaintiffs claim, the REITs
penalties is just as frequently viewed . . . as a cost of doing business
imposed by having to maintain a working relationship with a regulatory
agency, rather than as any indication of where the real truth lies.” SEC v.
Citigroup Global Mkts. Inc., 827 F. Supp. 2d 328, 333 (S.D.N.Y. 2011)
(emphasis added). Therefore, the court declines to take judicial notice of
DLA Defendants’ settlement with FINRA.
10
pursued a policy of maintaining a steady 7%
to 8% rate of distributions, without regard
to the ability of the REIT to fund the
distributions from operating income. The
Apple REIT’s distribution policy was
dictated by Defendants’ interest in carrying
on continuous sales of the REITs and the
need for new capital to fund distributions
to maintain the appearance that the REITs
were operating profitably. The Apple REITs
set distribution rates to be competitive
with other non-traded REITs and paid
distributions without regard to
profitability, even as they acquired
properties at prices they knew could not
conceivably justify the level of
distributions they were paying. Defendants
nevertheless continued to solicit new
investments from Plaintiffs and other
investors using offering materials that
contained false and misleading statements
about the Apple REITs’ investment objectives
and coy references to the possibility they
might return capital in the form of
distributions for some limited period of
time.
(Id. ¶ 11; see id. ¶ 79.)8
Plaintiffs claim that the stated
investment objectives were not followed because “the Apple REITs
8
(See also Compl. ¶ 100):
“[E]ven as the market peaked in 2007, Apple REITs Six
and Seven were not generating sufficient income to
consistently pay 7% to 8% dividends to investors from
operating cash.
. . . . Returning capital to investors
and taking on debt that must be serviced out of
future income and new investor proceeds limited the
REITs’ ability to acquire income-producing assets,
and thus to generate future income for distribution
to investors, and reduced the value of the shares.”);
id. ¶¶ 104-05 (second alteration in Offering
Documents) (“The offering documents [for each REIT
offering, which include the registration statements,
the prospectuses, and the prospectus supplements,]
say that ‘[d]istributions will be at the discretion
of our board [of directors]’ and ‘will depend on
11
operated in a manner inconsistent with” those objectives, as
opposed to “the result of mismanagement or changes in investment
objectives that occurred after Defendants had solicited
Plaintiffs’ investments.”
(Id. ¶ 10.)
Plaintiffs second claim that the REITs’ disclosures
“did not fairly appraise [sic] Plaintiffs of the following
alleged investment objectives and policies implemented in
operating earlier Apple REITs,” as well as REITs Six through
Ten:
[A]cquiring properties at prices that
ensured Apple REIT investors would lose a
substantial portion of their principal
unless the properties appreciated greatly in
value; depleting the capital raised from
investors to pay distributions at rates that
far exceeded the operating income generated
by the properties; and depleting capital to
repurchase at inflated values the shares
tendered by earlier investors who wished to
liquidate their interests, in order to
prevent the development of a secondary
market in which Apple REIT shares traded for
less than their stated value.
(Id. ¶ 12.)
Plaintiffs third allege that the following acts and
practices of the Defendants “compounded the misleading
factors including: gross revenue we receive from our
properties, our operating expenses, our interest
expenses incurred in borrowing, capital expenditures,
and our need for cash reserves.’ In fact, [however,]
the boards set distribution rates at a level that
would promote further sales of Apple REIT shares and
be competitive with other non-traded REITs.”
12
impressions created by the written disclosures Defendants
circulated to” the Plaintiffs:
DLA’s marketing and sales presentations
emphasized that investors could repose trust
and confidence in David Lerner and his sales
operatives; that David Lerner had developed
a desirable “middle ground” investment
strategy that permitted investors to achieve
reasonable rates of return without assuming
undue risks; that no investor had ever lost
a penny investing in Apple REITs; that the
Apple REITs paid attractive rates of return
in comparison to other alternatives
available to retail investors; that
investments in the Apple REITs were
desirable because they were shielded from
fluctuations in the stock market; that Apple
REIT investments would prove profitable
because the REITs were acquiring highly
desirable properties at attractive prices
without incurring debt; and that the Apple
REITs were appropriate investments for
conservative, income oriented investors.9
(Id. ¶ 13.)
Plaintiffs claim that these alleged
misrepresentations were material because Plaintiffs relied upon
them.
(See id. ¶ 3.)
In addition, Plaintiffs claim that
although the REITs’ shares were worth much less than $11, the
DLA Defendants’ monthly customer account statements valued all
of the Apple REITs at the market price and market value of $11
until May 2011.
(Id. ¶¶ 13, 78.)
Subsequent to the May 2011
FINRA complaint, the DLA Defendants replaced the $11 valuation
on the statements with “not priced,” “deleted the explanation of
9
(See also Compl. ¶ 7 (“Plaintiffs were told the Apple REITs were
safe, conservative investments that would protect their savings from the
volatility of the stock market,” “that previous Apple REITs had a track
record of paying dividends at a rate of return in the range of 7% to 8%”).)
13
how the share value was calculated from the statements, and gave
no explanation for the change to ‘not priced.’”
(Id. ¶¶ 13, 78,
173.)
Lastly, the Apple REIT Defendants are alleged to be
jointly responsible for the DLA Defendants’ alleged wrongdoings
based on their contractual relationships.
2.
(See id. ¶¶ 187-94.)
Substantive Claims
Plaintiffs’ thirteen-count complaint asserts the
following claims:
Count One, asserted on behalf of Proposed Class
Plaintiffs who acquired Apple REIT Ten shares and were damaged
by misrepresentations or omissions of material facts in REIT
Ten’s registration statement, alleges that the DLA Defendants,
REIT Ten, and those who served on the board of directors of REIT
Ten violated section 11.
(Id. ¶¶ 198-207.)
Count Two, asserted on behalf of Proposed Class
Plaintiffs who acquired REIT Nine and/or Ten shares and were
damaged by misrepresentations or omissions of material facts in
REIT Nine and/or Ten’s prospectuses or oral representations,
alleges that the DLA Defendants and REIT Nine and Ten violated
section 12(a)(2).
(Id. ¶¶ 208-19.)
Count Three, asserted on behalf of Proposed Class
Plaintiffs who acquired REIT Nine shares and were damaged by
misrepresentations or omissions of material facts in REIT Nine’s
14
prospectuses and/or oral representations, alleges that Apple
Nine Advisors, Apple Suites Realty Group, Apple Fund Management,
and Apple REIT Officers Waters, Wily, Kern, and Matson violated
section 15.
(Id. ¶¶ 220-23.)
Count Four, asserted on behalf of Proposed Class
Plaintiffs who acquired REIT Ten shares and were damaged by
misrepresentations or omissions of material facts in REIT Ten’s
registration statements, prospectuses, or oral representations,
alleges that Apple Ten Advisors, Apple Suites Realty Group,
Apple Fund Management, Apple REIT Officers Colton, Hall,
Keating, Rosenfeld, and Adams violated section 15.
(Id. ¶¶ 224-
27.)
Count Five, asserted on behalf of Proposed Class
Plaintiffs who acquired REIT Nine and/or Ten shares and were
damaged by misrepresentations or omissions of material facts in
REIT Nine and/or Ten’s prospectuses or oral representations
and/or REIT Ten’s registration statement, alleges that Lerner
violated section 15.
(Id. ¶¶ 228-31.)
Count Six alleges that DLA Defendants breached their
common law fiduciary duty and/or aided and abetted that breach.
(Id. ¶¶ 232-38.)
Count Seven alleges that the Apple Individuals
breached their fiduciary duty under the REIT’s bylaws and the
North American Securities Administrators Association’s Policy
15
Regarding Real Estate Investment Trusts, that Apple Affiliates
aided and abetted that breach, and that Apple Individuals and
Apple Affiliates aided and abetted the DLA Defendants’ breach of
fiduciary duty.
(Id. ¶¶ 239-44.)
Count Eight alleges common law unjust enrichment on
behalf of all Plaintiffs against Defendants.
(Id. ¶¶ 245-50.)
Count Nine alleges common law negligence and breach of
various federal and state laws “and applicable industry rules,
regulations, and regulatory notices issued by FINRA or its
predecessor, the National Association of Securities Dealers
(“NASD”), including FINRA Rules 2010, 2020, 2710, and NASD Rules
2210 and 2310 against the Defendants.
(Id. ¶¶ 251-55.)
Count Ten, asserted by individual plaintiff Berger on
behalf of Connecticut Subclass Members, alleges that the DLA
Defendants, Lerner, and REITs Eight, Nine, and Ten violated the
Connecticut Uniform Securities Act (“CUSA”), Conn. Gen. Stat. §
36b-4(a)(2) (misrepresentation or omission of a material fact
made in connection with an offer, a sale, or a purchase of a
security).
(Id. ¶¶ 256-60.)
Count Eleven, asserted by individual plaintiff Berger
on behalf of Connecticut Subclass Members, alleges that the
Apple Individuals, DLA Defendants, and REITs Eight, Nine, and
Ten violated the CUSA, Conn. Gen. Stat. § 36b-5(a)(2), by
misrepresenting or omitting a material fact in connection with
16
advising another as to the value, purchase, or sale of a
security, and § 36b-5(f), by engaging in dishonest or unethical
practices in connection with investment security advice.
(Id.
¶¶ 261-67.)
Count Twelve, asserted by individual plaintiff Berger
on behalf of Connecticut Subclass Members, alleges that the
Apple Individuals, DLA Defendants, and REITs Eight, Nine, and
Ten violated the CUSA, Conn. Gen. Stat. § 36b-29(a)(2), by
misrepresenting or omitting a material fact in connection with
an offer or sale of a security.
(Id. ¶¶ 268-75.)
Count Thirteen, asserted by individual plaintiff
Murray on behalf of Florida Subclass Members, alleges that the
Apple Individuals, DLA Defendants, and REITs Eight, Nine, and
Ten violated the Florida Securities Investor Protection Act
(“FSIPA”), Fla. Stat. § 517.301(1)(a), by obtaining money or
property by means of a misrepresentation or omission of a
material fact in connection with investment security advice or
an offer, sale, or purchase of a security.
(Id. ¶¶ 276-81.)
DISCUSSION
I.
Standard for Rule 12(b)(6) Motion to Dismiss
Rule 12(b)(6) provides for the dismissal of a cause
of action if plaintiff’s complaint fails “to state a claim upon
which relief can be granted.”
Fed. R. Civ. P. 12(b)(6).
In
order to survive a motion to dismiss, “a complaint must contain
17
sufficient factual matter, accepted as true, to ‘state a claim
to relief that is plausible on its face.’”
Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly,
550 U.S. 544, 570 (2007)).
To determine whether a complaint
states a plausible claim for relief, the Supreme Court has
suggested a “‘two-pronged approach.’”
Hayden v. Paterson, 594
F.3d 150, 161 (2d Cir. 2010) (quoting Iqbal, 556 U.S. at 679).
First, a court should begin “by identifying pleadings that,
because they are no more than conclusions, are not entitled to
the assumption of truth.”
Iqbal, 556 U.S. at 679 (“While legal
conclusions can provide the framework of a complaint, they must
be supported by factual allegations.”).
Second, “[w]hen there
are well-pleaded factual allegations, a court should assume
their veracity and then determine whether they plausibly give
rise to an entitlement to relief.”
Id.
The plausibility determination is “a context-specific
task that requires the reviewing court to draw on its judicial
experience and common sense.”
Id.
A claim is plausible “when
the plaintiff pleads factual content that allows the court to
draw the reasonable inference that the defendant is liable for
the misconduct alleged.”
Id. at 678.
The plausibility
standard, however, does not require a showing of a “probability”
of misconduct, but it does demand more than a “sheer possibility
that a defendant has acted unlawfully.”
18
Id.
A well-pleaded complaint may survive a motion to
dismiss even where “it strikes a savvy judge that actual proof
of those facts is improbable, and that a recovery is very remote
and unlikely.”
Twombly, 550 U.S. at 556 (citation and internal
quotation marks omitted).
This is because the court’s function
is “not to weigh the evidence that might be presented at trial
but merely to determine whether the complaint itself is legally
sufficient.”
Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.
1985).
In conducting such an assessment on a Rule 12(b)(6)
motion to dismiss, courts must “‘accept as true all allegations
in the complaint and draw all reasonable inferences in favor of
the non-moving party.’” Vietnam Ass’n for Victims of Agent
Orange v. Dow Chem. Co., 517 F.3d 104, 115 (2d Cir. 2008)
(citation omitted); Starr v. Sony BMG Music Entm’t, 592 F.3d
314, 321 (2d Cir. 2010). Further, courts may consider “the full
text of documents that are quoted in the complaint or documents
that the plaintiff either possessed or knew about and relied
upon in bringing the suit.”
Holmes v. Air Line Pilots Ass’n,
745 F. Supp. 2d 176, 193 (E.D.N.Y. 2010) (internal quotations
marks omitted).
When assessing the sufficiency of claims under
sections 11 and 12(a)(2) of the Securities Act, “the structure
of the analysis is guided by a preliminary inquiry into the
19
nature of the plaintiff’s allegations.
Where the claims are
‘premised on allegations of fraud,’ the allegations must satisfy
the heightened particularity requirements of Rule 9(b) of the
Federal Rules of Civil Procedure.”
In re Morgan Stanley Info.
Fund Sec. Litig., 592 F.3d 347, 358 (2d Cir. 2010) (internal
citation omitted).
However, where, as in this case, a
plaintiff’s claims are not premised on allegations of fraud,
(see generally Compl.), Rule 8(a) governs the complaint and
“notice pleading supported by facially plausible factual
allegations is all that is required--nothing more, nothing less”
Id.
II.
Defendants’ Motions to Dismiss10
“[I]n securities actions, the Court may consider
‘public disclosure documents required by law to be, and that
have been, filed with the SEC, and documents that the plaintiffs
either possessed or knew about and upon which they relied in
bringing the suit.’”
Sedona Corp. v. Ladenburg Thalmann & Co.,
No. 03 Civ. 3120, 2005 U.S. Dist. LEXIS 16382, at *17 (S.D.N.Y.
10
Although the three groups of Defendants filed separate motions
to dismiss, in addition to the arguments made in each group’s own motion,
Defendants incorporate by reference the arguments made in each other’s moving
papers. (See ECF No. 118, DLA Defendants’ Reply Mem. of Law in Supp. of Mot.
to Dismiss (“DLA Reply”) at 15 n.20; ECF No. 108, Apple REITs’ Mem. of Law in
Supp. of Mot. to Dismiss (“REITs Mem.”) at 1 n.1; Apple Individuals and
Affiliates’ Mem. of Law in Supp. of Mot. to Dismiss (“Individuals Mem.”) at 1
n.1.) Further, because the claims against Defendants substantially overlap
and derive from the same body of operative facts, Plaintiffs oppose all three
motions in a single opposition brief. (See generally ECF No. 116,
Plaintiffs’ Mem. of Law in Opp. to Defendants’ Mots. to Dismiss (“Pls.
Opp.”).) Therefore, the court refers to Defendants collectively throughout
this opinion, unless otherwise noted.
20
Aug. 8, 2005) (quoting Rothman v. Gregor, 220 F.3d 81, 89 (2d
Cir. 2000)).
The PSLRA further provides that “[o]n any motion
to dismiss . . . , the court shall consider any statement cited
in the complaint and any cautionary statement accompanying [a]
forward-looking statement, which [is] not subject to material
dispute, cited by the defendant.”
15 U.S.C. § 78u-5(e).
In its consideration of Defendants’ motions to dismiss
and Plaintiffs’ opposition thereto, the court has carefully
reviewed the extensive exhibits submitted by the parties.
These
exhibits include the Apple REITs’ prospectuses and supplements;
Form 10-Q, 10-K, and 8-K filings by the REITs to the SEC;
“Subscription Agreements” by which investors certify to having
received the prospectus; the “Acknowledgment of Risk” forms
executed by the individual Plaintiffs; and charts by the parties
that summarize the various disclosures at issue in this action.
(See generally ECF No. 117, Decl. of Michael D. Blanchard in
Supp. of DLA Defendants’ Mot. to Dismiss (“Blanchard Decl.”)
Exs. A-K; ECF No. 116-2, Decl. of Dena C. Sharp in Supp. of
Pls.’ Opp. to Mots. to Dismiss (“Sharp Decl.”) Exs. A-K.)
A.
Plaintiffs’ Claims for Violations of Sections 11 and
12(a)(2) of the Securities Act
Defendants argue that each of Plaintiffs’ claims
pursuant to sections 11 and 12(a)(2) of the Securities Act fail
as a matter of law.
(See generally ECF No. 115, DLA Defendants’
21
Mem. of Law in Supp. of Mot. to Dismiss (“DLA Mem.”) at 13-23.)
Plaintiffs counter that the Complaint adequately pleads claims
against Defendants pursuant to sections 11 and 12(a)(2).
generally Pls. Opp. at 20-49.)
(See
Each of Plaintiffs’ claims is
addressed below.
1.
Actionable Misrepresentations or Omissions
“Sections 11 [and] 12(a)(2) . . . of the Securities
Act impose liability on certain participants in a registered
securities offering when the publicly filed documents used
during the offering contain material misstatements or omissions.
Section 11 applies to registration statements, and section
12(a)(2) applies to prospectuses and oral communications.”
In
re Morgan Stanley, 592 F.3d at 358 (citing 15 U.S.C. §§ 77k(a),
77l(a)(2).)
Section 11 “prohibits materially misleading statements
or omissions in registration statements filed with the SEC.”
Id.
To state a claim under section 11, the
plaintiff must allege that: (1) she
purchased a registered security, either
directly from the issuer or in the
aftermarket following the offering; (2) the
defendant participated in the offering in a
manner sufficient to give rise to liability
under section 11; and (3) the registration
statement “contained an untrue statement of
a material fact or omitted to state a
material fact required to be stated therein
or necessary to make the statements therein
not misleading.”
22
Id. at 358-59 (quoting 15 U.S.C. § 77k(a)).
Section 11 “places
a relatively minimal burden on a plaintiff,” and is “designed to
assure compliance with the disclosure provisions of the
[Securities] Act by imposing a stringent standard of liability
on the parties who
offering.”
play a direct role in a registered
Herman & Maclean v. Huddleston, 459 U.S. 375, 381-82
(1983).
“Section 12(a)(2) provides similar redress where the
securities at issue were sold using prospectuses or oral
communications that contain material misstatements or
omissions.”
In re Morgan Stanley, 592 F.3d at 359.
“[T]he
elements of a prima facie claim under section 12(a)(2) are: (1)
the defendant is a ‘statutory seller’; (2) the sale was
effectuated ‘by means of a prospectus or oral communication’;
and (3) the prospectus or oral communication ‘include[d] an
untrue statement of a material fact or omit[ted] to state a
material fact necessary in order to make the statements, in the
light of the circumstances under which they were made, not
misleading.’”
Id. (quoting 15 U.S.C. § 77l(a)(2)).
Defendants
do not dispute that they qualify as “statutory sellers” pursuant
to section 12(a)(2).
(See generally DLA Mem.; Apple REIT Mem.;
Apple Individuals Mem.)
23
In determining whether a securities offeror’s
statements are actionable under sections 11 and 12(a)(2), a
court analyzes
the allegedly fraudulent materials in their
entirety to determine whether a reasonable
investor would have been misled. The
touchstone of the inquiry is not whether
isolated statements within a document were
true, but whether defendants’
representations or omissions, considered
together and in context, would affect the
total mix of information and thereby mislead
a reasonable investor regarding the nature
of the securities offered.
Rombach v. Chang, 355 F.3d 164, 173 (2d Cir. 2004) (quoting
Halperin v. Ebanker USA.com, Inc., 295 F.3d 352, 357 (2d Cir.
2002)).
Finally, “unlike securities fraud claims pursuant to
section 10(b) of the Securities Exchange Act of 1934, plaintiffs
bringing claims under sections 11 and 12(a)(2) need not allege
scienter, reliance, or loss causation.”
In re Morgan Stanley,
592 F.3d at 359 (internal citation omitted).
a.
The REITs’ “Investment Objectives”
The Apple REITs’ stated in their prospectuses that
their investment objectives included “maximiz[ing] shareholder
value by achieving long-term growth in cash distributions to
[their] shareholders,’” “acquiring income-producing real
estate,” and “‘maximiz[ing] current and long-term net income and
the value of [shareholders’] assets.”
24
(Compl. ¶¶ 6, 10, 76.)
Plaintiffs claim that the REITs’ stated investment objectives
constitute material misstatements or omissions because
“defendants’ true intention was to maintain the appearance that
the REITs were profitable to continue selling shares and
collecting fees.”
(Id. Counts One, Two; Pls. Opp. at 28.)
The
court finds that plaintiffs fail to state a claim that the
REITs’ investment objectives constitute material misstatements
or omissions.
The court first notes that to the extent Plaintiffs
claim that Defendants intentionally hid their true intentions
from investors and “at no time intended to, or did operate the
REITs” according to the REITs’ investment objectives, (id. at
23), this claim could only sound in fraud under section 10(b) of
the 1934 Act, which Plaintiffs have not adequately pleaded
pursuant to the heightened particularity requirement of Rule
9(b), Apple v. Atlantic Yards Dev. Co. LLC., No. 11-CV-5550,
2012 U.S. Dist. LEXIS 84281, at *21 (E.D.N.Y. June 18, 2012)
(citing Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128
(2d Cir. 1994)).
Indeed, Plaintiffs disclaim any intent to
allege fraud under section 10(b) in this action.
(Pls. Opp. at
19 n.5.)
Second, if Plaintiffs cannot and do not intend to
allege intentional fraud, then claims that “[t]he REITs acquired
properties that did not generate sufficient income to pay the
25
distributions [to shareholders] with cash,” (Compl. at 97), must
be viewed as “allegations constituting nothing more than
assertions of general mismanagement, or nondisclosures of
mismanagement, [which] cannot support claims under . . . §§ 11
and 12 of the Securities Act,” In re Donna Karan Int'l Secs.
Litig., No. 97-CV-2011, 1998 U.S. Dist. LEXIS 22435, at *25
(E.D.N.Y. Aug. 14, 1998); see also Field v. Trump, 850 F.2d 938,
948 (2d Cir. 1988) (“Allegations that a defendant failed to
disclose facts material only to support an action for breach of
state-law fiduciary duties ordinarily do not state a claim under
the federal securities laws.”).
Third, it is well-established that “the investment
objective announces the goal of the Fund, rather than a promise
to investors.
The investment objective is not the type of
statement that a reasonable investor would consider important in
deciding whether or not to invest.”
In re Alliance North Am.
Gov't Income Trust, Inc. Sec. Litig., 1996 U.S. Dist. LEXIS
14209, at *12 (S.D.N.Y. Sept. 26, 1996); see also San Leandro
Emergency Medical Group Profit Sharing Plan v. Philip Morris
Cos., 75 F.3d 801, 811 (2d Cir. 1996) (finding statements in
marketing plans that defendant was “optimistic” and “expected”
to do well was “puffery [that] cannot . . . constitute
actionable statements under the securities laws.”).
Further,
pursuant to the “bespeaks caution” doctrine and the PSLRA’s safe
26
harbor provision applicable to Plaintiffs’ claims, a statement
is not actionable where it is (1) identified as a forwardlooking statement and accompanied by meaningful cautionary
statements; (2) immaterial; or (3) not made with actual
knowledge that the statement was false or misleading.
U.S.C. § 77z-2(c).
See 15
The Apple REITs expressly caution in their
prospectuses that their objectives are forward-looking.
(See,
e.g., Blanchard Decl. Ex. E at 15 (Apple REIT Ten prospectus:
“We are a thinly-capitalized company and, as a result, you
cannot be sure . . . if we will achieve the investment
objectives described in this prospectus.”).)
The cases cited by Plaintiffs in support of their
claims regarding the Apple REITs’ investment objectives are
predominantly from courts outside of the Second Circuit, and
are, at any rate, factually distinguishable from this case.
For
instance, in Jones v. National Distillers & Chem. Corp., the
district court denied defendant’s motion for summary judgment
because issues of material fact remained as to, inter alia, the
defendant’s failure to disclose the present fact that its board
authorized higher payment for certain shares.
682-83 (S.D.N.Y. 1979).
484 F. Supp. 679,
Likewise, In re Evergreen Ultra Short
Opportunities Fund Sec. Litig., the plaintiffs’ sufficiently
pleaded misstatements of present fact, such as the defendant
mutual fund’s average portfolio duration and percentage of
27
assets invested in certain securities.
705 F. Supp. 2d 86, 92
(D. Mass. 2010); see also In re Charles Schwab Corp. Sec.
Litig., 257 F.R.D. 534, 542 (N.D. Cal. 2009) (same).
In
contrast, the Apple REITs’ investment objectives contained no
present and quantifiable statements of obviously aspirational
fact; rather, the REITs’ investment objectives consist of the
type of open-ended “puffery [that] cannot have misled a
reasonable investor to believe that the company had irrevocably
committed itself to one particular strategy.”
San Leandro, 75
F.3d at 811; (see, e.g., Compl. at 97 (Amendments to
registration statements for REITs Eight, Nine, Ten: “We seek to
maximize current and long-term net income and the value of our
assets”).)
Having considered whether the Apple REITs’ investment
objectives “together and in context, would affect the total mix
of information and thereby mislead a reasonable investor
regarding the nature of the securities offered,” the court
concludes that the objectives do not constitute actionable
misrepresentations or omissions.
Rombach, 355 F.3d at 173
(quotations marks omitted).
b.
The REITs’ Disclosure of Distribution
Policies
Plaintiffs claim that “statements in the Apple REIT
Nine and Ten offering documents about the policy of payment
28
distributions to shareholders were misleading.”
One, Two; Pls. Opp. at 29.)
(Compl. Counts
The court finds that Plaintiffs’
claim fails as a matter of law.
The Apple REITs disclosed in their offering documents
and other filings that distributions may be paid from offering
proceeds, as well as the historic record of past REITs’
distribution sources, no fewer than 127 times.
(See generally
Blanchard Decl. Ex. G at 8-57 (excerpts of disclosures from the
Apple REITs’ SEC filings concerning the payment of distributions
from sources other than operating income).)
For instance,
Prospectus Supplement 7 for Apple REIT Six, dated October 23,
2004, discloses in no uncertain terms that of the $867,000 in
dividends (or distributions) paid to shareholders through June
30, 2004, “substantially the entire dividend was a return of
capital.”
(Blanchard Decl. Ex. G at 8.)
There are dozens of
similarly unambiguous disclosures throughout the prospectuses
and other public filings of each REIT at issue here.
(See,
e.g., id. at 5 (Apple REIT Nine prospectus: “Our distributions
to our shareholders may not be sourced from operating cash flow
but instead from offering proceeds or indebtedness, which (to
the extent it occurs) will decrease our distributions in the
future.” (emphasis added)); id. at 7 (Apple REIT Ten prospectus:
“While we will seek generally to make distributions from our
cash generated from operations, we might make distributions
29
(although there is no obligation to do so) in certain
circumstances in part from financing proceeds . . . or . . .
proceeds from our offering of Units.
There is no limit on the
amount of distributions that may be funded with offering
proceeds or proceeds from debt, as opposed to cash generated
from operations.” (emphasis added)); see generally id. at 2-57.)
Defendants cannot be alleged to have misrepresented or
omitted that which they plainly disclosed.
See Brown v. E.F.
Hutton Group, Inc., 991 F.2d 1020, 1032 (2d Cir. 1993) (“[T]he
Prospectus [is] the single most important document and perhaps
the primary resource an investor should consult in seeking []
information”); In re UBS Auction Rate Sec. Litig., Nos. 08-CV3082, et al., 2010 U.S. Dist. LEXIS 59024, at *56 (S.D.N.Y. June
10, 2010) (granting defendants’ motions to dismiss where
prospectuses “disclosed that Defendants could, although they
were not obligated to do so, engage in the very conduct of which
Plaintiffs primarily complain”);
Joffee v. Lehman Bros., 410 F.
Supp. 2d 187, 194 (S.D.N.Y. 2006), aff’d 209 Fed. Appx. 80, 8182 (2d Cir. 2006) (dismissing complaint where all facts
plaintiffs alleged were concealed were, in fact, revealed in
public filings).
Nonetheless, Plaintiffs argue that the REITs’
disclosure that they “may from time to time distribute funds
that include a return of capital,” (Sharp Decl. Ex. A at 4-5),
30
was misleading because, in fact, it was “a certainty that
distributions would always be sourced by funds other than
operating income,” (Pls. Opp. at 30).
Plaintiffs’ argument has,
however, been expressly rejected by the Second Circuit in Wilson
v. Merrill Lynch & Co., 671 F.3d 120 (2d Cir. 2011).
There, the
Second Circuit noted that the defendant’s “statement that it
‘may routinely’ place support bids is not inconsistent with the
possibility that it would place such bids in every . . . auction
that took place over a particular period.”
Id. at 133.
The
Circuit further noted that while plaintiff “read[] the word
‘may’ as speaking to the likelihood that [defendant] would place
support bids, an investor could more easily understand the word
as disclosing merely that [defendant] was permitted, but not
required, to place bids for its own account to prevent an
auction from failing.”
Id. (citing Webster’s Third New
International Dictionary 1396 (2002) (defining “may” to mean,
inter alia, “have permission to,” “have liberty to,” and “be in
some degree likely to”)).
Recently, the Second Circuit further underscored the
speciousness of Plaintiffs’ argument in Anschutz Corp. v.
Merrill Lynch & Co., 690 F.3d 98 (2d Cir. 2012), in which a
party attempted to distinguish Wilson in the same way that
Plaintiffs do.
The Anschutz plaintiff, similar to Plaintiffs
here, argued that “[b]y the time the offering statements were
31
issued, [defendant] knew that it would participate . . . in 100
percent” of the events that defendant disclosed it “may”
participate in.
Id. at 108-09.
The Circuit rejected
plaintiff’s argument, noting that the Wilson complaint, which
was properly dismissed, alleged the same theory of
misrepresentation.
See id. at 109.
Plaintiffs also attempt to distinguish Wilson by
arguing that it, unlike this case, involved 1934 Act claims that
were subject to Rule 9(b) pleading.
(Pls. Opp. at 32.)
Plaintiffs’ assertion, however, that the analysis of whether a
statement is materially misleading differs under the 1933 Act
and the 1934 Act is unsupported by Second Circuit law.
See I.
Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., 936 F.2d 759,
761 (2d Cir. 1991) (“The central inquiry in determining whether
a prospectus is materially misleading under both Section 10(b)
and Section 11 is therefore whether defendants’ representations,
taken together and in context, would have [misled] a reasonable
investor about the nature of the investment.” (quotation marks
omitted) (alteration in original)); see also Rombach, 355 F.3d
at 178 n.11 (same).
The court notes that Plaintiffs’ assertion that the
Apple REITs’ distributions were “always” sourced by the return
of capital, (Pls. Opp. at 30), is based on Plaintiffs’ misguided
aggregation of the REITs’ distribution history on an annual
32
basis, whereas the Complaint correctly notes that the REITs made
distributions to shareholders on a monthly basis, (see Compl. ¶
16; see also Blanchard Decl. Ex. E at 9 (Apple REIT Ten
prospectus: “We intend to make monthly distributions commencing
after the first full month following the closing of the minimum
offering of 9,523,810 Units”).)
Therefore, Plaintiffs’ claim
that the Apple REITs’ distributions were “always” sourced by the
return of capital is purely speculative.
See Iqbal, 556 U.S. at
679.
Defendants have demonstrated that the Apple REITs’
distribution policies, as stated in their prospectuses, were not
misleading given that the prospectuses “state[] exactly the
fact[s] that [Plaintiffs] contend[] [have] been covered up,”.
Pincus, 936 F.2d at 762.
c.
The REITs’ Valuation of Shares
Plaintiffs claim that the REITs’ disclosure in its
offering documents that the $11 share prices “have been
established arbitrarily by us and may not reflect the true value
of the Units,” (Sharp Decl. Ex. A at 7), “was false and
misleading because in fact defendants chose and maintained an
$11 share price to compete with other non-traded REITs, nearly
33
all of which sold for $10,”11
at 34).
(Compl. Counts One, Two; Pls. Opp.
The court finds that the REITs’ valuation of shares was
not misleading, and therefore not actionable.
In addition to stating explicitly that the $11 share
price was established arbitrarily, the REITs’ offering documents
further disclosed that the price “may not reflect the true value
of the Units,” that “investors may be paying more for a Unit
than the Unit is actually worth” and should not “assume that the
per-Unit prices reflect the intrinsic or realizable value of the
Units or otherwise reflect our value, earnings or other
objective measures of worth,” and that “investors will not have
reliable information on the net fair value of the assets owned
by us.”
(Blanchard Decl. Ex. E at 17, 26, 100 (Apple REIT Ten
prospectus) (emphasis in original).)
Further, although the
Complaint offers a panoply of methods by which the REITs’
objective values can be measured, (Compl. ¶¶ 110, 122, 126-31,
133, 140, 176, 180), Plaintiffs also acknowledge that the “Apple
REITs are not traded on any exchanges” and thus “not subject to
the scrutiny of the market” or a valuation based on trading
price, (id. ¶ 112).
Therefore, the REITs cannot by any means be
said to have misrepresented the basis for their share prices.
As Defendants note, the nine different metrics by which
11
Plaintiffs’ underlying allegation again sounds in fraud.
Additionally, Plaintiffs acknowledge that two other non-traded REITs sold
shares for $20 and $25, but omitted these prices from their analysis because
these prices were “far above the rest of the REITs.” (Pls. Opp. at 34.)
34
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.
(DLA Mem. at 17.)
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 Barclays Bank PLC Sec. Litig., No.
09 Civ. 1989, 2011 U.S. Dist. LEXIS 2667, at *28 (S.D.N.Y. Jan.
5, 2011) (internal quotation marks omitted); see also id. at
*28-29 (“The assets here ‘were not traded on the New York Stock
Exchange or some other efficient market where the fair market
value typically is the price at which a share or other asset is
trading at any given moment. . . . Rather, the value of such
assets is a matter of judgment and opinion.’” (quoting Fait v.
Regions Fin. Corp., 712 F. Supp. 2d 117, 122-23 (S.D.N.Y.
2010)).
Furthermore, “[s]ubjective opinions are only
actionable under the Securities Act if a complaint alleges that
the speaker did not truly have the opinion at the time it was
made public.”
Id. (internal quotation marks omitted).
Plaintiffs additionally argue that Defendants “did not ‘have the
opinion’” that the shares were worth $11 because Defendants
stated that the offering share prices were established
35
“arbitrarily” in their disclosures.
(Pls. Opp. at 35.)
Yet,
Plaintiffs do not provide any specific explanation as to how
Defendants did not actually have the opinion that the REITs’ $11
share prices were arbitrary.
The Defendants expressly disclosed
in the REITs’ offering documents that if Apple REIT shares were
traded on a public market, they might trade for less than $11
per share.
(See, e.g., Blanchard Decl. Ex. E at 17, 26, 100.)
Consequently, Plaintiffs’ allegation that Defendants
misrepresented or omitted the market value of the Apple REITs’
shares is without merit.
Plaintiffs’ remaining arguments regarding the
valuation of Apple REIT shares are irrelevant to the sufficiency
of Plaintiffs’ section 11 and 12(a)(2) clams.12
Accordingly, the
court finds that Plaintiffs’ claim that the Apple REITs misled
investors about the valuation of REIT shares fails as a matter
of law.
12
Plaintiff’s invocation of FINRA Rule 2340 is irrelevant to this
action. (See Pls. Opp. at 34-35; Sharp Decl. Ex. G (Rule 2340).) First,
Rule 2340 concerns estimated investment values in account statements, not
offering documents. See Pollack v. Laidlaw Holdings, Inc., No. 90 Civ. 5788,
1995 U.S. Dist. LEXIS 5909, at *46 (S.D.N.Y. May 2, 1995) (holding, pursuant
to Gustafson v. Alloyd Co., 513 U.S. 561 (1995), that “Portfolio Evaluations”
(account statements) “cannot be prospectuses”); (see generally Sharp Decl.
Ex. G). Second, because FINRA does not provide a private right of action,
DLA Defendants’ alleged violations of FINRA rules are irrelevant to
Plaintiffs’ Securities Act claims. See Weinraub v. Glen Rauch Sec., Inc.,
399 F. Supp. 2d 454, 462 (S.D.N.Y. 2005) (“[Plaintiff] cannot state a valid
cause of action based on violations of New York Stock Exchange and NASD,”
(FINRA’s predecessor), “rules and guidelines, as these rules confer no
private right of action”).
36
d.
The Past Performance of Earlier REITs
Plaintiffs claim that the Apple REITs’ offering
documents contained actionable misstatements and omissions about
the performance of prior REITs.
Opp. at 36.)
(Compl. Counts One, Two; Pls.
Plaintiffs specifically challenge the veracity of
the Apple REITs’ statement in its various prospectuses and other
offering documents that “[i]n general, the investment objectives
of the . . . [REITs] previously organized by Mr. Knight . . .
were similar to our investment objectives of achieving long-term
growth in cash distributions, together with possible capital
appreciation, through the acquisition, ownership and ultimate
disposition of properties.”
Decl. Ex. A at 8-9).)
(Pls. Opp. at 36 (citing Sharp
Plaintiffs claim this statement was
misleading because it “does not inform investors that the prior
REITs have not generated sufficient income to pay their constant
7% to 8% distributions solely from operating income, and that
the REITs relied on a combination of borrowing and returning
investor capital to make up the difference.”
(Id. at 36-37.)
The REITs’ prospectuses, however, explicitly disclose
the income from operations, distribution amounts, and
distribution sources, including “return of capital,” of the
prior REITs.
(Blanchard Decl. Exs. D at 142 tbl.3; E at 123-
25); Nadoff v. Duane Reade, Inc., 107 Fed. App’x 250, 252 (2d
Cir. 2004) (“Accurate statements about past performance are self
37
evidently not actionable under the securities laws,”).
The
REITs’ statements about past performance are therefore not
misleading and not actionable.13
For the above reasons, Plaintiffs’ claims that
Defendants made material misrepresentations or omissions
pursuant to sections 11, 12(a)(2), and 15 fail as a matter of
law.
Therefore, Counts One and Two of the Complaint are
dismissed.
2.
Loss Causation
Plaintiffs’ section 11 and 12(a)(2) claims also fail
as a matter of law on the independent ground that Plaintiffs
have failed to allege any loss or damages attributable to
Defendants.
This necessarily means that Plaintiffs cannot
establish that Defendants’ purported “misstatement[s] or
omission[s] concealed something from the market that, when
disclosed, negatively affected the value of the security.”
Amorosa v. AOL Time Warner, Inc., 409 Fed. App’x 412, 415 (2d
Cir. 2011).
Plaintiffs correctly note that “claims under
sections 11 and 12 do not require allegations of . . . loss
13
Plaintiffs’ claim that the Apple REIT offering documents “do
not comply” with Guide 5 of the Securities Act Industry Guidelines (“Guide
5”) is also irrelevant to Plaintiffs’ claims. (See Pls. Opp. at 36-38.)
“Guide 5 . . . ‘is not a Commission rule nor is it published as bearing the
Commission’s official approval.’” See SEC, Staff Observations in the Review
of Promotional and Sales Material Submitted Pursuant to Securities Act
Industry Guide 5, at n.1 (Dec. 19, 2011) (quoting Securities Act Release No.
33-5692, Fed. Sec. L. Rep. (CCH) ¶ 80,405 (Mar. 17, 1976)); see also New York
City Emples. Ret. Sys. v. SEC, 45 F.3d 7, 12 (2d Cir. 1995) (noting that
interpretive rules “do not have force of law”).
38
causation.”
Fait, 655 F.3d at 109; see also In re Giant
Interactive Group, Inc. Sec. Litig., 643 F. Supp. 2d 562, 572
(S.D.N.Y. 2009) (“Because it is unnecessary to plead loss
causation to maintain claims under Sections 11 and 12, the
affirmative defense of negative causation is generally not
properly raised on a Rule 12(b)(6) motion,”); but see id.
(“[C]ourts have, on occasion, found dismissal of Section 11 and
12 claims based on a negative causation defense proper in light
of the allegations pleaded in the complaint,”).
Nonetheless,
the absence of loss causation is an affirmative defense to a
section 11 claim, upon which a court may dismiss an action when
it is “clear from the face of the pleadings that plaintiff
suffered no damages.”
Amorosa v. Ernst & Young LLP, 672 F.
Supp. 2d 493, 514 (S.D.N.Y. 2009); see also Amorosa, 409 Fed.
App’x at 417 (“The absence of loss causation is an affirmative
defense to a section 11 claim, but it is here apparent from the
face of the complaint.
It is thus a proper basis on which to
dismiss the claim.”); Pani v. Empire Blue Cross Blue Shield, 152
F.3d 67, 74 (2d Cir. 1998) (“An affirmative defense may be
raised by a pre-answer motion to dismiss under Rule 12(b)(6),
without resort to summary judgment procedure, if the defense
appears on the face of the complaint,”); In re State Street Bank
& Trust Co. Fixed Income Funds Invs. Litig., 774 F. Supp. 2d
584, 595 (S.D.N.Y. 2011) (same); In re Britannia Bulk Holdings
39
Inc. Secs. Litig., 665 F. Supp. 2d 404, 419-20 (S.D.N.Y. 2009)
(same).
Such is the case here.
“Loss causation is the causal link between the alleged
misconduct and the economic harm ultimately suffered by the
plaintiff.”
Lentell v. Merrill Lynch & Co., 396 F.3d 161, 172
(2d Cir. 2005) (internal quotation marks omitted).
“The PSLRA
codified this judge-made requirement: ‘In any private action
arising under this chapter, the plaintiff shall have the burden
of proving that the act or omission of the defendant alleged to
violate this chapter caused the loss for which the plaintiff
seeks to recover damages.’”
4(b)(4)).
Id. (quoting 15 U.S.C. § 78u-
“[T]o establish loss causation, a plaintiff must
allege . . . that the subject of the fraudulent statement or
omission was the cause of the actual loss suffered, i.e., that
the misstatement or omission concealed something from the market
that, when disclosed, negatively affected the value of the
security.
Otherwise, the loss in question was not foreseeable.”
Id. at 173 (internal quotations marks omitted) (emphasis in
original); see also Emergent Capital Inv. Mgmt., LLC v.
Stonepath Group, Inc., 343 F.3d 189, 198 (2003) (loss causation
is satisfied where the plaintiffs “specifically assert[] a
causal connection between the concealed information . . . and
the ultimate failure of the venture.”).
Plaintiffs go to great pains to contest the
40
Defendants’ purportedly “narrow formulation of loss causation,”
(see Pls. Opp. at 42-46.); however, there can be no question
that plaintiffs “must nevertheless satisfy the court that [they
have] suffered a cognizable injury under the statute,” N.J.
Carpenters Health Fund v. Residential Capital, LLC, No. 08 CV
8781, 2010 U.S. Dist. LEXIS 32058, at *15 (S.D.N.Y. Mar. 31,
2010) (quotation marks omitted).
Plaintiffs do not claim that
any Apple REIT shareholder has ever received less than $11 per
share, and in fact concede that the REITs redeem shares at $11
consistent with the redemption policy contained in the
prospectuses.
(See Compl. ¶ 111; see also Blanchard Decl. Ex. E
at 13-14, 27 (detailing in Apple REIT Ten prospectus the terms
and limitations of the REIT’s Unit Redemption Program).)
Further, nowhere in Plaintiffs’ sprawling 108-page Complaint is
there a single allegation that Plaintiffs have not consistently
received monthly distributions on their shares.
Compl.)
(See generally
Nor could Plaintiffs claim any loss in the value of
their investment upon the REITs’ sale on a national securities
exchange or consolidation with another REIT because, at the time
the Complaint was filed, none of REITs Six through Ten had yet
completed the five to seven year term before the REITs’
management could attempt to do so.
(See id. ¶ 3.)
Furthermore,
the cases cited by Plaintiffs in which shareholders’ investments
lost value are factually distinguishable from this case.
41
See,
e.g., N.J. Carpenters Health Fund v. DLJ Mortg. Capital, Inc.,
2010 U.S. Dist. LEXIS 47512, at *6 (S.D.N.Y. Mar. 29, 2010)
(“Plaintiff alleges that the value of its Certificates plummeted
by 79% shortly after purchase”); cf. id. at *15-16 (noting that
presumption that “true value to the investor is the price at
which [shares] may later be sold” is inapplicable where
“investors d[o] not allege a loss from selling the securities at
a reduced price”).
Plaintiffs also imply that they were induced into
purchasing their shares by the Defendants’ alleged
misrepresentations.
(See Compl. ¶ 186.)
This allegation “makes
out transaction causation—not loss causation.”
In re Salomon
Smith Barney Mut. Fund Fees Litig., 441 F. Supp. 2d 579, 589
(S.D.N.Y. 2006) (averring in a Securities Act complaint that,
“but for defendants’ material omissions, plaintiffs would not
have invested in the securities is sufficient to plead only
transaction causation or reliance,”).
However, “it is long
settled that a securities-fraud plaintiff must prove both
transaction and loss causation.”
(quotation marks omitted).
Lentell, 396 F.3d at 17
Moreover, “[i]t is not enough to
allege that a defendant’s misrepresentations and omissions
induced a purchase-time value disparity between the price paid
for a security and its true investment quality.”
Id. at 174
(quotation marks omitted); see also Emergent Capital Inv. Mgmt.,
42
LLC v. Stonepath Group, Inc., 343 F.3d 189, 198 (2d Cir. 2003)
(“Plaintiff’s allegation of a purchase-time value disparity,
standing alone, cannot satisfy the loss causation pleading
requirement.”)
Here, Plaintiffs cannot possibly establish loss
causation because, as the Complaint details, “[t]he Apple REITs
are not traded on any exchange.”
(Compl. ¶ 112.)
Consequently,
in the absence of the Apple REITs having already been sold on a
public trading market, Defendants cannot be alleged to have
“concealed something from the market that, when disclosed,
negatively affected the value of the security.”
F.3d at 173.
Lentell, 396
Indeed, “where the [investment’s value] does not
react to [] any misstatements in the [defendant’s] prospectus,
no connection between the alleged material misstatement and a
diminution in the security’s value has been or could be
alleged.”
In re State Street, 774 F. Supp. 2d at 596.
Finally, Plaintiffs themselves acknowledge that to the
extent that the Apple REITs have not performed as well as
Plaintiffs would have liked or anticipated, “the extended stay
and limited service hotel sector began to suffer due to the
real estate market crash and subsequent credit crunch” in 2007
and 2008.
(Compl. ¶ 119; see also id. ¶ 163 (noting the
negative “impact of the economy on the hotel industry”).)
This
further illustrates Plaintiffs’ inability to overcome a loss
43
causation affirmative defense by Defendants.
Cf. In re Merrill
Lynch & Co. Research Reports Secs. Litig., Nos. 02 MDL 1484, 02
CIV 9690, 2008 U.S. Dist. LEXIS 44344, at *22 (S.D.N.Y. June 4,
2008) (“[Plaintiff’s] failure to allege that his losses were due
to the purported fraud, rather than to the market-wide collapse
of the Internet sector, also requires dismissal”).
True, the
fact that a plaintiff’s losses coincide with a market-wide
phenomenon does not “necessarily eliminate[] a plausible
connection” between a plaintiff’s losses and a defendants’
misstatements or omissions.
King County v. IKB Deutsche
Industriebank AG, 708 F. Supp. 2d 334, 343 (S.D.N.Y. 2010)
(emphasis in original).
Here, however, Plaintiffs have failed
to proffer an actionable theory of loss.
In sum, Plaintiffs’ belabored Complaint appears only
to confirm that the Apple REITs are currently functioning in
exactly the manner that was anticipated and disclosed in the
REITs’ prospectuses and other offering documents.
Once more,
Counts One and Two against Defendants for violations of sections
11 and 12(a)(2) are dismissed.
B.
Plaintiffs’ Claims for Violations of Section 15 of the
Securities Act
Plaintiffs claim that the Apple Individuals &
Affiliates and Lerner should be jointly and severally liable
pursuant to section 15, which establishes so-called “control
44
person” liability under the Securities Act.
Three, Four, Five; Pls. Opp. at 49-53.)
(Compl. Counts
Specifically,
“[s]ection 15 . . . creates liability for individuals or
entities that ‘control[] any person liable’ under section 11 or
12.
Thus, the success of a claim under section 15 relies, in
part, on a plaintiff’s ability to demonstrate primary liability
under sections 11 and 12.”
In re Morgan Stanley, 592 F.3d at
358 (quoting 15 U.S.C. § 77o); see also Anegada Master Fund,
Ltd. v. PXRE Group Ltd., 680 F. Supp. 2d 616, 624 (S.D.N.Y.
2010) (“In order to state a claim for liability under section 15
of the Securities Act, a plaintiff must allege (a) a primary
violation by a controlled person, and (b) control by the
defendant of the primary violator.” (internal quotation marks
omitted).
Because Plaintiffs have failed to plead a primary
violation of sections 11 and 12(a)(2) against Defendants, Counts
Three, Four, and Five of the Complaint, alleged pursuant to
section 15, must also be dismissed.
See Rombach, 355 F.3d at
178; Anegada, 680 F. Supp. 2d at 624.
C.
Plaintiffs’ Common Law Claims
Without invoking any state’s laws, Plaintiffs allege
four common law claims against Defendants: (1) breach of
fiduciary duty and aiding and abetting breach of fiduciary duty
against the DLA Defendants, (Compl. Count Six), the Apple REITs,
45
the Apple Individuals, and the Apple Affiliates, (id. Count
Seven); (2) unjust enrichment against all Defendants, (id. Count
Eight); and (3) negligence against all Defendants, (id. Count
Nine).
Plaintiffs first suggest that in order to adjudicate
Plaintiffs’ common law claims, the court would need to conduct a
choice-of-law analysis in order to determine which state’s
common law applies to each individual Plaintiff’s claim.
Pls. Opp. at 61-62.)
(See
Plaintiffs then argue that because such an
analysis “requires a fact-specific determination and the
necessary facts are unavailable prior to discovery,” Plaintiffs’
common law claims cannot be subject to dismissal.
(Id. at 61.)
Indeed, the Complaint alleges only general claims against
Defendants, and does not invoke any particular state’s law.
(See Compl. ¶¶ 232-55.)
Plaintiffs, however, cannot rely on
their own unspecific pleading to save their common law claims.14
No matter the specific state law basis for their common law
claims, Plaintiffs must sufficiently allege that they were in
some way harmed by Defendants, which Plaintiffs cannot do.
14
Each
The nonspecific nature of Plaintiffs’ claims, in some instances
by all Plaintiffs against all Defendants, (Compl. Counts Eight, Nine), may
justify dismissal of Plaintiffs’ claims in and of itself, see Coakley v.
Jaffe, 49 F. Supp. 2d 615, 629 (S.D.N.Y. 1999) (“Even under the liberal
standards of notice pleading, a complaint must contain specific allegations
of fact indicating a deprivation of rights, not a mere litany of general
conclusions that . . . have no meaning”) (internal quotations marks omitted);
accord Davidson v. Flynn, 32 F.3d 27, 31 (2d Cir. 1994).
46
of Plaintiffs’ common law claims in Counts Six, Seven, Eight,
and Nine must therefore be and are dismissed.
1.
Breach of Fiduciary Duty
Irrespective of the nature of the duty Defendants owed
to Plaintiffs and are alleged to have breached, in order to
state a claim for breach of fiduciary duty, “damages remains an
element of the cause of action.”
Sharp Int’l Corp. v. State St.
Bank & Trust Co. (In re Sharp Int’l Corp.), 403 F.3d 43, 50 (2d
Cir. 2005); see also S & K Sales Co. v. Nike, Inc., 816 F.2d
843, 847-48 (2d Cir. 1987) (“[Plaintiffs] must prove . . . that
[they] suffered damages as a result of the breach”).
As the court previously discussed, Plaintiffs have
failed to sufficiently plead any damages as a result of
Defendants’ purported misrepresentations or omissions with
respect to the Apple REITs.
To the contrary, the Complaint
alleges that Plaintiffs have in fact consistently earned money
from the Apple REITs.
(See Compl. ¶ 183 (discussing the REITs’
“consistent 7-8% distributions”).)
Accordingly, Plaintiffs’
claim for common law breach of fiduciary duty must be and is
dismissed.
A claim for aiding and abetting a breach of fiduciary
duty must, as a matter of law, fail where no underlying breach
of fiduciary duty claim lies.
See Lerner v. Fleet Bank, N.A.,
459 F.3d 273, 292 (2d Cir. 2006); Schandler v. New York Life
47
Ins. Co., No. 09 Civ. 10463, 2011 U.S. Dist. LEXIS 46322, at *49
(S.D.N.Y. Apr. 26, 2011).
Therefore, Plaintiffs’ claim against
Defendants for aiding and abetting a breach of fiduciary duty is
also dismissed.
2.
Unjust Enrichment
The court first notes that “unjust enrichment [will]
only exist where no prior agreement govern[s] the rights of the
parties: A quasi or constructive contract . . . is an obligation
which the law creates, in the absence of any agreement.”
Superintendent of Ins. v. Ochs (In re First Cent. Fin. Corp.),
377 F.3d 209, 213 (2d Cir. 2004) (emphasis added) (internal
quotation marks omitted).
The Subscription Agreements and
Acknowledgment of Risk forms between Plaintiffs and Defendants
constitute the basis on which the rights of the parties are
governed, rather than a theory of unjust enrichment.
Nonetheless, it is also clear that Plaintiffs’ unjust
enrichment claims must be dismissed for Plaintiffs’ inability to
sufficiently allege any loss.
In order to prevail on a claim
for unjust enrichment, Plaintiffs must establish (1) that
Defendants were enriched; (2) that the enrichment was at
Plaintiffs’ expense; and (3) that the circumstances are such
that in equity and good conscience Defendants should return the
money or other such enrichment to Plaintiffs.
See, e.g., Golden
Pac. Bancorp v. FDIC, 273 F.3d 509, 519 (2d Cir. 2001) (noting
48
elements under New York law); see also McAnaney v. Astoria Fin.
Corp., 665 F. Supp. 2d 132, 175 (E.D.N.Y. 2009) (citing Beth
Israel Med. Ctr. v. Horizon Blue Cross and Blue Shield of N.J.,
Inc., 448 F.3d 573, 586 (2d Cir. 2006)).
Because Plaintiffs have failed to plead any actionable
damages or loss, Plaintiffs’ common law unjust enrichment claim
must be and is dismissed.
Cf. Castellano v. Young & Rubicam,
Inc., 257 F.3d 171, 187, 190-91 (2d Cir. 2001) (reversing
dismissal of unjust enrichment claim where there was “sufficient
evidence of loss causation”), abrogated on other grounds by
Assured Guar. (UK) Ltd. v J.P. Morgan Inv. Mgt. Inc., 18 N.Y.3d
341 (2011).
3.
Negligence
“A tort is comprised of (1) breach of a legallyimposed duty, and (2) an injury proximately caused by that
breach.”
Kulzer v. Pittsburgh-Corning Corp., 942 F.2d 122, 129
(2d Cir. 1991) (citing W. Keeton, Prosser & Keeton on the Law of
Torts § 1, at 1-7 (5th ed. 1984) (emphasis added); see also
Tufariello v. Long Island R.R., 458 F.3d 80, 87 (2d Cir. 2006)
(“To establish causation in a common law negligence action, a
plaintiff generally must show that the defendant’s conduct was a
‘substantial factor in bringing about the harm’” (quoting
Restatement 2d of Torts § 431(a) (emphasis added)); Arlington
Park Racetrack, Ltd. v. SRM Computers, Inc., 674 F. Supp. 986,
49
994 (E.D.N.Y. 1987) (harm or loss to plaintiff is necessary
element of all torts).
Once again, Plaintiffs have failed to plead any
cognizable theory of loss or harm.
Accordingly, Plaintiffs’
common law negligence claim must be and is dismissed.
In light of the foregoing, the court declines to
address Defendants’ remaining arguments in support of dismissal
of Plaintiffs’ common law claims.
D.
Plaintiffs’ Claims for Violations of the Connecticut
and Florida Exchange Acts
1.
CUSA
Individual plaintiff Berger alleges claims against the
DLA Defendants, Apple REITs Eight, Nine and Ten, the Apple
Individuals, and Knight, pursuant to Connecticut’s Blue Sky law,
CUSA §§ 36b-4, 36b-5, and 36b-29(a).
Eleven, Twelve.)
(Compl. Counts Ten,
Sections 36b-4 and 36b-5 mandate that “no
person shall, in connection with the offer, sale or purchase of
any security . . . make any untrue statement of a material fact
or omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which
they are made, not misleading . . . .”
Conn. Gen. Stat. § 36b-
4(a); see Conn. Gen. Stat. §§ 36b-5(a).
Section 36b-29(c) is
CUSA’s section 15 “control person” analog.
§ 36b-29(c).
50
See Conn. Gen. Stat.
In order to establish a claim under Section 36b of
CUSA, “there must be a primary violator.”
Connecticut Nat’l
Bank v. Giacomi, 242 Conn. 17, 46 (1997).
To establish the
liability of a primary violator, Berger must prove: “(1) that
the primary violator offered or sold a security by means of
either an untrue statement of a material fact, or an omission to
state a material fact necessary to make any statements made, in
the circumstances of their making, not misleading; and (2) that
the buyer did not know of the untruth or omission.”
Id.
As
Defendants note, Plaintiffs do not dispute that all of their
[CUSA] claims must fail absent a material misrepresentation or
omission, or unless Plaintiffs knew of the untruth or omission.
(DLA Reply at 18; see generally Pls. Opp.)
As the court previously held, supra, Plaintiffs’
claims that Defendants made untrue statements or omissions of
material facts in the offer and sale of Apple REIT shares fail
as a matter of law.
Because Berger cannot sufficiently plead
the first element of a Section 36b claim, Berger’s CUSA claims
in Counts Ten, Eleven, and Twelve, which are based on the same
allegations of fact, must also be and dismissed for failure to
51
state a claim.15
Therefore, the court need not address the
parties’ remaining arguments regarding this claim.
2.
FSIPA
Lastly, individual plaintiff Murray alleges claims
against the DLA Defendants, Apple REITs Eight, Nine and Ten, the
Apple Individuals, and Knight, pursuant to Florida’s Blue Sky
law, FSIPA § 517.301 (Compl. Count Thirteen.)
Section 517.301
makes it unlawful for any person
in connection with the offer, sale, or
purchase of any investment or security . . .
[t]o obtain money or property by means of
any untrue statement of a material fact or
any omission to state a material fact
necessary in order to make the statements
made, in light of the circumstances under
which they were made, not misleading . . . .
Anwar v. Fairfield Greenwich Ltd., 826 F. Supp. 2d 578, 584-85
(S.D.N.Y. 2011) (citing Fla. Stat. § 517.301(1)(a)).
To state a
claim under § 517.301, Murray must allege: “(1) a
misrepresentation or omission of material fact; (2) that this
misrepresentation or omission was justifiably relied on; and (3)
scienter.”
Id. (citing Durden v. Citicorp Trust Bank, FSB, No.
15
Alternatively, Berger’s § 36b-4 claims would also have to be
dismissed because § 36b-4 does not provide a private cause of action. See
Chanoff v. United States Surgical Corp., 857 F. Supp. 1011, 1023 (D. Conn.
1994) (declining to find a private cause of action under § 36b-4’s
predecessor statute, § 36-472). Although, as Plaintiffs note, more recent
courts have permitted plaintiffs to recover under § 36b-4, those courts have
not addressed whether § 36b-4 in fact provides a private cause of action.
See IM Partners v. Debit Direct Ltd., 394 F. Supp. 2d 503, 518 (D. Conn.
2005); Miller v. Inverness Corp., No. CV980071530S, et al., 2000 Conn. Super.
LEXIS 2771, at *27 (Conn. Super. Ct. Oct. 18, 2000).
52
3:07 civ. 974-J-34, 2009 U.S. Dist. LEXIS 127347, at *17 (M.D.
Fla. Aug. 21, 2009)).
As the court previously held, supra, Plaintiffs’
claims that Defendants made untrue statements or omissions of
material facts in the offer and sale of Apple REIT shares fail
as a matter of law.
Because Murray cannot sufficiently plead
the first element of a § 517.301 claim, Murray’s FSIPA claim in
Count Thirteen, which is based on the same allegations of fact,
must also be and is dismissed for failure to state a claim.
See
Jankovich v. Bowen, 844 F. Supp. 743, 749 (S.D. Fla. 1994)
(dismissing FSIPA claim for, among other reasons, failure to
adequately allege material misrepresentations).
Therefore, the
court need not address the parties’ remaining arguments
regarding this claim.
III. Plaintiffs’ Request for Leave to Amend
“‘[I]t is within the sound discretion of the district
court to grant or deny leave to amend.’”
Wilson, 671 F.3d at
139 (quoting McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184,
200 (2d Cir. 2007)).
“[W]here amendment would be futile, denial
of leave to amend is proper.”
omitted).
Id. at 140 (quotation marks
Although Plaintiffs’ Complaint, spanning 281
paragraphs and 108 pages, is the first iteration of a
Consolidated Class Action Complaint, it is the fifth complaint
to be filed by the various individual Plaintiffs, all of which
53
assert similar claims.
Plaintiffs have not “indicated to
the . . . court how further amendment would permit [them] to
cure the deficiencies in the complaint,” nor have they
“explained how they could cure the deficiencies that led to the
dismissal of [their] complaint.”
Id.; (Pls. Opp. at 76).
“In
the absence of any identification of how a further amendment
would improve upon the Complaint, leave to amend must be denied
as futile.”
Bd. of Trs. of Ft. Lauderdale Gen. Emples. Ret.
Sys. v. Mechel OAO, 811 F. Supp. 2d 853, 883 (S.D.N.Y. 2011).
Plaintiffs’ request for leave to amend the complaint is
therefore denied.
See Wilson at 140 (affirming denial of leave
to amend due to lack of “some indication as to what appellant[]
might add to [his] complaint in order to make it viable”
(alterations in original)); see also Tyler v. Liz Claiborne,
Inc., 814 F. Supp. 2d 323, 344 (S.D.N.Y. 2011) (dismissing
twice-amended complaint with prejudice on first motion to
dismiss); Fort Worth Employers’ Ret. Fund v. Biovail Corp., 615
F. Supp. 2d 218, 233 (S.D.N.Y. 2009) (dismissing once-amended
complaint on first motion to dismiss “because the flaws in
pleading are incurable on the facts of this case”).
IV.
Rule 11 Inquiry
“The PSLRA mandates that, at the end of any private
securities action, the district court must ‘include in the
record specific findings regarding compliance by each party and
54
each attorney representing any party with each requirement of
Rule 11(b).’”
Rombach, 355 F.3d at 178 (quoting 15 U.S.C. §
78u-4(c)(1)); see also Simon DeBartolo Group, L.P. v. Richard E.
Jacobs Group, Inc., 186 F.3d 157, 167 (2d Cir. 1999) (noting
that the PSLRA “functions . . . to reduce courts’ discretion in
choosing whether to conduct the Rule 11 inquiry at all”).
Further, “if the court finds that any party or lawyer violated
Rule 11(b), the PSLRA mandates the imposition of sanctions.”
Rombach, 355 F.3d at 178 (citing 15 U.S.C. § 78u-4(c)(2)).
Rule 11(b) pertains to parties’ representations to the
court, and states that:
By presenting to the court a pleading,
written motion, or other paper--whether by
signing, filing, submitting, or later
advocating it--an attorney or unrepresented
party certifies that to the best of the
person’s knowledge, information, and belief,
formed after an inquiry reasonable under the
circumstances:
(1) it is not being presented for any
improper purpose, such as to harass, cause
unnecessary delay, or needlessly increase
the cost of litigation;
(2) the claims, defenses, and other
legal contentions are warranted by existing
law or by a nonfrivolous argument for
extending, modifying, or reversing existing
law or for establishing new law;
(3) the factual contentions have
evidentiary support or, if specifically so
identified, will likely have evidentiary
support after a reasonable opportunity for
further investigation or discovery; and
(4) the denials of factual contentions
are warranted on the evidence or, if
55
specifically so identified, are reasonably
based on belief or a lack of information.
Fed. R. Civ. P. 11(b).
In this case, none of the parties have alleged that
another party’s submissions to the court have violated Rule
11(b).
Additionally, although the court herein dismisses
Plaintiffs’ complaint in its entirety with prejudice, “[t]he
operative question is whether [Plaintiffs’] argument[s] [are]
frivolous, i.e., the legal position[s] ha[ve] ‘no chance of
success,’ and there is ‘no reasonable argument to extend, modify
or reverse the law as it stands.’”
Fishoff v. Coty Inc., 634
F.3d 647, 654 (2d Cir. 2011) (quoting Morley v. Ciba-Geigy
Corp., 66 F.3d 21, 25 (2d Cir. 1995)).
In light of FINRA’s
prior complaint against DLA Defendants, which Plaintiffs admit
sparked this action, the court finds that Plaintiffs’ Complaint
was not frivolous, and therefore finds that sanctions are not
warranted.
CONCLUSION
For the foregoing reasons, Defendants’ motions to
dismiss the Amended Consolidated Class Action Complaint with
prejudice are granted in their entirety.
The Clerk of the Court
is respectfully directed to enter judgment in favor of (1)
defendants Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple
REIT Eight, Inc., Apple REIT Nine, Inc., and Apple REIT Ten,
56
Inc.; (2) defendants Glenn W. Bunting, Kent W. Colton, Michael
S. Waters, Robert M. Wiley, Bruce H. Matson, Garnett Hill, Jr.,
Anthony Francis “Chip” Keating, Ronald A. Rosenfeld, David J.
Adams, and Lisa B. Kern, Glade M. Knight, Bryan Peery, Apple
Fund Management, LLC, Apple Suites Realty Group Inc., Apple
Eight Advisors, Inc., Apple Nine Advisors, Inc., and Apple Ten
Advisors, Inc.; and (3) defendants David Lerner and David Lerner
Associates, Inc., and to close this case.
SO ORDERED.
Dated:
Brooklyn, New York
April 3, 2013
__________ _/s/____________
KIYO A. MATSUMOTO
United States District Judge
57
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