Hutchison v. Deutsche Bank Sec. Inc.

• Decision Date: 26 July 2011
• Docket Number: Docket No. 10–1535–cv.
• Citation: 647 F.3d 479
• Parties: Philip HUTCHISON, Individually and On Behalf of All Others Similarly Situated, Plaintiff,Sheet Metal Workers Local No. 33, Lead Plaintiff, Alfred Ivers, Lead Plaintiff, West Palm Beach Firefighters Pension Fund, Plaintiffs–Appellants,v.DEUTSCHE BANK SECURITIES INC., Citigroup Global Markets Inc., Wachovia Capital Markets, LLC, JMP Securities LLC, Credit Suisse Securities (USA) LLC, Defendants,CBRE Realty Finance, Inc., Keith Gollenberg, Michael Angerthal, Ray Wirta, Defendants–Appellees.
• Court: U.S. Court of Appeals — Second Circuit

647 F.3d 479

Philip HUTCHISON, Individually and On Behalf of All Others Similarly Situated, Plaintiff,Sheet Metal Workers Local No. 33, Lead Plaintiff, Alfred Ivers, Lead Plaintiff, West Palm Beach Firefighters Pension Fund, Plaintiffs–Appellants,

v.DEUTSCHE BANK SECURITIES INC., Citigroup Global Markets Inc., Wachovia Capital Markets, LLC, JMP Securities LLC, Credit Suisse Securities (USA) LLC, Defendants,CBRE Realty Finance, Inc., Keith Gollenberg, Michael Angerthal, Ray Wirta, Defendants–Appellees.

Docket No. 10–1535–cv.

United States Court of Appeals, Second Circuit.

Argued: June 1, 2011.Decided: July 26, 2011.

Susan K. Alexander (Sanford Svetcov, San Francisco, CA, Samuel H. Rudman, David A. Rosenfeld, and Evan J. Kaufman, New York, NY, on the briefs), Robbins Geller Rudman & Dowd LLP, San Francisco, CA, for Plaintiffs–Appellants.Robert S. Fischler (Justin J. Wolosz and David T. Cohen, on the brief), Ropes & Gray LLP, New York, NY, for Defendants–Appellees.Before: JACOBS, Chief Judge, LIVINGSTON, Circuit Judge, and RAKOFF, ^* District Judge.

DENNIS JACOBS, Chief Judge:

Defendant–Appellee CBRE Realty Finance, Inc. (“CBRE”), a real estate financing company, floated its initial public offering (the “IPO”) in September 2006. Among the purchasers were Plaintiffs–Appellants Sheet Metal Workers Local No. 33 and other plaintiffs (collectively, “Plaintiffs”) in this action. They appeal from an August 11, 2009 judgment of the United States District Court for the District of Connecticut (Underhill, J.), granting a Fed.R.Civ.P. 12(b)(6) motion to dismiss their putative securities class action complaint for failure to state a claim. Plaintiffs alleged that CBRE and its Chief Executive Officer Keith Gollenberg, Chief Financial Officer Michael Angerthal, and Chairman of the Board Ray Wirta (the “Defendants”) made false statements and omissions of material facts in the registration statement and prospectus, concerning the impairment of two mezzanine loans. The district court granted CBRE's motion to dismiss on the ground of immateriality, because the loans were fully collateralized at the time of the IPO. See Hutchison v. CBRE Realty Fin., Inc., 638 F.Supp.2d 265, 276 (D.Conn.2009) (“ Hutchison I ”). A motion to replead was denied. We affirm, albeit on somewhat different grounds.

BACKGROUND

Since this is an appeal from a Fed.R.Civ.P. 12(b)(6) dismissal, the following facts are drawn from Plaintiffs' Second Amended Class Action Complaint for Violations of Federal Securities Laws (the “Second Amended Complaint”), and are accepted as true. See Slayton v. Am. Express Co., 604 F.3d 758, 766 (2d Cir.2010). We also rely on information derived from CBRE's filings with the Securities and Exchange Commission (“SEC”) and other documents that are invoked by the complaint. See ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir.2007) (“[W]e may consider any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit.”).

CBRE is a commercial real estate speciality finance company focused on originating, acquiring, investing, financing, and managing commercial real estate-related loans and securities. Its investment portfolio consists of: whole loans; subordinated interests in first mortgage real estate loans; real estate-related mezzanine loans; commercial mortgage-backed securities; and joint venture investments.

On September 26, 2006, CBRE filed an SEC Form S–11/A Registration Statement (the “Registration Statement”) for its IPO. The Registration Statement offered 9,600,000 common shares to the public at $14.50 per share. The underwriters were granted an option to purchase up to an additional 1,440,000 common shares at $14.50 per share. The SEC declared the prospectus effective on September 27, 2006. The IPO raised approximately $144 million.

At the time of the IPO, two mezzanine loans were outstanding to developer Triton Real Estate Partners, LLC (“Triton”). As defined in CBRE's prospectus, investments in mezzanine loans “take the form of subordinated loans secured by second mortgages on the underlying property or loans secured by a pledge of the ownership interests in the entity that directly or indirectly owns the property.” The first loan, with a carrying value of $19.7 million, was made on or about October 31, 2005 and was collateralized by The Rodgers Forge, a 508–unit condominium conversion project in North Bethesda, Maryland (the “Rodgers Forge Loan”). The second loan, with a carrying value of $31.8 million, was made on or about November 8, 2005 and was collateralized by The Monterey, a 434–unit condominium conversion project in Rockville, Maryland (the “Monterey Loan,” and together with the Rodgers Forge Loan, the “Triton Loans”).

The Second Amended Complaint alleges that Defendants knew that these mezzanine loans were in trouble at the time of the IPO. Triton had missed tax payments on both The Rodgers Forge and The Monterey, sales were declining at both condominiums, and The Monterey development was over budget.¹ CBRE had entered into an Intercreditor Agreement in or around November 2005 with Freemont Investment and Loan (“Freemont”), the senior lender on the Monterey Loan. Under that agreement, CBRE and Freemont were required to keep each other apprised of any developments with respect to The Monterey, including whether the project was experiencing any financial difficulties. According to a former regional manager at Freemont, Triton had exceeded the construction budget for The Monterey by approximately $3–$5 million by the summer of 2006, and as a result of this “out-of-balance” condition, Freemont stopped funding its senior loan on several occasions. During the summer of 2006, Freemont discussed the “out-of-balance” condition with Triton; pursuant to the Intercreditor Agreement, Freemont would also have been required to inform CBRE.

Other allegations concerning Triton's troubles include: cost overruns due to unforeseen asbestos removal and unexpected mechanical and electrical issues at The Monterey; mechanics liens filed against both projects, claiming nonpayment of contractors in mid–2006; Triton's solicitation of additional funding from equity investors; and Triton's default on payments to sub-contractors, which caused the sub-contractors to halt construction on both projects.

The Second Amended Complaint alleges that CBRE's Registration Statement was materially inaccurate because it failed to disclose that the Triton Loans were “impaired” (a defined term ²). The Registration Statement reported that CBRE had reviewed its portfolio of loans and did not “identify any loans that exhibit[ed] characteristics indicating that impairment ha[d] occurred.”

On February 26, 2007, five months after the IPO, CBRE “announc[ed] its financial results for the fourth quarter [of 2006].” The press release indicated that as of December 31, 2006 CBRE had classified the Monterey Loan as “non-performing” and that the Rodgers Forge Loan was on CBRE's “watch list,” but that CBRE “had no impairments or loss reserves since inception.” (“Non-performing” and “watch list” are defined in the margin.³) Following the press release, CBRE's common stock price dropped more than 18% over the two-day period ending February 28, 2007.

CBRE reported more bad news in the following months. Its year-end 2006 Form 10–K (filed on or about March 26, 2007) reported that CBRE had advanced approximately $1.7 million to protect its mezzanine loan position in The Rodgers Forge. A May 7, 2007 press release disclosed that, as of April 25, 2007, CBRE was no longer pursuing equity real estate investments through joint ventures, and that on May 4, 2007, CBRE foreclosed on the Rodgers Forge Loan. On May 9, 2007, CBRE foreclosed on the Monterey Loan. CBRE wrote down the value of both loans, and incurred a $7.8 million impairment charge with regard to the write-down of the Monterey Loan.

On January 15, 2009, Defendants moved to dismiss the Second Amended Complaint pursuant to Fed.R.Civ.P. 12(b)(6), arguing that the Second Amended Complaint failed to plausibly allege that the prospectus contained a material misstatement or omission. On July 29, 2009, the district court issued an order dismissing the Second Amended Complaint for failure to state a claim. Judgment was entered on August 11, 2009, dismissing the action and closing the file.

The district court held that Plaintiffs did not plausibly allege that the omissions concerning the Triton Loans were material because, as reflected in CBRE's SEC filings, the Triton Loans were fully collateralized by the underlying real estate. Therefore, the district court reasoned, “CBRE was not at risk” of a material loss on the loans “at the time that the registration statement and prospectus issued.” Hutchison I, 638 F.Supp.2d at 275. The district court did not “rely on any quantitative benchmarks to assess the materiality of the alleged omissions at issue in this case.” Id. at 277.

After the dismissal, Plaintiffs moved for reconsideration or, in the alternative, for leave to file a Proposed Third Amended Complaint. The motion was denied. The district court found that Plaintiffs were attempting to relitigate the issue of materiality, and that the allegations they claimed had been overlooked had in fact been considered. Hutchison v. CBRE Realty Fin., Inc., No. 07–cv–1599, 2010 WL 1257495, at *2 (D.Conn. Mar. 25, 2010) (“ Hutchison II ”). In denying Plaintiffs' request for leave to file a Proposed Third Amended Complaint, the district court held that the proposed pleading added no relevant factual allegations and would have been futile. Id. at *3. Specifically, the district court noted that “[b]ecause the Triton Loans were adequately collateralized at the time of the IPO, there existed no...