In two different subprime securities suits, courts recently entered ruling with respect to dismissal motions going in opposite directions. In one case, the Second Circuit, in the second appellate ruling so far in connection with the subprime-related litigation wave, affirmed the lower court’s dismissal. In the other case, the district denied defendants’ motions to dismiss. Each may be significant in their own way.
The Centerline Holding Case
In a brief, five-page summary opinion issued on June 9, 2010 (here), the Second Circuit affirmed the lower court’s dismissal of the subprime-related securities class action lawsuit that had been filed against Centerline Holding Company and certain of its directors and officers.
As discussed here, on January Southern District of New York Judge Schira Scheindlin had dismissed the case without prejudice, finding that the plaintiffs had not sufficiently alleged that the defendants had had acted with scienter. In a August 4, 2009 order, Judge Scheindlin granted the defendants’ renewed motions to dismiss.
On appeal, the plaintiffs argued that they had sufficiently alleged the defendants had made material misrepresentations and omissions about the company’s plan to change its business model form one focused on the generation of distributable tax-exempt income to that of an asset manager focused on growth.
The Second Circuit affirmed the Judge Scheindlin’s dismissal, noting that "the effort in Plaintiffs’ amended complaint to characterize the Defendants’ class period statements as speaking to the company’s future plans – and this as misleading in light of Defendants’ undisclosed plans for Centerline – fails when the statements are reviewed in their entirety." These statements, the court found, "were not rendered misleading by the Defendants’ omissions."
Because the Defendants had not duty to disclose their plans, Plaintiffs’ had not adequately alleged conscious misbehavior or recklessness and "otherwise failed sufficiently to allege scienter."
The CIT Group Case
In a June 10, 2010 opinion (here), Judge Barbara Jones denied the defendants’ motion to dismiss in the subprime-related securities suit that had been filed against CIT Group and certain of its directors and officers.
As detailed here, the plaintiffs alleged that CIT’s public financial statements failed to account for tens of millions of dollars in loans to Silver State Helicopter, which were highly unlikely to be repaid and should have been written off. The plaintiffs also alleged that the company had misrepresented the performance of its subprime home lending and student loan portfolios.
Citing at length the recent dismissal motion denial in the Ambac case, Judge Jones concluded that the plaintiffs had adequately pled misrepresentation with respect the company’s deteriorating lending standards, which allegedly conflicted with the company’s public statements. She also concluded that the plaintiffs had adequately alleged actionable misstatements with respect to performance of CIT’s student loan portfolio.
Judge Jones also concluded that the plaintiffs had adequately alleged scienter. She found that the plaintiffs had adequately alleged that the defendants "knew about CIT’s lowered lending standards and in some cases affirmatively approve them – while publicly touting the company’s ‘conservative’ and ‘disciplined’ approach." She further noted, in connection with the conclusion that the plaintiffs had adequately alleged scienter, that the complaints adequately alleged that the defendants "learned of the deterioration of CIT’s home loan and student loan portfolios, which making public statements indicating that CIT was outperforming the market and would suffer only minimal losses."
Finally Judge Jones found that the ’33 Act plaintiffs’ claims met the pleading requirements to state a claim under Section 11.
Discussion
The Second Circuit’s affirmance of the Centerline Holding dismissal represents the second appellate court decision issued in connection with the subprime litigation wave. The first appellate decisions was the Eight Circuit’s September 1, 2009 opinion in the NovaStar Financial case, about which refer here. In NovaStar, the Eighth Circuit also affirmed the lower court’s dismissal.
Though coming later than the NovaStar ruling, the Centerline case could perhaps be more noteworthy, simply because such a large percentage of the subprime related cases have been filed in the Southern District of New York (which is located in the Second Circuit).
However, because the Second Circuit’s opinion was issued in the form of a summary order, its impact may be limited. By their own terms, summary orders, though they may be cited, "do not have precedential value" according applicable rules of the Second Circuit. Moreover the analysis in the Second Circuit’s opinion is quite limited.
Whatever the opinions impact may be on other cases, its greatest significance may have to do with simple scorekeeping – as in, two subprime related securities class action lawsuit appeals, two dismissal affirmances.
At the same time however, as the CIT case demonstrates, there are still cases in which the motions to dismiss are being denied. Among the more interesting things to me about the CIT ruling is the court’s reliance on the prior dismissal motion ruling in the Ambac case. I had speculated at the time of that the breadth of the language in the Ambac decision could make the court’s ruling influential. As the CIT decision confirms, the Ambac decision has proven to be influential.
I have in any event added these rulings to my running tally of the subprime-related securities class action lawsuit dismissal motion rulings. The tally can be accessed here.
Special thanks to a loyal reader for providing me with a copy of the CIT opinion.