Repub. Bank & Trust Co. v. Bear Stearns & Co. Inc

• Court: U.S. District Court — Western District of Kentucky
• Writing for the Court: CHARLES R. SIMPSON III
• Citation: Repub. Bank & Trust Co. v. Bear Stearns & Co., 707 F.Supp.2d 702 (W.D. Ky. 2010)
• Decision Date: 13 April 2010
• Docket Number: Civil Action No. 3:09-CV-287-S.
• Parties: REPUBLIC BANK & TRUST COMPANY, Plaintiffv.BEAR, STEARNS & CO., INC., et al., Defendants.

707 F.Supp.2d 702

REPUBLIC BANK & TRUST COMPANY, Plaintiffv.BEAR, STEARNS & CO., INC., et al., Defendants.

Civil Action No. 3:09-CV-287-S.

United States District Court,

W.D. Kentucky,

at Louisville.

April 13, 2010.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Laurence John Zielke, Lester I. Adams, Jr., The Zielke Law Firm, Louisville, KY, for Plaintiff.

Andrea Likwornik Weiss, Howard B. Levi, Levi Lubarsky & Feigenbaum LLP, New York, NY, Dustin E. Meek, Jonathan T. Salomon, Tachau Meek PLC, Louisville, KY, for Defendants.

MEMORANDUM OPINION

CHARLES R. SIMPSON III, District Judge.

In 2003 and 2006, Republic Bank & Trust Company bought from Bear Stearns several securities that it now recognizes to be, in the parlance of our times, “toxic assets.” Republic admits to not reading the relevant prospectuses prior to its purchases, but it has nevertheless sued Bear Stearns, its parent companies, and an employee for fraud, negligent misrepresentation, and violations of Kentucky's Blue Sky Law. The defendants now move to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6). For the reasons that follow, we will grant that motion in full.

I

The following facts are drawn from the face of the complaint (the allegations of which we must take as true for present purposes), as well as the prospectuses and prospectus supplements (“prosupps”) (collectively, the “offering documents”) for the securities in question.¹ Bear, Stearns & Company (“Bear Stearns”), a wholly-owned subsidiary of The Bear Stearns Companies (“Bear Stearns Companies”), employed Frederick W. Barney, Jr. as a senior manager. In that role, Barney solicited the business of Republic Bank & Trust Company (“Republic”) and convinced it to purchase several residential-mortgage-backed securities. Specifically, on March 31, 2003, Bear Stearns sold Republic a number of mortgage pass-through certificates issued by ABFS Mortgage Loan Trust 2003-1 for $20 million. Then on October 2, 2006, Republic bought from Bear Stearns additional mortgage pass-through certificates, issued by Bear Stearns ALTA Trust 2005-10, Bear Stearns ARM Trust 2006-2, Bear Stearns ARM Trust 2006-4, and IndyMac INDX Mortgage Loan Trust 2006-AR11, for a total price of more than $32 million.

There are two reasons an investor might buy this particular sort of asset (which was not labeled “toxic” until years after these securities were issued). Primarily, the holder of a pass-through certificate is entitled to a monthly distribution of principal and interest as homeowners make payments on the mortgage loans that underlie the security. Alternately, one might buy a mortgage-backed security with the expectation that its market value will appreciate, allowing the holder to sell it for a profit at some future date. Republic does not allege that the stream of income from any of the securities has been unexpectedly low. Nor does it claim that it sold the certificates, or that it attempted to do so. Rather, it complains that because it held the certificates on its balance sheet and was required to revise their value to reflect market prices, it recorded on-paper losses of some $14.2 million as of December 31, 2008. Basically, the certificates are not now worth as much as Republic expected they would be.

This decline in nominal value is not in Republic's view solely the fault of the recent global financial crisis and ensuing recession. Instead, the bank alleges that Bear Stearns, through Barney, made a series of misrepresentations and omissions in the run-up to its decisions to buy the securities, and that but for those misrepresentations it would not have bought the certificates and thus would not have had to write down the value of its assets. Thus it sued Bear Stearns, its salesman (Barney), its former parent (Bear Stearns Companies), and its new parent (JP Morgan Chase & Co., which bought the Bear Stearns Companies in March 2008), seeking to hold them responsible for deceiving Republic into buying now-troubled financial products. The defendants removed the case from the Jefferson Circuit Court, asserting diversity of citizenship under 28 U.S.C. § 1332, and moved to dismiss the complaint (for failure to state a cognizable claim) without answering it.

II

The Supreme Court has recently revised its understanding of the pleading standards under the Civil Rules. A complaint now “only survives a motion to dismiss if it ‘contain[s] sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.’ ” Courie v. Alcoa Wheel & Forged Prods., 577 F.3d 625, 629 (6th Cir.2009) ( quoting Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009)). This raises the bar from where Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957) had left it: Whereas under Conley a court was to dismiss a facially well-pleaded complaint only if its contents were so outlandish as to be utterly incapable of proof Iqbal (along with its predecessor Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)) advises us to toss out a case unless the allegations meet some minimum standard of plausibility. Courie, 577 F.3d at 629-30. While we must take the complaint's factual allegations as true in making this assessment, we need not accept the truth of legal conclusions or draw unwarranted factual inferences. DirecTV, Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir.2007); Gregory v. Shelby County, 220 F.3d 433, 446 (6th Cir.2000).

A claim of fraud or mistake creates a “high risk of abusive litigation,” Twombly, 550 U.S. at 569 n. 14, 127 S.Ct. 1955, and therefore must satisfy a still more stringent pleading standard under Fed.R.Civ.P. 9(b). At a minimum, the complaint must (1) specify the allegedly fraudulent statements, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent. Ind. State Dist. Council of Laborers v. Omnicare, Inc., 583 F.3d 935, 943 (6th Cir.2009); Frank v. Dana, 547 F.3d 564, 570 (6th Cir.2008). And while mental states “may be alleged generally,” Fed.R.Civ.P. 9(b), the allegations “must be made with sufficient particularity and with a sufficient factual basis to support an inference that they were knowingly made.” Coffey v. Foamex L.P., 2 F.3d 157, 162 (6th Cir.1993); Our Lady of Bellefonte Hosp., Inc. v. Tri-State Physicians Network, Inc., 2007 WL 2903231, at *6, 2007 U.S. Dist. LEXIS 72286, at *16 (E.D.Ky. Sept. 27, 2007). With these standards in mind, we turn to the allegations of the complaint.

III

A

Count I is titled “Fraud and Deceit,” and contains two distinct causes of action: fraud by misrepresentation and fraud by omission. At the outset, we consider the argument that Republic has failed to plead that the defendants caused them harm. We think this essential element, common to both torts, is sufficiently pleaded here. Republic's position, as the court understands it, is that it would not have purchased the securities in question, and therefore would not have had to take any write-downs, if the defendants had told it the whole truth and nothing but the truth prior to selling it the certificates. That is good enough at this stage. See Restatement (Second) of Torts § 548A (1977) (“A fraudulent misrepresentation is a legal cause of a pecuniary loss resulting from action or inaction in reliance upon it if, but only if, the loss might reasonably be expected to result from the reliance.”) With that question settled, we address the allegations of fraud in turn.

Common-law fraud in Kentucky requires proof of six elements: (1) that the declarant (the defendant or its agent) made a material representation to the plaintiff; (2) that this representation was false; (3) that the declarant knew the representation was false or made it with reckless disregard for its truth or falsity; (4) that the declarant intended to induce the plaintiff to act upon the misrepresentation; (5) that the plaintiff reasonably relied upon the misrepresentation; and (6) that the misrepresentation caused injury to the plaintiff. Flegles, Inc. v. TruServ Corp., 289 S.W.3d 544, 549 (Ky.2009) ( citing McHargue v. Fayette Coal & Feed Company, 283 S.W.2d 170 (Ky.1955) (requiring reasonable reliance); Restatement (Second) of Torts § 537 (1977) (“justifiable” reliance)); United Parcel Service Company v. Rickert, 996 S.W.2d 464 (Ky.1999). The misrepresentation in question “must relate to a past or present material fact.” Flegles, 289 S.W.3d at 549. A statement of opinion or prediction about investment prospects or future sales performance generally cannot form the basis of a fraud claim. Id.; McHargue, 283 S.W.2d at 172. Kentucky recognizes an exception to this rule against predictions where the proffered opinion “either incorporates falsified past or present facts or is so contrary to the true current state of affairs that the purported prediction is an obvious sham,” but an experienced institutional investor like Republic nonetheless remains under a duty to exercise “common sense” to protect itself. Flegles, 289 S.W.3d at 549. “ ‘[M]ere commendation, or even false representation by the seller of stock as to its value, when the purchaser has an opportunity to ascertain for himself such value by ordinary vigilance or inquiry, has no legal effect on the rights of the contracting parties, even when made with the intention to deceive.’ ” Id. ( quoting Ky. Elec. Dev. Co.'s Receiver v. Head, 68 S.W.2d 1, 3 (1934)). The exception is limited to cases where the defendant has misrepresented objective data or its own present intentions; “ ‘forward-looking recommendations and opinions are not actionable ... merely because they are misguided, imprudent or overly optimistic.’ ” Id. (quoting In re Salomon Analyst AT & T Litig., 350 F.Supp.2d 455, 467 (S.D.N.Y.2004)). The complaint contains three subjects on which the defendants allegedly made false statements.

a. “Reasonably Safe Investment Products ”

Republic...