Town N. Bank, N.A. v. Shay Fin. Servs., Inc.

• Decision Date: 30 September 2014
• Docket Number: Civil Action No. 3:11-CV-3125-L
• Court: U.S. District Court — Northern District of Texas
• Parties: TOWN NORTH BANK, N.A., Plaintiff, v. SHAY FINANCIAL SERVICES, INC.; UBS FINANCIAL SERVICES INC.; MORGAN STANLEY& CO. LLC; MERRILL LYNCH & CO., INC.; MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED; AND J.P. MORGAN SECURITIES LLC, as successor in interest to BEAR STEARNS & CO., INC., Defendants.

TOWN NORTH BANK, N.A., Plaintiff,
v.
SHAY FINANCIAL SERVICES, INC.; UBS FINANCIAL SERVICES INC.;
MORGAN STANLEY& CO. LLC; MERRILL LYNCH & CO., INC.;
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED;
AND J.P. MORGAN SECURITIES LLC, as successor in interest to
BEAR STEARNS & CO., INC., Defendants.

Civil Action No. 3:11-CV-3125-L

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF TEXAS DALLAS DIVISION

September 30, 2014

MEMORANDUM OPINION AND ORDER

Before the court is Bank Defendants' Motion for Interlocutory Appeal Pursuant to 28 U.S.C. 1292(b) and Stay of Discovery (Doc. 87) ("Motion for Interlocutory Appeal"), filed April 29, 2013. In reviewing Defendants' Motion for Interlocutory Appeal, the court revisited the briefs filed by the parties in conjunction with Defendants' motions to dismiss Plaintiff's Amended Complaint. After carefully reviewing the briefs filed by the parties in conjunction with the motions to dismiss the Amended Complaint and the allegations in the Amended Complaint, the court, for the reasons herein explained, determines that the Amended Complaint, while almost twice as long as the Original Complaint, does not cure the deficiencies noted in Defendants' original motions to dismiss and fails to state claims against Defendants upon which relief can be granted.

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The court therefore sua sponte vacates its March 30, 2013 opinion and issues this Amended Memorandum Opinion and Order in its place, which discusses in more detail and expounds on the grounds for dismissal set forth in Defendants' motions to dismiss. The court therefore grants the Motion to Dismiss Plaintiff's Amended Complaint Against Defendants UBS Financial Services, Inc., Morgan Stanley & Co. LLC, Merrill Lynch & Co., Inc. Merrill Lynch, Pierce, Fenner & Smith Inc., and J.P. Morgan Securities LLC (Doc. 62); grants Shay Financial Services, Inc.'s Motion to Dismiss (Doc. 60); and denies as moot the Bank Defendants' Motion for Interlocutory Appeal Pursuant to 28 U.S.C. 1292(b) and Stay of Discovery (Doc. 87).

I. Factual and Procedural Background

Plaintiff Town North Bank, N.A. ("Town North" or "Plaintiff") brought this action on November 11, 2011, seeking more than $100 million in damages against Defendants Shay Financial Services, Inc. ("Shay"); UBS Financial Services, Inc.; Morgan Stanley & Co. LLC; Merrill Lynch & Co., Inc.; Merrill Lynch, Pierce, Fenner & Smith Inc.; and J.P. Morgan Securities LLC (Doc. 62) (collectively, "Bank Defendants")¹ for alleged misrepresentations and omissions pertaining to thirty-seven securities purchased by Plaintiff from Defendants. The securities declined significantly in value after the stock market collapse in 2008.² Town North has alleged claims against Defendants

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based on violations of federal and state securities laws and common law fraud. Town North also asserts a breach of fiduciary duty claim under Texas law against Shay. Town North is a national banking association that was formed in 1972 and is located in Dallas, Texas. Town North has approximately $707 million in assets and 60 employees. On December 31, 2007, before the nationwide housing market collapse, Town North had assets in excess of $1.3 billion and approximately 250 employees. Defendants are securities brokers. Town North's claims stem from asset-backed securities ("ABS"), which include residential mortgage-backed securities ("RMBS") and collateralized debt obligations ("CDOs"), that it purchased from Defendants between 2005 and 2007.

With respect to the alleged securities violations, Town North contends that Defendants violated: (1) section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b),³ and Securities and Exchange Commission ("SEC") Rule 10b-5, which implements section 10(b); and (2) Texas Revised Civil Statute Article 581-33(A)(2) and (F)(2). According to Town North, Defendants violated the aforementioned state and federal securities statutes by making misrepresentations or omissions regarding the value and riskiness of the securities purchased by Town North. Town North contends that the misrepresentations or omissions by Defendants before and after it purchased the securities caused it to sustain approximately $113 million in damages.

Town North's federal and state claims are based in large part on its contention that the offering documents prepared by Defendants' affiliates contained false information or information that was no longer accurate by the time it purchased the securities at issue, and that Defendants

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misled it by failing to disclose that the securities were subject to greater risk at the time of the sale than indicated in the stock offering documents prepared by Defendants' affiliates at some earlier date. In this regard, Town North alleges that by late 2006 and 2007, Defendants' affiliates and others who structured the RMBS and CDOs understood that the RMBS asset credit ratings and correlation assumptions previously used to structure and rate the securities, before the housing and market collapse, "were no longer accurate or reliable." Pl.'s Am. Compl. ¶ 32. Town North alleges that after the record level of subprime mortgage defaults and the nationwide decline in housing prices, Defendants' affiliates knew or should have understood that the use of "boom-time assumptions concerning housing price appreciation, rates of mortgage default, and mortgage loss upon default" to rate the securities inaccurately represented the securities' risk. Id. ¶ 33. Town North contends that Defendants had a duty to speak because they knew that the offering documents, which were prepared by Defendants' affiliates, contained inaccurate or outdated information regarding the riskiness of the securities, and that Defendants breached this duty by failing to disclose material nonpublic information in their possession that was necessary to make the statements in the offering documents, at the time of sale, not misleading. Town North contends that by 2007, Defendants "had enough information to know and foresee that the information not disclosed caused the securities Defendants sold to Plaintiff in 2007 to have substantial embedded losses." Id. ¶ 75.

On February 10, 2012, Defendants moved to dismiss Plaintiff's federal and state claims pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4 ("PSLRA"). On April 9, 2012, Town North filed its Amended Complaint and responses to Defendants' motions to dismiss, contending that its amended pleadings satisfied the alleged deficiencies noted in the motions to dismiss. In response

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to a request by the parties, the court denied as moot Defendants' motions to dismiss in light of Plaintiff's Amended Complaint.

On May 18, 2012, Shay moved to dismiss Plaintiff's federal and state claims in the Amended Complaint. On the same day, the Bank Defendants also moved to dismiss Plaintiff's claims against them under Rules 12(b)(6) and 9(b) and the PSLRA. Shay then joined in the arguments made in the Bank Defendants' motion to dismiss. On March 30, 2013, the court denied two motions to dismiss Plaintiff's Amended Complaint filed by Shay and the Bank Defendants. Subsequently, on April 29, 2013, the Bank Defendants filed their Motion for Interlocutory Appeal, requesting leave to file an interlocutory appeal regarding their alleged affirmative disclosure obligation or "duty to speak." The Bank Defendants also request a stay of discovery until the threshold "duty to speak" issue has been resolved by the Fifth Circuit because, according to the Bank Defendants, Town North's claims encompass numerous securities and will require the parties to engage in extensive discovery. Mot. for Interlocutory Appeal 12. Shay moved and was permitted to j oin in the Bank Defendants' Motion for Interlocutory Appeal. As previously noted, the court determines that the Amended Complaint fails to state claims against Defendants upon which relief can be granted, and Defendants are entitled to dismissal of all of Plaintiff's claims. The court's determination in this regard moots Defendants' Motion for Interlocutory Appeal.

II. Standard for Rule 12(b)(6)—Failure to State a Claim

To defeat a motion to dismiss filed pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, a plaintiff must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007); Reliable Consultants, Inc. v. Earle, 517 F.3d 738, 742 (5th Cir. 2008); Guidry v. American Pub. Life Ins. Co., 512 F.3d 177, 180 (5th Cir.

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2007). A claim meets the plausibility test "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal citations omitted). While a complaint need not contain detailed factual allegations, it must set forth "more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555 (citation omitted). The "[f]actual allegations of [a complaint] must be enough to raise a right to relief above the speculative level . . . on...