Houser v. CenturyLink, Inc.

• Decision Date: 31 March 2022
• Docket Number: Court of Appeals No. 20CA1052
• Citation: 513 P.3d 395,2022 COA 37
• Parties: Dean HOUSER, Individually and on Behalf of All Others Similarly Situated, Plaintiff-Appellant, v. CENTURYLINK, INC., Glen F. Post, III, R. Stewart Ewing, Jr., David D. Cole, William A. Owens, Martha H. Bejar, Virginia Boulet, Peter C. Crown, W. Bruce Hanks, Jeffrey K. Storey, Steven T. Clontz, Mary L. Landrieu, Gregory J. McCray, Harvey P. Perry, Michael J. Roberts, Laurie A. Siegel, and Sunit S. Patel, Defendants-Appellees.
• Court: Colorado Court of Appeals

513 P.3d 395

2022 COA 37

Dean HOUSER, Individually and on Behalf of All Others Similarly Situated, Plaintiff-Appellant,

v.CENTURYLINK, INC., Glen F. Post, III, R. Stewart Ewing, Jr., David D. Cole, William A. Owens, Martha H. Bejar, Virginia Boulet, Peter C. Crown, W. Bruce Hanks, Jeffrey K. Storey, Steven T. Clontz, Mary L. Landrieu, Gregory J. McCray, Harvey P. Perry, Michael J. Roberts, Laurie A. Siegel, and Sunit S. Patel, Defendants-Appellees.

Court of Appeals No. 20CA1052

Colorado Court of Appeals, Division III.

Announced March 31, 2022

Ranson & Kane PC, Jason P. Kane, Colorado Springs, Colorado; Bottini & Bottini, Inc., Yury A. Kolesnikov, La Jolla, California, for Plaintiff-Appellant

Wheeler Trigg O'Donnell, LLP, Kathryn A. Reilly, Denver, Colorado; Willkie Farr & Gallagher LLP, Sameer Advani, Tariq Mundiya, New York, New York, for Defendants-Appellees

Opinion by JUDGE J. JONES

¶ 1 This case concerns class action claims asserted under sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the Act). 15 U.S.C. §§ 77k, 77l (a)(2), and 77o. More specifically, it involves the sufficiency of factual allegations supporting those claims, which relate to the 2017 merger of defendant CenturyLink, Inc., and Level 3 Communications, Inc. The claims allege material misstatements and omissions in a registration statement (section 11), material misstatements and omissions in a prospectus (section 12(a)(2)), and control person liability for the section 11 and section 12(a)(2) violations (section 15).

¶ 2 Apparently, no published Colorado appellate decision has addressed the sufficiency of facts alleged in support of such claims. Because parties are filing such claims in state court with increasing frequency,¹ we take this opportunity to provide some guidance to the district courts and the bar.

¶ 3 Plaintiff, Dean Houser, on behalf of himself and a proposed class of similarly situated shareholders, appeals the district court's order granting CenturyLink's motion to dismiss under C.R.C.P. 12(b)(5) for failure to state a claim on which relief can be granted and its order denying his motion for leave to amend his complaint. We affirm the order dismissing the complaint and affirm in part and reverse in part the order denying Houser's motion for leave to amend his complaint.

I. Background

¶ 4 On October 31, 2016, CenturyLink and Level 3 issued a press release announcing that they had signed an agreement to merge (the Merger Agreement). On December 15, 2016, the companies filed a joint preliminary proxy statement/prospectus in a registration statement with the Securities and Exchange Commission (SEC). The SEC declared the final registration statement (the Registration Statement), which incorporated the joint proxy statement/prospectus (the Prospectus), effective on February 13, 2017. (We refer to the Registration Statement and the Prospectus together as "the Offering Documents.") The companies’ respective shareholders voted to approve the merger on March 16, 2017, and the merger closed on November 1, 2017.

¶ 5 In June 2018, Houser filed this putative class action against CenturyLink and certain of its officers and directors. The complaint asserts a claim under section 11 of the Act based on alleged material misstatements and omissions in the Registration Statement. It asserts a claim under section 12(a)(2) based on alleged material misstatements and omissions in the Prospectus. And it asserts a claim under section 15 against the officers and directors based on the allegation that, as "control persons" of CenturyLink, they are liable for the company's section 11 and section 12(a)(2) violations.

¶ 6 CenturyLink moved to dismiss the complaint under Rule 12(b)(5) and to stay the proceedings pending court approval of a proposed settlement of a similar securities class action filed in federal court.² The state court granted the stay. Several months later, Houser moved to lift the stay because the federal court didn't approve the proposed settlement. The state court lifted the stay.

¶ 7 After it lifted the stay, the state court heard argument on CenturyLink's motion to dismiss. At the hearing, Houser's counsel moved for leave to amend the complaint in the event the court granted CenturyLink's motion to dismiss, based on facts that had come to light in other cases relating to the merger after the filing of the complaint in this case.

¶ 8 The district court granted CenturyLink's motion to dismiss and denied Houser's motion for leave to amend the complaint. Houser appeals both rulings.

II. Discussion

¶ 9 We start by determining whether, as to the alleged misstatements and omissions Houser raises on appeal,³ his complaint adequately pleads a claim for relief. We conclude that it does not. We then consider whether the district court should have allowed Houser to amend his complaint and conclude that, as to one theory, it should have, but as to all other theories, the district court didn't err by denying leave to amend.

A. Motion to Dismiss

¶ 10 The district court's order granting CenturyLink's motion to dismiss carefully parses the allegations of Houser's complaint and thoughtfully applies the applicable law. We don't see any basis for reversing the district court's order.

1. Standard of Review

¶ 11 We review de novo a district court's order granting a Rule 12(b)(5) motion to dismiss for failure to state a claim. Bewley v. Semler , 2018 CO 79, ¶ 14, 432 P.3d 582. And in doing so, we apply the same standards as the district court. Sch. Dist. No. 1 v. Masters , 2018 CO 18, ¶ 13, 413 P.3d 723. Thus, we determine whether the complaint's factual allegations are sufficient to raise a right to relief above the speculative level and provide plausible grounds for relief. Warne v. Hall , 2016 CO 50, ¶¶ 9, 24, 373 P.3d 588 ; Walker v. Women's Pro. Rodeo Ass'n, Inc. , 2021 COA 105M, ¶ 37, 498 P.3d 648. In making that determination, we must accept all the complaint's factual allegations as true, viewing them in the light most favorable to the plaintiff. Bewley , ¶ 14. But we don't consider "bare legal conclusions as true." Norton v. Rocky Mountain Planned Parenthood, Inc. , 2018 CO 3, ¶ 7, 409 P.3d 331 ; accord Denver Post Corp. v. Ritter , 255 P.3d 1083, 1088 (Colo. 2011) ("[W]e are not required to accept as true legal conclusions that are couched as factual allegations."); see also Ashcroft v. Iqbal , 556 U.S. 662, 678-79, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (" [Fed. R. Civ. P.] 8 ... does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions.").⁴

¶ 12 Before going further, we pause to observe that Houser's briefs on appeal are suffused with assertions of fact that aren't included in his complaint but, rather, are garnered from the complaint in a different case, In re CenturyLink Sales Pracs. & Sec. Litig. , 403 F. Supp. 3d 712 (D. Minn. 2019).⁵ But he doesn't cite any authority for the proposition that a party may salvage his own complaint by pointing the court to allegations in a complaint filed in a different case, and we aren't aware of any. We are limited to considering "the facts alleged in the pleadings, documents attached as exhibits or incorporated by reference, and matters proper for judicial notice." Norton , ¶ 7 ; see also Slater v. A.G. Edwards & Sons, Inc. , 719 F.3d 1190, 1196 (10th Cir. 2013) ("In a securities case, we may consider, in addition to the complaint, documents incorporated by reference into the complaint, public documents filed with the SEC, and documents the plaintiffs relied upon in bringing suit."). Allowing a party to rely on allegations in a complaint in another case would be inconsistent with C.R.C.P. 8(a) ’s requirement that the complaint contain a short and plain statement of the claim showing that the plaintiff is entitled to relief and with C.R.C.P. 11(a) ’s requirement that an attorney certify that the pleading is grounded in fact after reasonable inquiry.

2. Applicable Law

¶ 13 Sections 11 and 12(a)(2) impose strict liability for making material misleading statements or omissions in a registration statement (section 11) or in a prospectus or oral communication (section 12(a)(2)). 15 U.S.C. §§ 77k, 77l (a)(2) ; see Panther Partners Inc. v. Ikanos Commc'ns, Inc. , 681 F.3d 114, 120 (2d Cir. 2012) ; In re Morgan Stanley Info. Fund Sec. Litig. , 592 F.3d 347, 358-59 (2d Cir. 2010).

¶ 14 Thus, a plaintiff pleading a claim under section 11 or section 12(a)(2) must identify (1) a misstatement or omission that is (2) material. See Slater , 719 F.3d at 1196 ; Panther Partners , 681 F.3d at 120 ; In re Morgan Stanley Info. Fund Sec. Litig. , 592 F.3d at 360. As this articulation of elements implies, a plaintiff asserting claims under either of these provisions doesn't need to allege or prove scienter, reliance, or loss causation. City of Pontiac Policemen's & Firemen's Ret. Sys. v. UBS AG , 752 F.3d 173, 182-83 (2d Cir. 2014) ; see Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund , 575 U.S. 175, 179, 135 S.Ct. 1318, 191 L.Ed.2d 253 (2015) (intent to deceive or defraud isn't an element of a section 11 claim); Panther Partners , 681 F.3d at 120.⁶

¶ 15 In the case of an alleged omission, a plaintiff must allege that the securities laws required the omitted material fact to be included or that its absence rendered statements in the registration statement or prospectus misleading. Slater , 719 F.3d at 1196 ; In re Adams Golf, Inc. Sec. Litig. , 381 F.3d 267, 277 (3d Cir. 2004) ; see McDonald v. Kinder-Morgan, Inc. , 287 F.3d 992, 998 (10th Cir. 2002) ("[A] duty to disclose arises only where both the statement made is material, and the omitted fact is material to the statement in that it alters the meaning of the statement." (quoting In re Bos. Tech., Inc. Sec. Litig. , 8 F. Supp. 2d 43, 53 (D. Mass. 1998) )). A duty to disclose a fact may arise from an affirmative obligation imposed by law. Houser relies on two such provisions: Item 303 of SEC Regulation S-K, 17...