In re Apple Reits Litig.
| Decision Date | 03 April 2013 |
| Docket Number | 11-CV-2919 (KAM) |
| Parties | IN RE APPLE REITs LITIGATION |
| Court | U.S. District Court — Eastern District of New York |
Putative class plaintiffs Stanley and Debra Kronberg, Marvin Bendavid, Laura Berger, Barbara Shefsky, and William Murray ("individual plaintiffs") commenced this Consolidated Class Action pursuant to the Private Securities Litigation Reform Act, 15 U.S.C. § 77a et seq. ("PSLRA") and Federal Rule of Civil Procedure 23 on behalf of themselves and others similarly situated (all plaintiffs, collectively, "Proposed Class Plaintiffs") against defendants alleging claims under section 11, 15 U.S.C. § 77k ("section 11"), section 12(a)(2), 15 U.S.C. § 77l(a)(2) ("section 12(a)(2)"), and section 15, 15 U.S.C. § 77o ("section 15"), of the Securities Act of 1933 ("Securities Act"); common law breach of fiduciary duty, unjust enrichment, and negligence; the Connecticut Uniform Securities Act; and the Florida Securities Investor Protection Act. (See generally ECF No. 82, Amended Consolidated Class Action Complaint ("Compl.").)
Presently before the court are three motions to dismiss by (1) defendants Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc., and Apple REIT Ten, Inc. (collectively, the "Apple REITs"); (2) defendants Glenn W. Bunting, Kent W. Colton, Michael S. Waters, Robert M. Wiley, Bruce H. Matson, Garnett Hill, Jr., Anthony Francis "Chip" Keating, Ronald A. Rosenfeld, David J. Adams, and Lisa B. Kern, Glade M. Knight, Bryan Peery (collectively, the "Apple Individuals"), Apple Fund Management, LLC, Apple Suites Realty Group Inc., Apple Eight Advisors, Inc., Apple Nine Advisors, Inc., and Apple Ten Advisors, Inc. (collectively, the "Apple Affiliates"), (collectively, "Apple Individuals & Affiliates"); and (3) defendants David Lerner and David Lerner Associates, Inc. ("DLA") (collectively, "DLA Defendants") (all defendants, collectively, "Defendants"). (See ECF No. 104, Mot. to Dismiss for Failure to State a Claim by Apple REITs; ECF No. 105, Mot. to Dismiss for Failure to State a Claim by Apple Affiliates; ECF No. 115, Mot. to Dismiss for Failure to State a Claim by DLA Defendants.) For the reasons set forth below, Defendants' motions to dismiss the Complaint are granted.
On June 17, 2011, Nancy Kowalski filed a complaint in this district. (See ECF No. 1, Compl.); Kowalski v. Apple REITTen, Inc., et al, 11-CV-2919 (E.D.N.Y.). On June 20, 2011, Stanley and Debra Kronberg filed a class action complaint (and an amended class action complaint on October 20, 2011) against the DLA Defendants in the United States District Court for the District of New Jersey. Kronberg v. David Lerner Associates, Inc., et al., 11-CV-3558 (D.N.J.). On June 28, 2011, Marvin Leff filed a complaint in this district against the same defendants named in Kowalski's complaint. (See ECF No. 9, Notice of Related Case entered June 28, 2011); Leff v. Apple REIT Ten, Inc., et al., 11-CV-3094 (E.D.N.Y.). On November 9, 2011, the District of New Jersey granted the DLA Defendants' motion to transfer the Kronberg action to this district for consolidated proceedings with the other two actions. Upon stipulation of the parties on December 13, 2011, the court ordered that these three cases be consolidated into one action in this district. (See ECF No. 78, Stipulation and Order.) Subsequently, on February 17, 2012, plaintiffs filed the instant Complaint.
Plaintiffs are six individuals who, based on DLA Defendants' solicitations, invested in real estate investmenttrusts ("REITs"),1 specifically, REIT Six, REIT Seven, REIT Eight, REIT Nine, and/or REIT Ten, which have been operated or sold by Defendants. (Compl. ¶¶ 4-5, 15-19.)
Plaintiffs bring this putative class-action lawsuit on behalf of themselves and a Proposed Class of all others who have purchased shares in Apple REITs Six, Seven, Eight, Nine, and Ten, which were offered and sold by Defendants. (Id. ¶ 58.). (Id. ¶ 14.) Additionally, the Kronberg individual plaintiffs allege claims on behalf of themselves and a proposed New Jersey subclass consisting of all other New Jersey residents who have purchased any of the Apple REITs' shares that were offered and sold by the DLA Defendants; the Bendavid and Shefsky individual Plaintiffs allege claims on behalf of themselves and a proposed New York subclass consisting of all other New York residents who have purchased any of the Apple REITs' shares that were offered and sold by the DLA Defendants; individual plaintiff Berger alleges claims on behalf of herself and a proposed ConnecticutSubclass consisting of all other Connecticut residents who have purchased any of the Apple REITs' shares that were offered and sold by the DLA Defendants; individual plaintiff Murray brings this lawsuit on behalf of himself and a Proposed Florida Subclass consisting of all other Florida residents who have acquired any of the Apple REITs' shares that were offered and sold by DLA Defendants. (Id. ¶¶ 59-62.)
The Apple REITs are non-traded public companies subject to Securities and Exchange Commission ("SEC") reporting, that offer and sell non-traded security interests, primarily in hotel revenues.2 (Id. ¶ 73; see also id. ¶¶ 28-32.) All of the Apple REITs' shares have been SEC-registered, and the shares are nearly illiquid because they are not traded on any public securities exchange. (Id. ¶ 73.) As of February 17, 2012, REITs Six through Nine are operating but have closed to new investors, and REIT Ten is still open to new investors.3
The Apple Affiliates are four corporations and one limited liability company "that provide property managementacquisition, advisory, operational and managerial services to the Apple REITs."4 (Id. ¶ 5.)
Glade M. Knight is the founder, Chairman, and Chief Executive Officer of all of the Apple REITs, is the sole owner of Apple Suites Realty Group, Apple Eight Advisors, Apple Nine Advisors, and Apple Ten Advisors, and is the indirect owner of Apple Fund Management. (Id. ¶¶ 5, 28-33, 72, 96.) Knight has signed the SEC registration statements for REITs Eight through Ten, and has signed various SEC forms with respect to Apple REIT Nine. (Id. ¶ 33.)
Bryan Peery, the Executive Vice President and Chief Financial Officer of all of the Apple REITs, has signed the SEC registration statements for REITs Eight through Ten and has signed various SEC forms with respect to REIT Nine. (Id. ¶ 39.)
At the time the Complaint was filed, each of the Apple REIT Individuals had been a director of at least one of the Apple REITs. (Id. ¶¶ 40-50.) Each REIT Individual has been named in the SEC registration statement or post-effective amendments of REITs Eight, Nine, or Ten. (Id. ¶¶ 40-50.)
David Lerner ("Lerner") is the founder, president, and controlling owner of the private brokerage firm DLA, a registrant with the SEC and a member of the Financial Industry Regulatory Authority ("FINRA"). (Id. ¶¶ 20, 26.) DLA has "served as [the] best efforts underwriter and exclusive selling agent" of the Apple REITs.5
Plaintiffs allege the following pertinent facts, which the courts accepts as true for purposes of Defendants' motions.
"The offerings in which Plaintiffs invested were structured as 'blind pool' offerings, in which Plaintiffs committed their money before knowing what properties the REITs would purchase with the net offering proceeds." (Id. ¶ 6.) After the DLA Defendants sold the first 5% of each of the REITs' shares for $10.50, they sold the rest of the shares at a fixed price of $11 per share. (Id. ¶¶ 8, 77.) Until sometime in February 2012, all of the REITs consistently paid the Plaintiffs monthly distributions equal to, on an annualized basis, approximately 7%-8% of their principal investments. (Id. ¶¶ 8, 79.) Plaintiffs believed that until approximately May 2011, theREITs "were performing sufficiently well to justify payment of dividends of 7% to 8%," and that Plaintiffs had a good chance of recovering their principal at the end of the investments' terms. (Id. ¶ 8.) Through the DLA Defendants' "Dividend Reinvestment Plan" ("DRIP"), many of the REITs' investors reinvested their distributions to acquire additional shares of open Apple REITs at the fixed price of $11 per share. (Id. ¶ 80; see id. ¶ 87.) The DLA Defendants are alleged to have encouraged its investors "to invest in multiple REITs." (Id. ¶ 87.)
Investors of the REITs have had the limited right to redeem their shares, and, if done within three years of their initial investment, investors would receive 92% of their principal investment. (Id. ¶ 81.) After three years, investors could redeem their shares for the full $11 purchase price. (Id. ¶ 81.) Redemptions after three years "were limited to 3% to 5% of the weighted average number of shares outstanding during the 12-month period immediately prior to the date of redemption." (Id. ¶ 81.) Hence, "if a substantial number" of investors "were to seek redemption at or about the same time, only a small fraction [of investors] would be eligible." (Id. ¶ 81.)
Because REITs are not publicly traded, Plaintiffs (1) anticipated "hold[ing] their shares for a five to seven year term, with the understanding that" the DLA Defendants would eventually "seek to list the shares on a national securitiesexchange"; (2) relied "on the sale of properties or listing for the return of their principal"; and (3) relied "on the disclosures made by [the DLA Defendants] for information about the value of the REITs' shares."6 (Id. ¶ 3.)
In May 2011, FINRA filed a complaint against the DLA Defendants.7 (Compl. ¶ 9.) After that lawsuit became public,"[r]edemption requests for all of the Apple REITs increased significantly, and the Apple REITs [have, as of February 17, 2012, ceased]...
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