440 F.3d 278 (5th Cir. 2006), 04-11300, Financial Acquisition Partners LP v. Blackwell

Docket Nº:04-11300.
Citation:440 F.3d 278
Party Name:FINANCIAL ACQUISITION PARTNERS LP, on behalf of themselves and all others similarly situated; John D. May, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. L. Keith BLACKWELL; Jonathan S. Pettee; Randolph E. Brown; Ron B. Kirkland; Deloitte & Touche LLP, a Delaware Limited Liability Partnership, Defendants-Appell
Case Date:February 14, 2006
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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440 F.3d 278 (5th Cir. 2006)

FINANCIAL ACQUISITION PARTNERS LP, on behalf of themselves and all others similarly situated; John D. May, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants,


L. Keith BLACKWELL; Jonathan S. Pettee; Randolph E. Brown; Ron B. Kirkland; Deloitte & Touche LLP, a Delaware Limited Liability Partnership, Defendants-Appellees.

No. 04-11300.

United States Court of Appeals, Fifth Circuit

Feb. 14, 2006.

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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William B. Federman, Stuart William Emmons (argued), Federman & Sherwood, Oklahoma City, OK, for Plaintiffs-Appellants.

Stacy R. Obenhaus, William G. Whitehill (argued), Randy D. Gordon, Gardere Wynne Sewell, Dallas, TX, for L. Keith Blackwell, Randolph E. Brown and Ron B. Kirkland.

Craig Louis Weinstock, Christopher Benjamin Dove (argued), Locke, Liddell & Sapp, Houston, TX, for Jonathan S. Pettee.

Karen Lee Hirschman, Vinson & Elkins, Dallas, TX, Marie Roach Yeates (argued), Vinson & Elkins, Houston, TX, for Deloitte & Touche, LLP.

Appeal from the United States District Court for the Northern District of Texas

Before JOLLY, BEAM, [*] and BARKSDALE, Circuit Judges.

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In this putative class action for securities fraud, Financial Acquisition Partners and John D. May (Plaintiffs) appeal the Federal Rule of Civil Procedure 12(b)(6) dismissal of their second amended complaint pursuant to the Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4. Plaintiffs' claims arise from their purchase of shares, and the bankruptcy shortly thereafter, of Amresco, Inc. Plaintiffs challenge the district court's: (1) holding implicitly that collateral estoppel did not preclude the individual defendants' raising certain defenses; (2) striking opinions from an expert's affidavit attached to the complaint; (3) holding Plaintiffs failed to satisfy the PSLRA's pleading requirements; and (4) denying leave to amend their complaint. AFFIRMED


The following factual recitation is based on the complaint at issue and public filings, all of which may be considered in deciding a Rule 12(b)(6) motion, as discussed infra.

Amresco was publicly traded. As a debtor in bankruptcy when this action was initiated, it was subject to the automatic stay provisions. 11 U.S.C. § 362.

Defendants L. Keith Blackwell, Jonathan Pettee, Randolph E. Brown, and Ron B. Kirkland (Individual Defendants) are former officers and directors of Amresco. Brown was chairman of the board and CEO from November 2000 until Amresco's bankruptcy filing; Blackwell, its general counsel and president; Pettee, its chief financial officer; and Kirkland, its senior vice president and chief accounting officer. Defendant Deloitte & Touche LLP was Amresco's auditor.

Prior to its 2 July 2001 bankruptcy filing, Amresco was a small and middle-market lending company with three main segments: commercial finance, asset management, and home equity lending. Its operations centered around its commercial finance line of business. Commercial finance revenues were primarily earned from (1) interest and fees on loans to small and middle-market business owners; (2) accrued earnings on retained interests in securitizations; (3) servicing fees on its loan portfolios; and (4) gains on the securitization on sale of loans.

One of Amresco's significant divisions was a lender to restaurants (including well-known national chains) and other small to middle-market businesses. Amresco funded these loans through a warehouse financing facility (revolving credit line) before bundling them for sale to a third party. These bundled loans were securitized - sold into a trust and then bonds backed by underlying trust loans issued. Amresco retained an interest in the securitized loans. Borrowers signed a note for an amount 5 to 10% greater than the amount loaned and paid interest on that greater amount (credit enhancement). The credit enhancement also served as collateral for the loan; but, of course, if net losses in the securitization pool exceeded 10%, Amresco's cash flow would decrease. The premium was returned to borrowers if there were no deficiencies within the pool; otherwise, they forfeited those payments. If the loans became more than 105 to 360 days delinquent (depending on the loan), payments to investors were accelerated; Amresco's cash flow would decrease; and it would have to write-down some of its subordinated interests.

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Because the anticipated payments on the retained interests extended into the future, Amresco had to estimate, and report on its financial statements, the present fair value of those payment streams. The Form 10-K for the year 2000 (Y2000 10-K), signed on 30 March 2001 and filed on 2 April, noted that different assumptions might materially affect the estimates.

Two key assumptions in that Y2000 10-K were the projected credit loss and the discount. Amresco believed net losses would not exceed the credit enhancement range, so that borrowers would absorb the entire loss. Therefore, it estimated a net credit loss of zero percent. Amresco stated that a 1.5% credit loss increase would reduce the value of Amresco's retained interest by $27 million.

Amresco's Y2000 10-K, accompanied by Deloitte's audit, reported assets of $715 million and shareholders' equity of $165 million. It also showed Amresco suffered losses of $69 million in 1998, $221 million in 1999, and $218 million in 2000. The Y2000 10-K stated Amresco no longer had access to its prior warehouse financing. Therefore, Amresco needed to find a new lender; but, the Y2000 10-K stated a new lender was not guaranteed and that, until one was found, Amresco's ability to make new loans was substantially impaired.

This action concerns shares of Amresco purchased from 29 March 2001 to 2 July 2001 by a claimed class. (Again, the Y2000 10-K primarily at issue was signed on 30 March 2001 and filed on 2 April.) Plaintiffs claim fraud relating to (1) Amresco's financial statements; (2) statements its officers made to certain shareholders; and (3) other omissions. The allegations primarily involve the following events: (1) in April 2000, Amresco agreed to a material executive compensation plan for its officers, including the Individual Defendants, that should have been, but was not, disclosed immediately to the public; (2) on 12 March 2001, Amresco retained Greenhill & Co. to explore restructuring options, including, but not limited to, bankruptcy; (3) on 2 April 2001, Amresco filed its Y2000 10-K, signed by Brown, Pettee, and Kirkland (Plaintiffs allege numerous material misstatements and omissions related to this filing, including Amresco's not disclosing the potential for default, and eventually the default, of a $50 million loan to Duke & Long); and (4) on 10 May 2001, Brown, Pettee, and Blackwell met with shareholders in Oklahoma, allegedly telling them Amresco would obtain new warehouse financing. (These alleged statements were the subject of another action, discussed infra, Prescott Group Aggressive Small Cap, L.P. v. Blackwell, et al., No. 02-CV-0517-EA (M) (N.D. Okla. 25 Aug. 2003) (unpublished).)

Plaintiffs' complaint was filed in mid-2002. Approximately six months later, by joint motion, Plaintiffs declared their intention to file an amended complaint and Defendants agreed to delay moving to dismiss until that complaint was filed. The motion was granted.

The first amended complaint was filed in early 2003. After Defendants moved to dismiss, Plaintiffs filed an opposed motion for leave to amend (to file the second amended complaint at issue). In July 2003, in granting leave to amend, the district court cautioned: additional amendment "[would] not be granted absent extraordinary circumstances". Fin. Acquisition Partners, L.P. v. Blackwell, no. 3: 02-CV-1586-K (N.D. Tex. 28 July 2003) (unpublished).

Accordingly, that month, Plaintiffs filed their second amended complaint (SAC); Defendants moved to dismiss, including Deloitte's moving to strike Plaintiffs' expert's affidavit attached to the SAC. Responding

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in opposition to the motions to dismiss, Plaintiffs, inter alia, urged application of collateral estoppel, from the above-referenced Oklahoma Prescott litigation, to certain matters in dispute. In a detailed and comprehensive opinion that exceeded the 50-page SAC by only a few pages, the district court granted, in part, Deloitte's motion to strike; granted the motions to dismiss; and denied leave to amend the SAC (to file a fourth complaint).


Plaintiffs contest the district court's: (1) implicitly denying application of collateral estoppel; (2) striking part of their expert's affidavit; (3) holding the SAC failed to satisfy the PSLRA's pleading requirements; and (4) denying leave to amend the SAC.


In the Prescott litigation, plaintiffs alleged Blackwell, Brown, Kirkland, and Pettee made misstatements in May 2001 (post-filing of the Y2000 10-K that April) in connection with their incentive compensation arrangements, Amresco's ability to obtain a warehouse line of credit, and the impairment of the Duke & Long loan. That action was settled, but only after denial of the Individual Defendants' motion to dismiss regarding the compensation and Duke & Long claims. Plaintiffs maintain such denial in Prescott provides collateral estoppel for those claims in this action.

The SAC was filed in July 2003; the Prescott dismissal order, that August. Plaintiffs first urged application of collateral estoppel in opposition to the motions to dismiss. In dismissing the action at hand, the district court by implication rejected such application. No authority need be cited for the rule that a reviewing court will consider an issue properly presented to a district court, even though not addressed by it.

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