George Durgin v. Technical Olympic USA, Inc.

FILED
U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
FEB 18, 2011
JOHN LEY
CLERK
[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
______________________
No. 09-15595
_______________________
D.C. Docket No. 06-61844-CV-KAM
GEORGE DURGIN,
Individually and on Behalf of
all others Similarly Situated, et al.,
Plaintiffs,
BRICKLAYERS & TROWEL TRADES
INTERNATIONAL PENSION FUND,
Plaintiff-Appellant-
Cross Appellee,
versus
ANTONIO P. MON,
DAVID J. KELLER,
RANDY L. KOTLER,
Defendants-Appellees-
Cross Appellants.
Appeals from the United States District Court
for the Southern District of Florida
(February 18, 2011)

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Before EDMONDSON, PRYOR, and BARKSDALE, Circuit Judges.*
PER CURIAM:
Lead plaintiff Bricklayers & Trowel Trades International Pension Fund
challenges the district court’s, pursuant to Federal Rule of Civil Procedure 12(b)(6)
(failure to state claim), dismissing this securities-fraud action because the Pension
Fund’s consolidated, amended complaint did not satisfy the heightened-pleading
standard imposed by the Private Securities Litigation Reform Act of 1995 (PSLRA),
Pub. L. No. 104-67, § 101(b), 109 Stat. 737, 743, as amended, 15 U.S.C. § 78u-4
(2006). Primarily at issue is whether the amended complaint’s allegations adequately
raised a “strong inference” that defendants acted with the requisite scienter.
AFFIRMED.
I.
The following is based on the allegations in the amended complaint, consistent
with our de novo standard of review for a Rule 12(b)(6) dismissal, as discussed infra.
The Pension Fund, lead plaintiff in this putative class action, purchased
common stock from Technical Olympic USA, Inc. (TOUSA), which built and
marketed homes. TOUSA’s stock ultimately lost its value, and the Pension Fund
Honorable Rhesa Hawkins Barksdale, United States Circuit Judge for the Fifth Circuit, sitting by *
designation.
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suffered loss. Defendants served as TOUSA executive officers: Antonio P. Mon,
executive vice chairman, chief executive officer, and president since 2002; David J.
Keller, chief financial officer, senior vice president, and treasurer between May 2004
and May 2006; and Randy L. Kotler, vice president and chief accounting officer from
June 2002 until May 2006, when he replaced Keller as chief financial officer.
In August 2005, TOUSA finalized the formation of a joint venture (JV), with
Falcone/Ritchie, LLC, to acquire substantially all homebuilding assets of
Transeastern Properties, Inc.—“approximately 22,000 homesites throughout all major
Florida markets”. The JV acquisition, which cost approximately $857 million, was
funded in large part by a $675 million loan to the JV by a consortium of banks (the
Lenders). The Lenders required TOUSA to guarantee it would complete certain JV
construction projects should the JV default on the loan and reimburse the Lenders for
losses arising from fraud, intentional misconduct, waste and misappropriation, or
voluntary bankruptcy filed by any party (the guarantees). The loan equaled nearly 70
percent of TOUSA’s net worth, and TOUSA lacked the liquidity to repay the debt in
the event the guarantees were triggered.
Following the acquisition, defendants—in SEC filings, press releases, and
analysts’ conference calls—represented the loan was “non-recourse” to TOUSA,
implied it was secured only by the JV’s assets, and failed, until 10 March 2006, to
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disclose the guarantees to investors. On 13 March 2006, TOUSA’s stock closed at
$18.48 per share, down from the previous day’s $18.65 closing.
In November 2006, TOUSA publicly disclosed Lenders’ demand letters,
informing TOUSA they were aware of problems it was experiencing due to the
housing market’s condition and demanding it satisfy its obligations under the
guarantees. The next day, TOUSA announced it was contesting its liability under the
guarantees; it asserted the JV’s problems stemmed only from “the inability to sell and
deliver the volume of homes necessary to support the capital structure due to the
downturn in the Florida housing market”. As a result of this disclosure, TOUSA’s
stock declined from $10.79 to $7.00 per share.
The first of several securities-fraud actions against TOUSA was filed that
December; they were consolidated in March 2007. That July, TOUSA settled
Lenders’ separate JV-loan action against it. TOUSA subsequently filed for
bankruptcy; hence, it is not a defendant in this action.
The Pension Fund was designated lead plaintiff in July 2008 and, that
September, filed the amended complaint at issue. The Pension Fund alleged:
defendants, because of their positions with TOUSA, controlled the content of, inter
alia, TOUSA’s SEC filings, press releases, and presentations to securities analysts;
and, consistent with the below-discussed standard for securities-fraud liability,
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defendants intended to “deceive, manipulate, or defraud” shareholders or acted with
“severe recklessness”, by, inter alia, characterizing the JV loan as “non-recourse” to
TOUSA.
In September 2009, the district court dismissed this action under Rule 12(b)(6),
ruling, inter alia, that the amended complaint failed to adequately allege defendants
“made” misleading statements, including with a “strong inference of scienter”. In
doing so, the court granted the Pension Fund leave to file a second amended
complaint, stating that it “must include allegations that establish the element of
scienter”. Electing instead to appeal, the Pension Fund had the court enter a final
judgment.
II.
A Rule 12(b)(6) dismissal for failure to meet PSLRA’s heightened-pleading
standard is reviewed de novo. E.g., Mizzaro v. Home Depot, Inc., 544 F.3d 1230,
1236 (11th Cir. 2008). As discussed infra, this action is pursuant, inter alia, to Rule
10b-5, 17 C.F.R. § 240.10b-5, promulgated by the SEC under § 10(b) of the
Securities Exchange Act of 1934, ch. 404, 48 Stat. 891, as amended, 15 U.S.C.
§ 78j(b) (2006).
Primarily at issue is whether the amended complaint satisfies PSLRA’s
standard for pleading scienter, as required for a § 10(b) claim. Because it fails to do
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so, we need not decide, inter alia, whether defendants “made” false or misleading
statements or whether the JV loan was “non-recourse” to TOUSA.
Also at issue is whether the amended complaint states a claim for “control
person” liability under § 20(a) of that Act, 15 U.S.C. § 78t(a). Such liability is
imposed against a “person who, directly or indirectly, controls any person liable
under any provision of this chapter”. 15 U.S.C. § 78t(a). “To state a claim under
section 20(a)[,] a complaint must allege that primary liability under section 10(b) [of
that Act] exists . . . .” Rosenberg v. Gould, 554 F.3d 962, 967 (11th Cir. 2009)
(internal quotation marks and citations omitted). Because the amended complaint
fails, as discussed infra, to satisfy PSLRA’s heightened standard for pleading scienter
for the § 10(b) claim, it also fails to state a claim under § 20(a).
A.
Section 10(b) proscribes
us[ing] or employ[ing], in connection with the purchase or
sale of any security registered on a national securities
exchange or any security not so registered, or any
securities-based swap agreement . . . , any manipulative or
deceptive device or contrivance in contravention of such
rules and regulations as the [SEC] may prescribe as
necessary or appropriate in the public interest or for the
protection of investors.
15 U.S.C. § 78j(b). The SEC’s resulting Rule 10b-5 forbids
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any person, directly or indirectly, . . . (a) To employ any
device, scheme, or artifice to defraud, (b) To make any
untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements
made, in the light of the circumstances under which they
were made, not misleading, or (c) To engage in any act,
practice, or course of business which operates or would
operate as a fraud or deceit upon any person, in connection
with the purchase or sale of any security.
17 C.F.R. § 240.10b-5; see Mizzaro, 544 F.3d at 1236. To state a claim under that
Rule, the following must be alleged: (1) a material misrepresentation or omission by
defendant; (2) made with scienter; (3) in connection with the purchase or sale of a
security; (4) plaintiff’s reliance upon the misrepresentation or omission; (5) economic
loss; and (6) loss causation. E.g., Goodman Life Income Trust v. Jabil Circuit, Inc.,
594 F.3d 783, 789 (11th Cir. 2010).
As noted, pursuant to PSLRA, there are heightened-pleading requirements for
Rule 10b-5 securities-fraud actions. See 15 U.S.C. § 78u-4(b)(1); Mizzaro, 544 F.3d
at 1238. For scienter, PSLRA provides: “the complaint shall, with respect to each
act or omission alleged to violate this chapter, state with particularity facts giving rise
to a strong inference that the defendant acted with the required state of mind”. 15
U.S.C. § 78u-4(b)(2) (emphasis added); see Rosenberg, 554 F.3d at 965. That
“required state of mind” can be either an “intent to deceive, manipulate, or defraud”
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or “severe recklessness”. Mizzaro, 544 F.3d at 1238; see also Tellabs, Inc. v. Makor
Issues & Rights, Ltd., 551 U.S. 308, 313 (2007).
Accordingly, to survive a Rule 12(b)(6) motion, the allegations in the Pension
Fund’s amended complaint must give rise to a “strong inference” that defendants
acted with either an “intent to deceive, manipulate, or defraud” its investors or
“severe recklessness”. In Tellabs, the Supreme Court held: for an inference that
defendant acted with the requisite scienter to qualify as “strong”, it “must be more
than merely plausible or reasonable—it must be cogent and at least as compelling as
any opposing inference . . . .” 551 U.S. at 314.
Along this line, and consistent with the above-stated standard of review for
Rule 12(b)(6) dismissals and the applicable law for a § 10(b) claim, the Court stated:
“First, faced with a Rule 12(b)(6) motion to dismiss a § 10(b) action, courts must .
. . accept all factual allegations in the complaint as true”[;] “Second, courts must
consider the complaint in its entirety . . . [and determine] whether all of the facts
alleged, taken collectively, give rise to a strong inference of scienter . . .”[;] “Third,
. . . the court must take into account plausible opposing inferences”. Id. at 322-23
(internal citations omitted) (emphasis in original). Accordingly, for the Pension Fund
to have adequately pleaded scienter: the allegations in the amended complaint must
give rise to a “strong inference” that defendants acted with either an “intent to
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deceive, manipulate, or defraud” or “severe recklessness”; and, that strong inference
must be “at least as compelling as any opposing inference one could draw from the
facts alleged”. See Mizzaro, 544 F.3d at 1238 (citing Tellabs, 551 U.S. at 323-24).
The Pension Fund maintains here that the failure to timely describe the JV
loans as being with recourse against TOUSA, as discussed infra, satisfies the scienter
element. In that regard, the amended complaint alleges generally that defendants,
because of their positions with TOUSA: controlled the content of TOUSA’s SEC
filings, press releases, and presentations to securities analysts, all of which were
misleading because they described the JV loan, until March 2006, as “non-recourse”
to TOUSA; were privy to non-public information concerning TOUSA’s obligations
under the guarantees; and knew TOUSA’s public representations were materially
false and misleading or were deliberately reckless in regard to the truth of the
representations because the loan was not unequivocally “non-recourse” to TOUSA.
1.
The amended complaint fails to allege any direct evidence showing defendants
acted with the requisite scienter. For example, there are no allegations they: did not
reasonably believe the JV loan was “non-recourse” to TOUSA; ever told anyone or
questioned whether the loan was not “non-recourse”; ever read the guarantees, much
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less believed they required more extensive disclosure; thought any person at TOUSA
was engaging in fraud; or had any reason to believe the guarantees represented a
material risk for TOUSA and its investors. See Rosenberg, 554 F.3d at 966; Mizzaro,
544 F.3d at 1252.
In short, even if the loan was not “non-recourse” to TOUSA, the amended
complaint fails to allege defendants knew that. As was the case in Mizzaro, the
Pension Fund contends here only: due to defendants’ positions with TOUSA and the
size of the JV loan, they “must have known about” the alleged misleading nature of
their statements. Mizzaro, 544 F.3d at 1250 (emphasis in original). There are no
allegations in the amended complaint of communications from any of the defendants
from which it can be inferred defendants knew the classification of the loan or
description of the guarantees was misleading. See id. at 1247-48, 1250 (“Indeed, the
amended complaint fails to cite even one communication of any kind from the
individual defendants . . . that could reasonably be interpreted as ordering or even
encouraging . . . fraud.”) (emphasis in original). The amended complaint alleges no
“‘‘red flags’” that would have alerted defendants that their non-recourse statements
were materially false or misleading; instead, it “rests [only] ‘on speculation and
conclusory allegations’”. Rosenberg, 554 F.3d at 966 (quoting Garfield v. NDC
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Health Corp., 466 F.3d 1255, 1265-66 (11th Cir. 2006)); see also Mizzaro, 544 F.3d
at 1252.
2.
In the absence of direct evidence, the Pension Fund maintains here that facts
alleged in the amended complaint circumstantially give rise to the requisite strong
inference of scienter. First, it alleged the $675 million loan equaled 70 percent of
TOUSA’s net worth, which was placed at risk “if the [JV] went bankrupt, became
insolvent, or if any other conditions under the Guarantees were triggered”. Second,
it alleged that “[d]efendants each actively participated in [TOUSA’s] acquisition of
Transeastern through the JV and were aware of the Guarantees as part of that
transaction”. The Pension Fund maintains defendants’ knowledge of the guarantees
is demonstrated by the allegations regarding extensive documentation the Lenders
required of TOUSA before, and after, the loan. (“[T]he Credit Agreements required
TOUSA and the . . . JV to provide the Lenders with a ‘Borrowing Base Certificate’
no later than 20 days after the last day of each calendar month”.). The Pension Fund
contends here that, as a result, each defendant was likely required to produce
numerous documents for the Lenders on behalf of TOUSA, and that this shows
defendants knew their representations concerning the guarantees were misleading.
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The Pension Fund ultimately maintains here that it is “exceedingly unlikely”
defendants’ repeated statements about the loan’s being “non-recourse”, while acting
as TOUSA high-ranking officers, “were the result of merely careless mistakes at the
management level based on false information fed it from below, rather than of an
intent to deceive or a reckless indifference to whether the statements were
misleading”. Makor Issues & Rights, Ltd. v. Tellabs, Inc., 513 F.3d 702, 709 (7th Cir.
2008). Considering the amended complaint as a whole, however, its allegations are
insufficient to give rise to a “strong inference” of either fraudulent intent or severe
recklessness (the latter’s being discussed further below) that is “at least as compelling
as any opposing inference of” conduct that did not violate § 10(b). See Tellabs, 551
U.S. at 314.
B.
Regarding “severe recklessness”, the Pension Fund maintains here that the
allegations are sufficient to show such conduct. According to the Pension Fund,
because there is no plausible explanation how a member of TOUSA senior
management could have been unaware of the misleading nature of representing the
loan as “non-recourse” to TOUSA, defendants were severely reckless. Such
recklessness, however, is
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limited to those highly unreasonable omissions or
misrepresentations that involve not merely simple or even
inexcusable negligence, but an extreme departure from the
standards of ordinary care, and that present a danger of
misleading buyers or sellers which is either known to the
defendant or is so obvious that the defendant must have
been aware of it.
Mizzaro, 544 F.3d at 1238 (emphasis added) (internal citations omitted).
Considering the amended complaint as a whole, including the terms of the
guarantees, it was not “highly unreasonable” or an “extreme departure from the
standards of ordinary care” to describe the loan as non-recourse because more was
required than TOUSA’s simply being liable for the balance due on the JV loan if
there was non-payment by the JV. The above-discussed conditions for the guarantees
had to be triggered: JV default on the loans; losses arising from fraud, intentional
misconduct, or waste and misappropriation; or voluntary bankruptcy filed by any
party.
Even if the loan was not properly characterized as “non-recourse” to TOUSA,
the amended complaint fails to sufficiently allege defendants were severely reckless
by not being aware their statements could be perceived as false or misleading to the
extent required, as defined above, for severe recklessness. An inference of severe
recklessness is not as compelling as an inference that, at worst, defendants acted with
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inexcusable negligence. Restated, as quoted above, even that form of negligence
does not constitute severe recklessness. Id.
III.
For the foregoing reasons, the judgment is AFFIRMED.
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