Hutchison v. Cbre Realty Finance, Inc.
| Citation | 638 F.Supp.2d 265 |
| Decision Date | 29 July 2009 |
| Docket Number | No. 3:07CV1599 (SRU).,3:07CV1599 (SRU). |
| Court | U.S. District Court — District of Connecticut |
| Parties | Philip HUTCHISON, Individually and On Behalf of All Others Similarly Situated, Sheet Metal Workers, Local No. 33, Alfred Ivers, and West Palm Beach Firefighters Pension Fund, Plaintiffs, v. CBRE REALTY FINANCE, INC., Keith Gollenberg, Michael Angerthal, and Ray Wirta, Defendants. |
David A. Rosenfeld, Evan J. Kaufman, Samuel H. Rudman, Coughlin Stoia Geller Rudman & Robbins, Melville, NY, Nancy A. Kulesa, Mark P. Kindall, Izard Nobel, LLP, West Hartford, CT, Jeffrey S. Nobel, Izard Nobel PC, Hartford, CT, for Plaintiffs.
Daniel J. Klau, Pepe & Hazard, Hartford, CT, Harvey J. Wolkoff, Justin J. Wolosz, Ropes & Gray LLP, Boston, MA, Robert S. Fischler, Ropes & Gray LLP, New York, NY, for Defendants.
On October 30, 2007, Philip Hutchison filed a class action complaint1 on behalf of "all persons ... who purchased the common stock of CBRE [Realty Finance, Inc.] pursuant and/or traceable to the Company's initial public offering (the "IPO") on or about September 29, 2006 (the `Class'/`Plaintiffs')." Compl. at ¶ 1.2 The named defendants include CBRE Realty Finance, Inc. ("CBRE"), "a commercial real estate specialty finance company," and several individual defendants who held executive and management positions at CBRE during the relevant time period at issue (the "Individual Defendants").3 Id. at ¶¶ 14-18.
The plaintiffs claim violations of sections 11, 12(a)(2), and 15 of the Securities Act of 1933,4 based on allegations that CBRE failed to disclose (in both its IPO registration statement and sales prospectus) that one of its outstanding debtors, Triton Real Estate Partners, Inc. ("Triton"), was experiencing "severe financial distress" in connection with two real estate development projects to which CBRE had provided financing (the "Triton Loans"). Id. at ¶ 81. Specifically, the plaintiffs contend that CBRE's failure to disclose the risks associated with the Triton Loans contravened standards of Generally Accepted Accounting Principles ("GAAP"), resulting in a "negligently prepared" registration statement and prospectus that induced the plaintiffs to purchase CBRE shares at "materially inflated prices." Id. at ¶¶ 6, 84-112.
In response, the defendants argue that the plaintiffs fail to "plead facts showing knowledge by [CBRE] of any [information] that required [CBRE] to [disclose] the [Triton] Loans prior to the [IPO] or to make any specific disclosures in the offering documents regarding the [Triton] [L]oans." Mot. Dismiss 2.5 In the alternative, the defendants argue that plaintiffs Hutchison and Sheet Metal Workers, Local No. 33 ("SMW") lack standing because "they did not purchase their shares in the IPO or at any other time before unregistered shares entered the market." Mem. in Support of Mot. Dismiss at 13.
On November 14, 2008, I heard oral argument on motions to dismiss the Corrected Amended Class Action Complaint (which was then the operative pleading). At that time, I dismissed the section 12(a)(2) claim without prejudice; the plaintiffs have re-pled that claim. For the reasons that follow, the defendants' motion to dismiss is GRANTED.
I assume the following facts, as set forth in the Complaint, as true:
As a real estate financier, defendant CBRE focuses its business on "originating and acquiring whole loans, bridge loans, subordinate interests in whole loans, commercial mortgage-backed securities, mezzanine loans, and joint venture interests in entities that own commercial real estate." Compl. at ¶ 14. On September 26, 2006, CBRE filed with the Securities and Exchange Commission (the "SEC") a Form S-11/A Registration Statement in advance of its anticipated IPO. Id. at ¶ 40. The registration statement declared that CBRE intended to issue 9.6 million common shares to the public at $14.50 a share, with an underwriter purchase option of up to an additional 1.44 million common shares at the same price. Id. On September 27, 2006, the SEC declared the sales prospectus effective, and CBRE ultimately raised approximately $144 million through its IPO. Id. at ¶ 41.
At the time of the IPO, CBRE had made two mezzanine loans to real estate developer Triton Real Estate Partners, LLC ("Triton"), with an aggregate carrying value of approximately $51 million. Id. at ¶¶ 46-47. Those loans were to provide financing for two condominium conversion projects in Maryland, The Rodgers Forge and The Monterey.6 Id. In the fall of 2006, "missed real estate tax payments, declining sales of Triton's converted condominium units," and cost overruns in connection with the Monterey project caused the Triton Loans to "go bad." Id. at ¶¶ 58-60. Additionally, in the summer of 2006, Triton "became delinquent in making payments to contractors, and ... Triton attempted to `recapitalize'" by seeking a cash infusion from foreign investors, which never materialized. Id. at ¶ 68. "As a result of this [severe] financial distress that began before the IPO, renovation stalled, undeveloped apartments went vacant, and partially converted condominiums went unsold...." Id. at ¶ 70 (emphasis added). Collectively, these problems "adversely affected Triton's cash flow and indicated that the risk of default associated with [the Triton] [L]oans had increased significantly." Id.
When filed with the SEC, CBRE's registration statement contained an unaudited financial report maintaining that the Company "did not identify any loans that exhibit characteristics indicating that impairment had occurred."7 Id. at ¶ 97. The plaintiffs allege, however, that at the time of the IPO, the Triton Loans were exhibiting such characteristics. Id. at ¶¶ 83, 98. At or about the time of the IPO:
• Triton had breached loan covenants with the senior lenders on The Monterey;
• Triton was financially "over-extended" with multiple ongoing condo-conversion projects in a local market that was rapidly deteriorating;
• Triton had accumulated significant cost overruns on The Monterey and The Rodgers Forge properties;
• Triton was aggressively seeking funding from equity investors;
• Triton had defaulted on payments to subcontractors, causing them to halt construction, thereby stalling development on The Monterey and The Rodgers Forge; and
• Converted [condominium] units went unsold and partially converted apartments at The Monterey and The Rodgers Forge remained vacant.
Id. at ¶ 98. Also, the registration statement failed to "include significant factors that made the IPO risky," including geographical business constraints and local regulatory impediments associated with the Triton Loans. Id. at ¶¶ 107-12.
At the close of trading on February 26, 2007, CBRE issued a press release "announcing its financial results for the fourth quarter [of 2006]" and indicating that on December 31, 2006, CBRE had classified the Monterey loan as non-performing.8 Id. at ¶ 114. CBRE also announced that the Rodgers Forge loan was on the company's "watch list," but that CBRE "had no impairment or loss reserve since inception." Id. Following this revelation, "the price of CBRE common stock declined more than 18% on extremely heaving [trading] volume during the two day period ending February 28, 2007."9 Id.
"On or about March 26, 2007, CBRE filed its December 31, 2006 Form 10-K with the SEC," disclosing the non-performing and watch list loans, and stating that the Company had "funded approximately $1.7 million to protect [its] mezzanine loan position in [the Rodgers Forge] asset." Id. at ¶ 115. Less than two months later, CBRE foreclosed on both the Rodgers Forge and the Monterey properties, writing-down the value of both loans and incurring a $7.8 million impairment charge with regard to the write-down of the Monterey project.10 Id. at ¶¶ 117, 120, 122.
At or around the time of the foreclosures, more than half of the Rodgers Forge units were vacant "and only about a dozen of the units converted into condominiums had been sold."11 Id. at ¶ 117. Likewise, less than 1% of The Monterey's units had been renovated, with "only 35% of the building leased."12 Id. at ¶ 120. After the markets closed on August 6, 2007, CBRE issued a press release about its financial position for the second quarter of 2007, including information regarding the foreclosed assets. Id. at ¶ 122. Following that announcement, CBRE's stock value declined from $6.25 a share to $4.25 a share, "a decline of 32% and 70% lower than the IPO price of $14.50." Id. at ¶ 123.
The plaintiffs in this action seek class certification pursuant to Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure, compensatory damages (with interest), costs and expenses (including attorneys', accountants', and experts' fees), and rescission or a rescissory measure of damages with respect to their section 12(a)(2) claim. Id. at p. 41. The defendants argue that the plaintiffs have failed to adequately "allege the material misstatement or omission that is an element of [their] Securities Act claims," and that the complaint should be dismissed in its entirely under Rule 12(b)(6) for failure to state a claim upon which relief can be granted. Alternatively, the defendants have moved pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure to dismiss claims brought by plaintiffs Hutchison and SMW for lack of standing.13
A motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6) should be granted only if "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984). The function of a motion to dismiss is "merely to assess the legal feasibility of a complaint, not to assay the weight of evidence which might be offered in support thereof." Ryder...
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