Hubbard v. Bankatlantic Bancorp, Inc.

• Decision Date: 23 July 2012
• Docket Number: No. 11–12410.,11–12410.
• Citation: 688 F.3d 713,23 Fla. L. Weekly Fed. C 1330,83 Fed.R.Serv.3d 161
• Parties: Joseph C. HUBBARD, individually and on behalf of all others similarly situated, Plaintiff, State–Boston Retirement System, Plaintiff–Appellant, v. BANKATLANTIC BANCORP, INC., James A. White, Valarie C. Toalson, Jarett S. Levan, Alan B. Levan, Defendants–Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

688 F.3d 713

83 Fed.R.Serv.3d 161

23 Fla. L. Weekly Fed. C 1330

Joseph C. HUBBARD, individually and on behalf of all others similarly situated, Plaintiff,State–Boston Retirement System, Plaintiff–Appellant,

v.BANKATLANTIC BANCORP, INC., James A. White, Valarie C. Toalson, Jarett S. Levan, Alan B. Levan, Defendants–Appellees.

No. 11–12410.

United States Court of Appeals, Eleventh Circuit.

July 23, 2012.

Mark S. Arisohn, Mindy S. Dolgoff, Serena Hallowell, Michael W. Stocker, Labaton Sucharow, LLP, New York City, Mark S. Danek, Benjamin J. Hinerfeld, Matthew L. Mustokoff, Andrew L. Zivitz, Barroway, Topaz, Kessler, Meltzer & Check, LLP, Radnor, PA, for Plaintiff–Appellant.

Richard B. Jackson, Gordon McRae Mead, Jr., Andrea Naomi Nathan, Adam Michael Schachter, Cecilia Duran Simmons, Eugene E. Stearns, Stearns, Weaver, Miller, Weissler, Alhadeff & Sitterson, PA, Miami, FL, for Defendants–Appellees.

Appeals from the United States District Court for the Southern District of Florida.

Before TJOFLAT, PRYOR and FAY, Circuit Judges.

TJOFLAT, Circuit Judge:

This appeal concerns a private securities fraud class action brought under § 10(b) of the Securities Exchange Act of 1934¹ and SEC Rule 10b–5² against a bank holding company, BankAtlantic Bancorp, Inc., and its management (collectively, “Bancorp”)³by State–Boston Retirement System, a shareholder and the lead plaintiff. State–Boston sought to prove at trial that the holding company had misrepresented the level of risk associated with commercial real estate loans held by its subsidiary, BankAtlantic. After the trial, the District Court submitted the case to the jury on a verdict form seeking general verdicts and answers to special interrogatories under Federal Rule of Civil Procedure 49(b). When the jury returned a verdict partially in favor of State–Boston, Bancorp moved for judgment as a matter of law under Federal Rule of Civil Procedure 50. Perceiving an inconsistency between two of the jury's interrogatory answers, the District Court discarded one of them and granted the motion on the basis of the remaining findings.

This was error. When a court considers a motion for judgment as a matter of law—even after the jury has rendered a verdict—only the sufficiency of the evidence matters. Chaney v. City of Orlando, 483 F.3d 1221, 1227 (11th Cir.2007). The jury's findings are irrelevant. See id. at 1227–28. Despite the District Court's error, we may affirm for any reason supported by the record. E.g., United States v. Harris, 608 F.3d 1222, 1227 (11th Cir.2010). In this case, we conclude that the evidence was insufficient to support a finding of loss causation, an element required to make out a securities fraud claim under Rule 10b–5. See, e.g., Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 342, 125 S.Ct. 1627, 1631, 161 L.Ed.2d 577 (2005) (listing among the elements of a § 10(b) securities fraud claim “loss causation, i.e., a causal connection between the material misrepresentation and the loss” (emphasis omitted) (internal quotation marks omitted)). We therefore affirm.

I.

A.

BankAtlantic Bancorp, Inc., is a publicly traded bank holding company incorporated and headquartered in Florida. Its subsidiary, BankAtlantic, is a federally chartered bank that offers consumer and commercial banking and lending services throughout Florida. This case concerns allegations that from October 19, 2006, until October 25, 2007 (the “class period”),⁴ Bancorp fraudulently misled the public about the deteriorating credit quality of BankAtlantic's commercial real estate portfolio.⁵ That portfolio comprised land acquisition and development loans; land acquisition, development, and construction loans; and builder land bank loans (“BLB loans”). Each of these categories comprised loans to investors to buy land for initial developmentfollowed by sale for further development. The relevant distinction for purposes of this case is between BLB loans, which were made to investors after they had sold options to purchase lots to homebuilders, and non-BLB loans, which involved no such pre-disbursement option contracts.

BankAtlantic internally monitored the risk associated with these land loans by assigning each loan a grade on a scale from one to thirteen—the lower the grade, the safer the loan. Grades one through nine were considered passing. But once a loan was assigned a grade of ten—and therefore classified as a “special mention” asset—or a grade of eleven—and therefore classified as a “substandard” asset—it was placed on a “Loan Watch List” to allow the bank's management to keep track of loans that might pose problems.⁶

The Loan Watch List, which was updated monthly, was a purely internal risk-monitoring tool; it was not released to the public. Bancorp's public disclosures did regularly reveal the amount of loans designated “nonaccrual,” as opposed to “accruing.” That designation indicated the bank's judgment that a loan was unlikely to be repaid according to the terms of the loan agreement. But many commercial real estate loans that were graded ten or eleven, and therefore catalogued on the Loan Watch List, were not designated nonaccrual. Concern about these loans, therefore, was not revealed to the public.

B.

State–Boston's case concerns these commercial real estate loans designated special-mention or substandard, or otherwise identified as potentially problematic, but not designated nonaccrual and therefore not disclosed to the public as a source of concern. According to State–Boston, Bancorp knew at least as early as the fall of 2006 that it had reason to be worried about the credit quality of the commercial real estate portfolio. State–Boston introduced evidence of what it viewed as lax underwriting, as well as internal communications within BankAtlantic that revealed concern that some borrowers might be unable to sell the land securing their loans to homebuilders, making their loans difficult to pay off.

In public statements, however, Bancorp denied concern about BankAtlantic's commercial real estate portfolio. On October 19, 2006, in a quarterly earnings conference call open to the public, James White, then Bancorp's Chief Financial Officer, said, “There's really nothing significant to note on the credit quality front[,] which in itself[,] given the current real estate environment[,] I think is a favorable commentary.” White noted that the land securing BankAtlantic's commercial real estate loans might be developed more slowly than anticipated, but suggested that the bank's underwriting gave investors reason for confidence: “[I]n our situation and because of our insistence on hard equity in projects,” he said, “we believe we're dealing with borrowers with staying power that will enable them to ride through this if indeed that trend does manifest.” On November 29, 2006, at an investor conference in New York, Jarett Levan, then President of BankAtlantic, announced that there were no troubling credit quality trends ahead.

Over time, however, Bancorp's private concerns about the commercial real estate portfolio—as reflected in the increasing number of accruing but special-mention or substandard loans on the Loan Watch List—intensified. The first iteration of the Loan Watch List generated during the class period showed no special-mention or substandard commercial real estate loans that were accruing and therefore unknown to the public. On March 31, 2007, however, the Loan Watch List showed, in addition to more than $20.5 million in nonaccrual land loans, an accruing but substandard land loan of more than $21.2 million.

By then, concern about the commercial real estate portfolio had registered in other internal communications as well. For example, in an email to several BankAtlantic officers dated March 14, 2007, Alan Levan, then Bancorp's CEO and Chairman of the Board of Directors, noted a “parade of land loans coming in for extensions recently” and warned, “It's pretty obvious the music has stopped. In most cases, the presold contract to a builder has either gone away or is in dispute or being modified.” And at a Credit Policy Committee meeting on March 21, 2007, several BankAtlantic officers discussed the recent “migrat[ion]” of about $90 million in commercial real estate loans from grade four, in the bank's risk-grading system, to the lower, but still passing, grades of five, six, and seven because of the weakening housing market.

On April 25, 2007, in an 8–K⁷ reporting financial results for the first quarter of 2007, and in another earnings conference call the next day, Bancorp partially disclosed its concern about the commercial real estate portfolio. In addition to disclosing the amount of BankAtlantic's nonaccrual loans, the 8–K warned,

The current environment for residential land acquisition and development loans is a concern, particularly in Florida, and represents an area where we remain very cautious in our credit management. In view of market conditions, we anticipate we may experience further deterioration in the portfolio over the next several quarters as the market attempts to absorb an oversupply of available lot inventory.

During the April 26 conference call, Alan Levan mentioned two nonaccrual loans in BankAtlantic's commercial real estate portfolio—one for about $12.5 million and one for about $7.5 million. Levan said both were BLB loans. He warned that the Florida housing market was slowing and that, as a result, the risk associated with the BLB portfolio could worsen. Because of market conditions, Levan said, homebuilders were becoming more reluctant to buy lots on the land that secured the BLB loans. That day, Bancorp's stock price dropped from $10.55 per share to $9.99.

C.

Some of the risk associated with BankAtlantic's commercial real estate portfolio remained undisclosed. During the April 26 conference call, Levan did not disclose that a $21.2 million BLB loan had been designated “substandard” and placed on the Loan Watch List. Nor did he disclose concern...