Hohenstein v. Behringer Harvard REIT I, Inc. et al
Filing
62
MEMORANDUM OPINION AND ORDER granting 45 Motion to Dismiss the Plaintiffs' Amended Complaint. Judgment will be entered for the defendants. (Ordered by Senior Judge A. Joe Fish on 3/27/2014) (ctf)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
LILLIAN HOHENSTEIN, Individually,
and on behalf of all others similarly
situated, ET AL.,
Plaintiffs,
VS.
BEHRINGER HARVARD REIT I, INC.,
ET AL.,
Defendants.
THOMAS NELSON and VINCENT
VALADEZ, on behalf of all others
similarly situated,
Plaintiffs,
VS.
BEHRINGER HARVARD REIT I, INC.,
ET AL.,
Defendants.
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CIVIL ACTION NO.
3:12-CV-3772-G
CONSOLIDATED WITH
3:12-CV-4842-G
MEMORANDUM OPINION AND ORDER
Before the court is the defendants’ motion to dismiss the plaintiffs’ amended
complaint (docket entry 45). For the reasons stated below, the motion is granted.
I. BACKGROUND
A. Factual Background
This is a securities class action. It was brought by several plaintiffs on behalf of
all persons and entities that purchased or otherwise acquired shares of Behringer
Harvard REIT I. See Consolidated Amended Class Action Complaint (“Complaint”)
¶ 2 (docket entry 41). A real estate investment trust, or REIT, is an investment
vehicle that allows individual investors to purchase shares in a diverse portfolio of real
estate, which is managed by the REIT. See id. ¶ 4; Defendants’ Memorandum of Law
in Support of Motion to Dismiss Amended Complaint (“Motion”) at 2 (docket entry
46). Behringer Harvard REIT I, Inc. (“BH REIT”) was incorporated by the
investment firm Behringer Harvard in Maryland in 2002. Id.; Complaint ¶ 24. The
plaintiffs allege that defendant Behringer Holdings, LLC is the parent company of BH
REIT. Complaint ¶¶ 25-26. The other defendants, Robert Behringer, Robert Aisner,
Steven Partridge, Ronald Witten, and Charles Dannis are members of BH REIT’s
board of directors. Complaint ¶¶ 27-32. Partridge, Witten, and Dannis are
independent directors on that board, with no other material connection to BH REIT.
See Motion at 2.
BH REIT started as a non-traded REIT, meaning that it was not listed on any
public exchange markets. Complaint ¶ 4. Instead, investors purchased shares with an
eye to selling them in a future liquidation event. Id. In the case of BH REIT, the
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liquidation event was scheduled for 2017. Id. ¶ 5. In the meantime, BH REIT paid
investors regular distributions. Id. ¶ 12. If shareholders wished to sell their shares
before the liquidation event, they had to do so through an “inefficient secondary
market.” Id. ¶ 4. Until 2009, investors could also sell shares back to BH REIT
through a shareholder redemption program. Id. ¶ 79.
In January 2009, BH REIT began a Distribution Reinvestment Program
(“DRP”), through which shareholders could purchase additional shares of the REIT.
Id. ¶ 9. In its previous offerings, most shares of the REIT were offered at a price of
$10 per share, with a smaller number of shares sold at $9.50 per share. Id. ¶ 7.
During the DRP, shares were sold to the public at $10 per share, but current
shareholders could purchase shares through the DRP for $9.50 per share. See id.
¶ 69. In the Registration Statement that accompanied the DRP, BH REIT
acknowledged that:
Our board of directors arbitrarily determined the selling
price of the shares to be issued under the DRP, which is
the same offering price as the shares issued under our prior
distribution reinvestment plan, and the price bears no
relationship to our book or asset values, or to any other
established criteria for valuing issued or outstanding shares.
Id.; Motion at 6. There was also an exculpation provision in the Registration
Statement that stated:
Neither we nor any of our officers, directors, agents or
employees will have any responsibility or liability as to the
value of our shares, any change in the value of the shares
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acquired for each participant’s account, or the rate of
return earned on, or the value of, the interest-bearing
accounts, if any, in which distributions are invested.
In addition, neither we nor any of our officers, directors,
agents or employees will be liable under the DRP for any
act done in good faith, or for any good faith omission to
act . . .
Id. at 4.
In February 2009, the Financial Industry Regulatory Authority, or FINRA,
passed a new regulation that required FINRA members to update estimated
investment values eighteen months after the close of an investment offering. Id. at 6.
In compliance with the FINRA regulation, BH REIT continued to price its DRP
shares at $9.50 until May 17, 2010, when it revalued the shares at $4.25 per share.
See id. at 6-7; Complaint ¶ 84. BH REIT then set the DRP price to match that new
valuation. Motion at 7.
In April 2011, BH REIT issued a proxy statement to its shareholders,
requesting that they vote on several amendments to the BH REIT charter. See id. at
8-9; Complaint ¶ 14. In the proxy statement, the directors of BH REIT stated that
one objective of the amendments was to take a number of measures “to position the
Company to pursue a liquidity event in the future.” Exhibit 7 to Appendix to
Defendants’ Memorandum of Law in Support of Motion to Dismiss Amended
Complaint (“Defendants’ Appendix”) at 5 (docket entry 47-1). Another objective of
the amendments was to regulate future mini-tender offers, or offers made to purchase
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less than 5% of the outstanding shares of BH REIT. Motion at 8-9. The
amendments would require any party seeking to make a mini-tender offer to make
the same sorts of disclosures required of normal tender offerors. See id. at 9.
Regarding these amendments, the directors stated in the proxy statement that:
We believe that these mini-tender offers are potentially
harmful to our stockholders, as they are not subject to the
filing, disclosure and procedural requirements established
by the SEC for formal tender offers. In addition,
responding to these mini-tender offers can be both costly
and time consuming for the Company. We believe that
the addition of Section 12.2 will further protect the
Company and its stockholders by requiring any person or
group seeking to tender for the Company’s shares to
provide substantial disclosure regarding its or their offer.
Exhibit 7 to Defendants’ Appendix at 26. When the proposed amendments were
taken up at BH REIT’s annual meeting, over 90% of represented shares voted to
approve them. Motion at 9.
After the amendments were passed, in August 2011 and February 2012, CMG
Legacy Growth Fund (“CMG”) made offers to purchase one million shares
(approximately 0.34% of the outstanding shares) of BH REIT at a price of $1.80 per
share. Complaint ¶¶ 89, 95. BH REIT valued its shares at $4.55 and $4.64 at those
times, respectively. Complaint ¶¶ 93, 98. CMG acknowledged that its $1.80 offer
price was reached “by applying an approximate 60% liquidity discount to the
Estimated Net Asset Value of the REIT’s assets” for the August 2011 offer.
Complaint ¶ 90. The February 2012 offer was discounted by 39%. Motion at 10.
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CMG also disclosed that it intended to hold onto the shares until a liquidation event
in hopes of recovering the “full Estimated Net Asset Value.” Id. (quoting Exhibit 11
to Defendants’ Appendix at 8; Exhibit 12 to Defendants’ Appendix at 12).
BH REIT filed Schedule 14D-9 Solicitation/Recommendation Statements with
the SEC in response to each of CMG’s tender offers. Complaint ¶¶ 92, 97. In those
statements, the directors of BH REIT advised shareholders not to accept the tender
offers due to their low value and because they felt that CMG was trying to make a
profit at the expense of BH REIT’s shareholders. See id. ¶¶ 93, 98. The directors also
pointed out that even on the secondary market, shares of BH REIT were trading for
significantly more than CMG’s offer price. See id. Lastly, the board stated that:
Although the board of directors cannot provide any
guarantee that the Company will maintain any particular
rate of distributions or pay any distributions in the future,
Stockholders who choose to participate in the Tender Offer
by selling their shares to the Bidders will lose the right to
receive any future distributions, including any distributions
made or declared after the expiration date of the Tender
Offer.
Id. The Schedule 14D-9 statements incorporated by reference the Form 10-K that
BH REIT had filed with the SEC in 2011. See Exhibit 13 to Defendants’ Appendix at
5; Exhibit 14 to Defendants’ Appendix at 5. The 2011 Form 10-K had disclosed that
“[h]istorically, the amount of our declared distributions has exceeded our cash flow
from operating activities,” and that “all or a portion of our distributions” had been
paid “from the proceeds of our final offering or from borrowings.” See Exhibit 9 to
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Defendants’ Appendix at 11, 36. The fact that distributions were not necessarily paid
from cash flow had also been disclosed in BH REIT’s previous prospectuses that
accompanied each share offering. See Exhibit 1 to Defendants’ Appendix at 115;
Exhibit 2 to Defendants’ Appendix at 35; Exhibit 3 to Defendants’ Appendix at 120.
B. Procedural Background
Initially, shareholders of BH REIT filed two separate lawsuits against the
company. See Class Action Complaint (docket entry 1); Class Action Complaint
(docket entry 1 of 3:12-CV-4842-G). On January 4, 2013, the court consolidated
those two cases into this one. See Order Consolidating Cases (docket entry 39). The
combined plaintiffs then filed a consolidated amended complaint, bringing claims for
breach of fiduciary duty of loyalty, breach of fiduciary duty of candor, violations of
Section 14(e)/Rule 14e-2(b) and Section 14(a)/Rule 14a-9 of the Exchange Act, and
unjust enrichment. See generally Complaint.
On March 1, 2013, the defendants filed a motion to dismiss the plaintiffs’
claims. See Defendants’ Motion to Dismiss Amended Complaint (docket entry 45).
Plaintiffs filed a response, see Lead Plaintiffs’ Response to Defendants’ Motion to
Dismiss and Supporting Memorandum (“Response”) (docket entry 52), and the
defendants filed a reply in support of their motion. See Defendants’ Reply in Further
Support of Motion to Dismiss Amended Complaint (“Reply”) (docket entry 55). The
motion is now ripe for decision.
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II. ANALYSIS
A. Rule 12(b)(6) Standard
“To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must plead
‘enough facts to state a claim to relief that is plausible on its face.’” In re Katrina
Canal Breaches Litigation, 495 F.3d 191, 205 (5th Cir. 2007) (quoting Bell Atlantic
Corporation v. Twombly, 550 U.S. 544, 570 (2007)), cert. denied, 552 U.S. 1182
(2008). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not
need detailed factual allegations, a plaintiff’s obligation to provide the grounds of his
entitlement to relief requires more than labels and conclusions, and a formulaic
recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555
(citations, quotation marks, and brackets omitted). “Factual allegations must be
enough to raise a right to relief above the speculative level, on the assumption that all
the allegations in the complaint are true (even if doubtful in fact).” In re Katrina
Canal, 495 F.3d at 205 (quoting Twombly, 550 U.S. at 555) (internal quotation marks
omitted). “The court accepts all well-pleaded facts as true, viewing them in the light
most favorable to the plaintiff.” Id. (quoting Martin K. Eby Construction Company, Inc.
v. Dallas Area Rapid Transit, 369 F.3d 464, 467 (5th Cir. 2004)) (internal quotation
marks omitted).
The Supreme Court has prescribed a “two-pronged approach” to determine
whether a complaint fails to state a claim under Rule 12(b)(6). See Ashcroft v. Iqbal,
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556 U.S. 662, 678-79 (2009). The court must “begin by identifying the pleadings
that, because they are no more than conclusions, are not entitled to the assumption
of truth.” Id. at 679. The court should then assume the veracity of any well-pleaded
allegations and “determine whether they plausibly give rise to an entitlement of
relief.” Id. The plausibility principle does not convert the Rule 8(a)(2) notice
pleading to a “probability requirement,” but “a sheer possibility that a defendant has
acted unlawfully” will not defeat a motion to dismiss. Id. at 678. The plaintiffs must
“plead[] factual content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged.” Id. “[W]here the well-pleaded
facts do not permit the court to infer more than the mere possibility of misconduct,
the complaint has alleged -- but it has not ‘show[n]’ -- ‘that the pleader is entitled to
relief.’” Id. at 679 (alteration in original) (quoting FED. R. CIV. P. 8(a)(2)). The court,
drawing on its judicial experience and common sense, must undertake the “contextspecific task” of determining whether the plaintiffs’ allegations “nudge” their claims
against the defendants “across the line from conceivable to plausible.” See id. at 679,
683.
B. Breach of Fiduciary Duty
The plaintiffs initially brought claims for breach of the fiduciary duties of
loyalty and candor. See Complaint ¶¶ 101-110. After the defendants filed their
motion to dismiss, the plaintiffs conceded that their breach of fiduciary duty of
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loyalty claim was likely barred by statute, as it would have to be brought either by BH
REIT itself or as a shareholder derivative suit. See Response at 1 n.1. However, the
plaintiffs also asserted that their second claim was not restricted to breach of fiduciary
duty of candor alone, but encompassed breaches of the duties of due care, good faith,
and -- somewhat confusingly, considering they conceded dismissal of their breach of
fiduciary duty of loyalty claim -- loyalty. See Response at 11 & n.3. The plaintiffs
claim that BH REIT’s board of directors breached these fiduciary duties by pricing
shares at $9.50 per share during the DRP “without taking any reasonable steps to
inform themselves as to a fair value for BH REIT shares,” and by “misleadingly
suggesting that the shares were valued in accordance with the rules of FINRA.” See
Complaint ¶ 109. The court concludes that the plaintiffs have failed to state a claim
for any of these fiduciary duty causes of action. Their breach of fiduciary duty claim
must therefore be dismissed.
1. Legal Standards
In Maryland,1 the duties of directors of financial institutions have been set
down in statute. Section 2-405.1(a) of Maryland’s Corporations and Associations
Code states that:
The court will apply the law of Maryland because the laws of the state in
which a corporation was incorporated govern “the rights, powers, and duties of its
board of directors and shareholders and matters relating to its shares.” See Hollis v.
Hill, 232 F.3d 460, 464-65 (5th Cir. 2000) (internal quotation omitted).
1
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(a) A director shall perform his duties as a director,
including his duties as a member of a committee of the
board on which he serves:
(1) In good faith;
(2) In a manner he reasonably believes to be
in the best interests of the corporation; and
(3) With the care that an ordinarily prudent
person in a like position would use under
similar circumstances.
MD. CODE, CORPS. & ASS’NS § 2-405.1(a). As the plaintiffs concede, the Maryland
code also specifies that “[n]othing in [section 2-405.1] creates a duty of any director
of a corporation enforceable otherwise than by the corporation or in the right of the
corporation.” MD. CODE, CORPS. & ASS’NS § 2-405.1(g). The Court of Appeals of
Maryland, Maryland’s highest court, has recognized that “the language of subsection
(g) . . . plainly means that, to the extent § 2-405.1 creates duties on directors such as
the duty of care contained in § 2-405.1(a), those duties are enforceable only by the
corporation or through a shareholders’ derivative action.” Shenker v. Laureate
Education, Inc., 983 A.2d 408, 426 (Md. 2009).
If the plaintiffs were bringing a derivative action, they would have to surmount
the business judgment rule as codified in section 2-405.1(a). In Maryland, “there is a
presumption that directors of a corporation acted in good faith and in the best
interest of the corporation.” Wittman v. Crooke, 707 A.2d 422, 425 (Md. Ct. Spec.
App. 1998); see also Werbowsky v. Collomb, 766 A.2d 123, 138 (Md. 2001) (“Absent
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an abuse of discretion, [a director’s] judgment will be respected by the courts.”). To
rebut that presumption, a plaintiff must allege “more than mere suspicions and must
state a claim in particular, rather than conclusory terms.” Bender v. Schwartz, 917
A.2d 142, 152-53 (Md. Ct. Spec. App. 2007). In other words, a plaintiff must make
allegations that clearly show that a director did not act “[i]n good faith,” “[i]n a
manner he reasonably believes to be in the best interests of the corporation,” or
“[w]ith the care that an ordinarily prudent person in a like position would use under
similar circumstances.” See MD. CODE, CORPS. & ASS’NS § 2-405.1(a).
Maryland has recognized one limited duty outside of those laid down in
section 2-405.1(a). In Shenker v. Laureate Education, Inc., the court found that when a
corporation’s directors chose to sell the corporation, they “owed fiduciary duties of
candor and maximization of shareholder value to [the shareholders], common law
duties not encompassed or superseded by § 2-405.1(a).” 983 A.2d at 422. Shenker
has been interpreted to mean that when directors are selling a corporation, they are
not acting within their “managerial” capacities, and thus owe duties beyond the
managerial duties imposed by section 2-405.1. See Becker v. Inland American Real
Estate Trust, Inc., No. 13 C 3128, 2013 WL 6068793, at *4 (N.D. Ill. Nov. 18,
2013); George Wasserman & Janice Wasserman Goldsten Family LLC v. Kay, 14 A.3d
1193, 1213 (Md. Ct. Spec. App. 2011) (“because the directors [in Shenker] were
acting outside of their normal managerial duties, they were not protected by . . .
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§ 2-405.1 and, thus, were subject to direct common law duties of candor and good
faith owed to the shareholders”). To date, Shenker’s holding has been limited to its
narrow set of circumstances, and courts have not imposed a fiduciary duty of candor
in other situations. See Kay, 14 A.3d at 1213; Stender v. Cardwell, No.
07-CV-02503-REB-MJW, 2010 WL 1930260, at *4 (D. Colo. May 12, 2010) (“The
duties of candor and maximization of value that directors directly owe to shareholders
recognized in Shenker arise in a very narrow context -- specifically, that of a cash-out
merger when the decision to sell the corporation already has been made.”); Consortium
Atlantic Realty Trust, Inc. v. Plumbers & Pipefitters National Pension Fund, No.
365879-V, 2013 WL 605865, at *6 (Md. Cir. Ct. Feb. 5, 2013) (“Shenker is limited,
until the Court of Appeals says otherwise, to ‘a cash-out merger when the decision to
sell the corporation has already been made’”) (quoting JAMES HANKS, MARYLAND
CORPORATION LAW § 6.6A at 192 (2012 Supplement)).
Lastly, Maryland law recognizes corporate exculpation provisions that protect
corporate directors from any harm they cause unless it “was committed in bad faith,”
“[w]as the result of active and deliberate dishonesty,” or if the “director actually
received an improper personal benefit.” MD. CODE, CORPS. & ASS’NS § 2-418(b)(1).
The Fourth Circuit has held that such an exculpation provision can form the basis of
a motion to dismiss. See Hayes v. Crown Central Petroleum Corporation, 78 F. App’x
857, 865 (4th Cir. 2003).
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2. Application
The plaintiffs’ fiduciary duty claim is blocked by the requirement that suits
against directors for violations of section 2-405.1(a) must be brought as shareholder
derivative actions or by a corporation itself. The plaintiffs aver that they are suing
the directors because of their role “in the management and administration of the
affairs of BH REIT.” Complaint ¶ 108. Lawsuits against directors in their managerial
capacities must be brought through section 2-405.1, which cannot be done directly
by the shareholders. See MD. CODE, CORPS. & ASS’NS § 2-405.l(g). The plaintiff
have not met the requirements for bringing a derivative action. See Motion at 15 n.7.
Therefore, their breach of fiduciary duty claim must be dismissed.
Even if the plaintiffs were bringing their claim within a shareholder derivative
suit, they have failed to state a claim for breach of fiduciary duty. To state a claim for
a breach of section 2-405.1, the plaintiffs would have to show that the directors did
not act “[i]n good faith,” “[i]n a manner [they] reasonably believe[d] to be in the best
interests of the corporation,” or “[w]ith the care that an ordinarily prudent person in
a like position would use under similar circumstances.” See MD. CODE, CORPS. &
ASS’NS § 2-405.l(a). The plaintiffs claim that the directors breached those duties by
pricing the DRP shares “at an inflated and completely arbitrary level . . . without
taking any reasonable steps to inform themselves as to a fair value for BH REIT
shares” and “by misleadingly suggesting that the shares were valued in accordance
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with the rules of FINRA.” Complaint ¶ 109. The plaintiffs are incorrect. BH REIT
very clearly disclosed that the DRP price was “arbitrarily determined” and that “the
price bears no relationship to our book or asset values, or to any other established
criteria for valuing issued or outstanding shares.” See Motion at 6. The plaintiffs
insist that the DRP pricing was still somehow reckless and misleading, but the court -along with other courts that have considered similar offerings -- disagrees. See Allyn
v. CNL Lifestyle Properties, Inc., No. 6:13-CV-132-ORL-36, 2013 WL 6439383, at *4
(M.D. Fla. Nov. 27, 2013); Becker, 2013 WL 6068793, at *5; In re Apple REITs
Litigation, No. 11-CV-2919, 2013 WL 1386202, at *14 (E.D.N.Y. Apr. 3, 2013).
The plaintiffs have alleged nothing more than “mere suspicions.” See Bender, 917
A.2d at 152. Furthermore, the directors did in fact price the shares in compliance
with FINRA -- FINRA allowed them to keep the shares at the initial offering price for
18 months, and afterward, when the directors reevaluated the shares, they changed
the price to reflect the current value. See Motion at 6-7.
Insofar as the facts alleged here are concerned, Shenker did not impose any
additional duties on the directors beyond those created by section 2-405.1. Courts
have only applied the fiduciary duty from Shenker in situations involving the sale of a
corporation, and this court sees no reason to be the first to impose an additional duty
in an unrelated circumstance.
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Lastly, the directors are protected by BH REIT’s exculpation provisions. The
exculpation provision in BH REIT’s charter stated:
LIMITATION OF DIRECTOR AND OFFICER
LIABILITY. To the maximum extent that Maryland law,
in effect from time to time, permits the limitation of the
liability of directors and officers of a corporation, no
present or former Director or officer of the Company shall
be liable to the Company or to any Stockholder for money
damages.
Motion at 16-17. There was also an exculpation provision in the DRP Registration
Statement that insulated directors from “any responsibility or liability as to the value
of our shares.” Id. at 4. These provisions protected the directors from any liability
unless the plaintiffs could show “bad faith,” “active and deliberate dishonesty,” or “an
improper personal benefit.” See MD. CODE, CORPS. & ASS’NS § 2-418(b)(1). As
discussed above, the plaintiffs have made only conclusory and unsupported
allegations regarding the directors’ “bad faith,” “active and deliberate dishonesty,” or
reception of “improper personal benefit[s].” They therefore cannot overcome the
exculpation provisions.
To summarize, the plaintiffs’ breach of fiduciary duty claim must be dismissed
because: (1) their claim should have been brought as a shareholder derivative action;
(2) even if the plaintiffs had brought their claim as a derivative action, they could not
overcome the business judgment rule; (3) the directors did not owe a duty outside of
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section 2-405.1; and (4) the directors were shielded by BH REIT’s exculpation
provisions.
C. Violations of Exchange Act
The plaintiffs also bring two claims under the Exchange Act, 15 U.S.C. § 78n.
The first is for a violation of section 14(e), 15 U.S.C. § 78n(e), and Rule 14e-2(b), 17
C.F.R. § 240.14e-2, promulgated thereunder, alleging that the directors made
misrepresentations while encouraging shareholders not to accept CMG’s mini-tender
offers. See Complaint ¶¶ 112-14. Specifically, the plaintiffs maintain that the
Schedule 14D-9 statements that the directors released after CMG’s offers “failed to
disclose material facts that [sic] about the value of the Company’s stock and that FFO
[“funds from operations,” or cash flow generated by operations] of the Company has
never been sufficient to cover its distributions.” Complaint ¶ 113. The plaintiffs also
claim that the directors violated section 14(a), 15 U.S.C. § 78n(a), and Rule 14a-9,
17 C.F.R. § 240.14a-9, promulgated thereunder, by misleadingly stating in the proxy
statement released in connection with the 2011 charter amendments that one
objective of the amendments was “‘to position the Company to pursue a liquidity
event in the future’ and that the proposal with regard to tender offers was necessary
to ‘protect’ the Company’s stockholders.” ¶¶ 116-22. These claims must be
dismissed both under the heightened pleading standards of the Private Securities
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Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4, and for failure to state
a claim under sections 14(e) and 14(a).
1. PSLRA Standards
The PSLRA requires a plaintiff alleging securities fraud to “state with
particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind,” 15 U.S.C. § 78u-4(b)(2)(A), that is, facts giving rise to a
strong inference of “scienter.”2 In Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.
308 (2007), the Supreme Court held that “[t]o qualify as ‘strong’ . . ., an inference of
scienter must be more than merely plausible or reasonable -- it must be cogent and at
least as compelling as any opposing inference of non-fraudulent intent.” Id. at 314.
Accordingly, to ascertain whether the plaintiff has stated a cognizable claim for
securities fraud, the court must compare the “competing inferences rationally drawn
from the facts alleged” to determine whether the facts alleged sufficiently support a
strong inference of scienter. Id.
The Supreme Court has defined scienter as “a mental state embracing
intent to deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185,
193 n.12 (1976). The Fifth Circuit has held that scienter can be shown by “either
intent or severe recklessness.” See Financial Acquisition Partners LP v. Blackwell, 440 F.3d
278, 287 (5th Cir. 2006) (emphasis in original). Severe recklessness “is limited to
those highly unreasonable omissions or misrepresentations that involve not merely
simple or even inexcusable negligence, but an extreme departure from the standards
of ordinary care, and that present a danger of misleading buyers or sellers which is
either known to the defendant or is so obvious that the defendant must have been
aware of it.” Central Laborers’ Pension Fund v. Integrated Electrical Services Inc., 497 F.3d
546, 551 (5th Cir. 2007) (internal quotation omitted).
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The plaintiffs fail to sufficiently plead scienter for either of their Exchange Act
claims. In relation to their 14(e) claim, the plaintiffs allege that in responding to
CMG’s mini-tender offers, the directors of BH REIT did not disclose that BH REIT’s
cash flow was not sufficient to cover distributions, because they were concerned about
losing control of the company. See Complaint ¶ 16; Response at 7-8, 33-34. This
allegation makes little sense given that each mini-tender offer was for 0.34% of
outstanding shares. See Motion at 10. Furthermore, CMG specified that it was not
trying to take control of BH REIT. See id. And lastly, the plaintiffs’ allegation is a
non-issue because the directors of BH REIT did repeatedly disclose that distributions
came from investor offerings and loans. See Motion at 31. While they may not have
directly repeated that disclosure again in the Schedule 14D-9 statements, they were
not required to. See Garber v. Legg Mason Inc., 347 F. App’x 665, 669 (2d Cir. 2009).
Furthermore, the directors incorporated their prior disclosures by reference in the
Schedule 14D-9 statements. See Reply at 8-9. The plaintiffs try to pick apart these
disclosures and argue that they were misleading, thus giving rise to an inference of
scienter. See Response at 31-33. The court disagrees. A review of these many
disclosures could lead to only one conclusion, viz., that BH REIT was not making
distributions from cash flow, which is all the company was required to disclose. See
Apple REITs, 2013 WL 1386202, at *13.
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The plaintiffs’ section 14(a) claim similarly fails to plead scienter. The
plaintiffs argue that the directors somehow knew that requiring disclosures from minitender offerors did nothing to protect investors, and that saying as much was
knowingly misleading. See Response at 38-39. However, they fail to allege any
details to support this allegation, as required by the PSLRA. See 15 U.S.C.
§ 78u-4(b)(1).
The PSLRA also requires that a plaintiff “prov[e] that the act or omission of
the defendant alleged to violate this chapter caused the loss for which the plaintiff
seeks to recover damages.” See 15 U.S.C. § 78u-4(b)(4). The Supreme Court has
applied “damages” in that section to mean “economic loss.” See Dura Pharmaceuticals,
Inc. v. Broudo, 544 U.S. 336, 347 (2005). Plaintiffs who sue under the Exchange Act
because of a missed tender opportunity must show that they suffered an economic
loss “by retaining the stock instead of selling it at the premium offered by the tender
offeror.” Horowitz v. Pownall, 582 F. Supp. 665, 668 (D. Md. 1984). If the market
price of a stock was higher than the tender offer when that offer was made, a plaintiff
cannot show that he suffered an economic loss as a result of not taking the offer. Id.
Both of the plaintiffs’ Exchange Act claims seek damages to compensate them
for losing the opportunity to sell their shares through mini-tender offers. Therefore,
the plaintiffs would have to show that they would have been able to make more
money by selling their shares through a mini-tender offer than they did by retaining
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their shares. The plaintiffs cannot make such a showing. Regarding the 14(e) claim,
CMG’s mini-tender offers were for $1.80 per share. Complaint ¶¶ 89, 95. However,
shares of BH REIT were selling for $1.75-$3.25 per share in the secondary market at
the time of CMG’s first offer, Complaint ¶ 90, and for $2.35-$3.00 per share at the
time of the second offer. Complaint ¶ 95. Therefore, declining CMG’s tender offers
could not have caused the plaintiffs an economic loss.
The plaintiffs also cannot show with that they suffered an economic loss as a
result of the charter being amended to require mini-tender offerors to make certain
disclosures. The plaintiffs argue that the amendments caused a “[r]eduction of their
liquidity options,” see Response at 39, but such a claim is purely speculative, as the
plaintiffs cannot show that they would have received additional mini-tender offers in
the absence of the charter amendments. The plaintiffs therefore cannot show that
the amendments “caused [a] loss” for which they “seek[] to recover damages,” as
required by the PSLRA. See 15 U.S.C. § 78u-4(b)(4).
2. Section 14(e) and Rule 14e-2(b)
The plaintiffs’ section 14(e) claim also must be dismissed because the plaintiffs
fail to plead a material omission on the part of the directors. Section 14(e) states
that:
It shall be unlawful for any person to make any untrue
statement of a material fact or omit to state any material
fact necessary in order to make the statements made, in the
light of the circumstances under which they are made, not
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misleading, or to engage in any fraudulent, deceptive, or
manipulative acts or practices, in connection with any
tender offer or request or invitation for tenders, or any
solicitation of security holders in opposition to or in favor
of any such offer, request, or invitation.
15 U.S.C. § 78n(e). “The Court must dismiss a complaint founded on allegations of
securities fraud if the allegedly omitted or misrepresented information was in fact
appropriately disclosed.” White v. Melton, 757 F. Supp. 267, 272 (S.D.N.Y. 1991).
The court can consider publicly filed documents while making this determination.
See In re Keyspan Corporation Securities Litigation, 383 F. Supp. 2d 358, 374 n.6
(E.D.N.Y. 2003); Sable v. Southmark/Envicon Capital Corp., 819 F. Supp. 324, 333
(S.D.N.Y. 1993).
As discussed above, the directors of BH REIT repeatedly disclosed that
distributions came from new offerings and loans. The prospectuses to which
shareholders had to agree before purchasing shares of BH REIT stated that
distributions did not necessarily come from the company’s cash flow. See, e.g., Exhibit
3 to Defendants’ Appendix at 120 (“[W]e have and may continue to pay all or a
substantial portion of our distributions from the proceeds of such offerings or from
borrowings in anticipation of future cash flow.”) (from 2006 Prospectus).
Furthermore, the Form 10-K that BH REIT filed with the SEC for 2010, before
CMG’s mini-tender offers, stated that distributions could come from “borrowings” or
offering “proceeds.” See Exhibit 9 to Defendants’ Appendix at 11, 36. The court
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concludes that these disclosures were sufficient, and that the plaintiffs have therefore
failed to plead a material omission on the part of the directors.
3. Section 14(a) and Rule 14a-9
The plaintiffs similarly cannot show that the directors violated Section 14(a).
A director violates Section 14(a) and Rule 14a-9 if he releases a proxy statement
“which, at the time and in the light of the circumstances under which it is made, is
false and misleading with respect to any material fact, or which omits to state any
material fact necessary in order to make the statements therein not false or
misleading.” 17 C.F.R. § 240.14a-9(a). To state a claim for a violation of section
14(a), a plaintiff must show that: (1) a proxy statement contained a material
misrepresentation or omission; (2) the “defendants acted at least negligently in
distributing the proxy statement”; and (3) the proxy statement was an “essential link”
in causing the transaction at issue. Hulliung v. Bolen, 548 F. Supp. 2d 336, 339 (N.D.
Tex. 2008) (Godbey, J.) (internal quotations omitted). To show that a statement of
belief was false, a plaintiff must establish both that the speaker did not actually
believe it, and that the statement expressed something false about its subject. See
Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1095-96 (1991).
The plaintiffs have not made allegations sufficient to show that the directors
did not subjectively believe that the charter amendments that required mini-tender
offerors to make certain disclosures would “protect the Company and its
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stockholders.” They have also not sufficiently alleged that such an idea is objectively
false. Furthermore, the parts of the Schedule 14D-9 statements that referred to
“position[ing] the Company to pursue a liquidity event in the future” were quite
clearly related to separate amendments and should not have misled the plaintiffs
about the purpose of imposing a disclosure requirement on mini-tender offerors. See
Exhibit 7 to Defendants’ Appendix at 5.
D. Unjust Enrichment
Lastly, the plaintiffs’ claim for unjust enrichment must be dismissed. To state
a claim for unjust enrichment under Maryland law, a plaintiff must show “(1) [a]
benefit conferred upon the defendant by the plaintiff; (2) [a]n appreciation or
knowledge by the defendant of the benefit; and (3) [t]he acceptance or retention by
the defendant of the benefit under such circumstances as to make it inequitable for
the defendant to retain the benefit without the payment of its value.” Hill v. Cross
Country Settlements, LLC, 936 A.2d 343, 351 (Md. 2007). “‘[T]he burden is on the
plaintiff to establish that the defendant holds plaintiff’s money and that it would be
unconscionable for him to retain it.’” Bank of America Corp. v. Gibbons, 918 A.2d 565,
569 (Md. Ct. Spec. App. 2007) (quoting Plitt v. Greenberg, 219 A.2d 237, 241 (Md.
1966)).
As the plaintiffs have failed to state claims for either breach of fiduciary duty
or violations of the Exchange Act, the conduct of the defendants could hardly be
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deemed “unconscionable,” and there is nothing “inequitable” which must be undone.
Therefore, the plaintiffs’ unjust enrichment claim is dismissed.
III. CONCLUSION
For the reasons stated above, the defendants’ motion is GRANTED.
Judgment will be entered for the defendants.
SO ORDERED.
March 27, 2014.
___________________________________
A. JOE FISH
Senior United States District Judge
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