In an unpublished per curiam opinion dated May 24, 2011, the United States Court of Appeals for the Eleventh Circuit affirmed the district court’s dismissal of the credit crisis-related securities class action lawsuit pending against certain former officers of the bankrupt mortgage REIT, HomeBanc. A copy of the Eleventh Circuit’s opinion can be found here.



HomeBanc was an Atlanta-based real estate investment trust in the business of investing in and originating residential mortgage loans. In their consolidated amended complaint, the plaintiffs alleged that prior to the company’s August 9, 2007 bankruptcy the defendants projected an "overly rosy picture" of the company’s finances, and misrepresented the company’s underwriting practices, loan loss reserve model, and other aspects of the company’s lending and mortgage investment operations. The plaintiffs alleged that the company "loosened its underwriting standards and policies in response to slowing loan originations and shifted from its stated focus on conservative risk management to attempting to profit by selling poor quality loans." The defendants moved to dismiss.


As discussed here (scroll down), on April 13, 2010, Northern District of Georgia Judge Timothy Batten granted the defendants’ motion to dismiss. Judge Batten agreed with the defendants’ position that "the bulk of the statements upon which Plaintiff relies fail to satisfy the …standards for materiality." Among other things he found that the complaint "makes conclusory allegations of falsity without establishing contrary true facts." He also said that the complaint is "rife with forward-looking statements made by HomeBanc that were accompanied by meaningful risk disclosures."


Judge Batten also concluded that the plaintiff "has failed to allege sufficient facts to demonstrate a cogent and compelling inference of scienter," noting that "the complaint cites differences of opinion, conjecture and innuendo in an attempt to make the Defendants’ behavior look suspicious, but it conspicuously omits any facts that would require one to rule out an innocent explanation for the alleged behavior." Judge Batten also held that the plaintiff had not sufficiently pled loss causation. The plaintiffs appealed.


The May 24 Decision

In their May 24 per curiam opinion, a three judge panel of the Eleventh Circuit affirmed the district court. The panel agreed with the district court that the plaintiffs’ amended complaint’s scienter allegations were not sufficient to meet the pleading requirements of the PSLRA. The panel stated that


Although the Complaint alleges that the appellees expressed mistaken confidence in HomeBanc’s financial well-being and furthermore engaged in business practices that contributed to HomeBanc’s demise, the facts alleged do not give rise to a strong inference that appellees knew that their statements were fraudulent or were reckless in light of actual knowledge.


Rather the stronger inference is that appellees simply failed to predict the eventual collapse of the housing and subprime market, and, as a result, were ill-prepared to respond when the markets crashed. Indeed, as the district court explained “[t]he Complaint cites differences of opinion, conjecture and innuendo in an attempt to make [appellees’] behavior look suspicious, but it conspicuously omits any facts that would require one to rule out an innocent explanation for the alleged behavior.” Moreover, the public disclosures identified in the Complaint are replete with myriad warnings and other cautionary statements, which significantly undermines any inference that appellees intended to mislead HomeBanc’s investors.



The Eleventh Circuit’s opinion in the HomeBanc case is the latest in a series of decisions in which the appellate courts have affirmed the district court’s dismissals of subprime or credit crisis-related securities class action lawsuits. Earlier example include the NovaStar Financial case (about which refer here), the Centerline Holdings case (refer here) and the Impac Mortgage Holdings case (refer here). At this point, it seems clear the appellate courts are reluctant to setting aside the dismissal motion rulings of the district courts in these cases.


However, there has been at least one exception to the pattern of appellate rulings; as discussed here, in connection with the Nomura Subprime Securities Suit, the First Circuit affirmed in part and reversed in part the lower court’s dismissal of the case. With the Eleventh Circuit’s affirmance in the HomeBanc case, the Nomura decision remains the only appellate ruling remains the only appellate ruling in which the lower court’s dismissal was not affirmed, even if the ruling reversed the lower court in that case only in part.


The Eleventh Circuit’s designation of its HomeBanc decision as “not for publication” compels me to return to one of my recurring gripes. In this day of universal Internet availability of all appellate rulings, isn’t the notion that any opinion is “not for publication” rather illusory, not to say anachronistic? Not only that, but the Eleventh Circuit cannot bar participants from referencing the case, as Federal Rule of Appellate Procedure 32.1 expressly provides that courts may not "prohibit or restrict" the citation to appellate opinions by designating them as, for example, "not for publication." So why bother designating an opinion as not for publication?


I have also always worried about what the “not for publication” designation implies. It sort of sounds like, well, here’s our ruling, but we really don’t want anybody to see it. Or maybe, here it is, we really don’t think of much of it, this opinion really doesn’t represent our best work. What are the parties to think of the fact that the appellate panel doesn’t think an opinion is worthy of publication—that their dispute wasn’t sufficient to command the effort required to produce a published opinion?  I think the very idea that an appellate court would designate an opinion as not for publication is a poor practice and sends the wrong messages.


I have in any event updated my running tally of subprime and credit crisis-related securities lawsuit case resolutions to reflect the Eleventh Circuit’s opinion in the HomeBanc case. My tally can be accessed here.


Special thanks to a loyal reader for alerting me to the Eleventh Circuit’s opinion.


More Litigation Following a “Say on Pay” No Vote: Yet another shareholder lawsuit has been filed following a “no” vote from shareholders on executive compensation. As reported here, at the company’s May 10, 2011 shareholder meeting, holders of a majority of shares of Hercules Offshore Corporation voted against the advisory executive compensation resolution. And then, according to press reports, on June 13, 2011, plaintiffs purporting to act of behalf of the company filed a shareholders’ derivative suit in Texas state court against the company’s board alleging breach of fiduciary duty.


As I have previously noted (here and here), one of the follow on effects of the advisory say on pay vote required by the Dodd-Frank Act has been the outbreak of investor litigation following a ‘no” vote of shareholders on the executive compensation resolution. Though the number of companies whose executive compensation resolutions have been voted down by shareholder is still relatively small, a relatively high number of companies receiving negative votes have been hit with the follow on shareholder suits.


Speakers’ Corner: Next week I will be attending the Stanford Law School Directors’ College in Palo Alto California. I will also be speaking on the topic of “Indemnification and D&O Insurance” on a panel with my friends Priya Cherian Huskins of Woodruff-Sawyer and Anthony Tatulli of Chartis. If it works out as planned, I hope to be publishing blog posts about the conference while I am there. Information about the conference can be found here.