Patel v. Patel

• Decision Date: 14 January 2011
• Docket Number: Civil Action No. 1:09–CV–3684–CAP.
• Parties: Mukta PATEL, Ashok Parekh, Jitu Patel, and Andrea Boswell, and Phil Boswell, on behalf of themselves and all others similarly situated, Plaintiffs,v.Mukesh C. PATEL, R.C. Patel, Edward L. Briscoe, Scott Dix, Brij M. Kapoor, Mukund R. Patel, Narenda D. Patel, Dhiru G. Patel, and Balvant Patel, Defendants.
• Court: U.S. District Court — Northern District of Georgia

761 F.Supp.2d 1375

Mukta PATEL, Ashok Parekh, Jitu Patel, and Andrea Boswell, and Phil Boswell, on behalf of themselves and all others similarly situated, Plaintiffs,

v.Mukesh C. PATEL, R.C. Patel, Edward L. Briscoe, Scott Dix, Brij M. Kapoor, Mukund R. Patel, Narenda D. Patel, Dhiru G. Patel, and Balvant Patel, Defendants.

Civil Action No. 1:09–CV–3684–CAP.

United States District Court, N.D. Georgia, Atlanta Division.

Jan. 14, 2011.

Arthur Stock, Josh M. Rubens, Lawrence J. Lederer, Robin Switzenbaum, Berger & Montague, P.C., Philadelphia, PA, Michael J. Gorby, Gorby Reeves & Peters, Atlanta, GA, for Plaintiffs.Kerry K. Vatzakas, Robert R. Long, IV, Theodore Joseph Sawicki, Alston & Bird, LLP, Atlanta, GA, for Defendants.

ORDER

CHARLES A. PANNELL, JR., District Judge.

This matter is before the court on the defendants' motion to dismiss the plaintiffs' amended complaint [Doc. No. 27].

I. Factual Background

Horizon BanCorp was founded in 2000 by the defendants Mukesh Patel and R.C. Patel; the company's name was changed in 2005 to Haven Trust BanCorp, Inc. [Doc. No. 23, ¶¶ 13, 14]. The company was organized as a holding company for Haven Trust Bank and had no business operations other than the Bank, its sole and wholly-owned subsidiary [ Id. at ¶ 33]. The Bank was a Georgia state-chartered bank headquartered in Duluth, Georgia; the Bank operated four branches in Atlanta and had loan production officers in Alabama and Oklahoma. The company was a vehicle to obtain cash for the Bank by selling the company's common stock to investors, including the plaintiffs here. Haven Trust and the Bank were operated and controlled by the defendants [ Id. at ¶¶ 13–23]. As directors of both the company and the Bank, the defendants were responsible for and controlled the operations of both entities [ Id. at ¶¶ 23, 127–129]. In addition, as the founders, the defendants Mukesh Patel (Chairman of Haven Trust), his brother R.C. Patel, and Edward Briscoe (Haven Trust's President and Chief Executive Officer) shared in the daily operations of the company and the Bank [ Id. at ¶¶ 13–14].

From its inception, Haven Trust grew at a rapid pace, from $29 million in assets in its first year of operation in 2000 to approximately $575 million by 2008 [ Id. at ¶ 35]. This rapid growth was largely predicated on the use of non-core funding, including brokered deposits, which were used for risky acquisition, development, and construction (ADC) loans and other types of commercial real estate (CRE) lending [ Id. at ¶¶ 38–44]. Haven Trust initially marketed itself to the Indian and Asian–American communities and likewise focused much of its efforts to sell the company's common stock to those communities [Doc. No. 23, ¶ 33].

The defendants solicited investors through private placement memoranda (PPM's), which were drafted and approved by the defendants [ Id. at ¶¶ 22 and 26]. The first stock offering was in March 2006, with a second offering in March 2008 [ Id. at ¶¶ 61–71 and 73–88]. The plaintiffs contend that the 2006 and 2008 PPM's concealed the true financial condition and business operations of Haven Trust and specifically failed to disclose the Bank's excessively risky lending practices, the defendants' self-dealing transactions, violations of laws and regulations related to loan underwriting deficiencies, and the defendants' complete failure to address and correct the numerous known improprieties that had been repeatedly identified by federal and state regulators [ Id. at ¶¶ 2–3, 36–37, 45–59].

On December 12, 2008, the Georgia Department of Banking and Finance announced publicly that the Bank had been closed and that the FDIC had been appointed as receiver [Doc. No. 23, ¶ 3]. At that time, the Bank had assets (or outstanding loans) of $572 million and customer deposits of only $515 million [ Id. at ¶ 57]. The Bank's collapse rendered Haven Trust's stock worthless, resulting in damage to the plaintiffs' investments [ Id. at ¶¶ 37 and 89].

II. Legal Standard—12(b)(6) Motion to Dismiss [Doc. No. 27]

The defendants move to dismiss the plaintiffs' amended complaint in its entirety pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. A Rule 12(b)(6) motion requires an assessment of whether the plaintiffs have set forth claims upon which this court may grant relief. In considering a defendant's motion to dismiss, the court accepts the plaintiff's allegations as true, Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984), and construes the complaint in the plaintiff's favor, Duke v. Cleland, 5 F.3d 1399, 1402 (11th Cir.1993). A complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations:

[A] plaintiff's obligation to provide the “grounds” of his “entitle[ment] to relief” requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true.

Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555–56, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Ultimately, the complaint is required to contain “only enough facts to state a claim to relief that is plausible on its face.” Id. at 1974. But, “[d]ismissal is warranted if the complaint lacks an allegation as to a necessary element of the claim raised.” Id. Also, this court applies the traditional pleading requirement of Federal Rule of Civil Procedure 8(a) to the instant motion to dismiss, which requires the complaint to contain only “a short and plain statement of the claim,” but also to “provide the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests.” Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 346, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). Some of the plaintiffs' claims may also be subject to the pleading requirements of Federal Rule of Civil Procedure 9(b), which requires civil plaintiffs alleging fraud to plead: “(1) the precise statements, documents, or misrepresentations made; (2) the time and place of and person responsible for the statement; (3) the content and manner in which the statements misled the plaintiffs; and (4) what the defendants gained by the alleged fraud.” Ambrosia Coal & Construction Company v. Morales, 482 F.3d 1309, 1316 (11th Cir.2007).

“Although authorized by the Federal Rules of Civil Procedure, the liberal rules as to the sufficiency of a complaint make it a rare case in which a motion on this ground should be granted.” St. Joseph's Hospital, Inc. v. Hospital Corporation of America, 795 F.2d 948, 953 (11th Cir.1986). In light of these standards, the court reviews the complaint to determine whether dismissal is warranted.

III. AnalysisA. Counts I and II—Georgia Securities Act Violations

The defendants contend that the plaintiffs' purported “non-fraud” claims, Counts I and II of the amended complaint, fail because scienter is an essential element of claims under O.C.G.A. §§ 10–5–12(a) and 10–5–14(a). Counts I and II of the amended complaint state that the plaintiffs “expressly exclude and disclaim any allegation sounding in fraud, or intentional, knowing, or reckless conduct” [Doc. No. 23, ¶¶ 90 and 96]. In response, the plaintiffs contend that there is some uncertainty as to whether scienter is required under the Georgia statute. The court agrees with the defendants that Georgia law requires a showing of scienter to state a claim for relief. O.C.G.A. § 10–5–12(a)(2).

As an initial matter, the plaintiffs argue that they are invoking subsection (B) of O.C.G.A. § 10–5–12(a)(2), as opposed to subsections (A) and (C). Aside from the fact that the plaintiffs do not limit their claims in the amended complaint to only subsection (B), the plaintiffs are unable to cite any case law which supports their assertion that subsection (B) does not require a showing of fraud under Georgia law.

Additionally, the plaintiffs rely on Abrams & Wofsy v. Renaissance Investment Corp., 820 F.Supp. 1519 (N.D.Ga.1993) for the assertion that this court has recognized that O.C.G.A. § 10–5–12(a)(2)(B) tracks the language of the non-fraud provision of § 12(a)(2) of the Securities Act of 1933, but this reliance is inappropriate. Abrams & Wofsy interpreted the pre–1986 version of O.C.G.A. § 10–5–12(a). In 1986, the Georgia Securities Act was altered substantially, and the text of the 1985 version is markedly different from the operable version of § 10–5–12(a)(2) at issue in this case. The Georgia Court of Appeals has recognized that the current version of § 10–5–12(a)(2) mirrors Rule 10b–5 promulgated under the Securities Exchange Act of 1934 and has held that it requires a showing of scienter. See Keogler v. Krasnoff, 268 Ga.App. 250, 601 S.E.2d 788 (2004); GCA Strategic Investment Fund, Ltd. v. Joseph Charles & Associates, Inc., 245 Ga.App. 460, 537 S.E.2d 677 (2000). While the Georgia Supreme Court and the Eleventh Circuit have not spoken on this issue, the court finds that the interpretation of Georgia law by the Georgia Court of Appeals is sufficient to determine the state of Georgia law on this issue. As the plaintiffs have expressly disclaimed a showing of scienter in Counts I and II, the defendants' motion to dismiss Counts I and II of the amended complaint [Doc. No. 27] is GRANTED.

B. Count IV (Federal Rule 10b–5 Claim)

The defendants contend that this claim should be dismissed for the following reasons: (1) the scienter allegations fail to support an inference of scienter that is at least as compelling as plausible non-culpable inferences; (2) the plaintiffs fail to allege loss causation; (3) the defendants were prohibited by law from disclosing any of the information contained in the bank regulators' confidential reports; and (4) that the remaining alleged misrepresentations and omissions are not material or...