Citizens Nat'l Bank v. Volunteer Bancorp, Inc.

CITIZENS NATIONAL BANK and CNB BANKSHARES, INC. Plaintiffs, v. VOLUNTEER BANCORP, INC. and CIVIS BANK, Defendants.

No.: 3:20-CV-555-TAV-HBG

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF TENNESSEE

June 14, 2021

MEMORANDUM OPINION

This civil matter is before the Court on Defendants' Motion to Dismiss the Second Amended Complaint [Doc. 18]. Defendants seek dismissal under Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure, the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. §§ 78u-4 et seq., and 28 U.S.C. § 1367(c) [Id. p. 1]. Plaintiffs responded in opposition [Doc. 22], and defendants replied [Doc. 23]. The matter is now ripe for resolution. For the reasons that follow, the motion to dismiss [Doc. 18] will be GRANTED.

I. Factual Background

Plaintiffs bring this action, asserting that defendants fraudulently made material misrepresentations and omissions in relation to the sale or purchase of securities in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5, promulgated thereunder [Doc. 17 p. 8]. The parties began conversations to arrange a purchase of Defendant Civis Bank ("Civis") in January 2019 [Id. ¶ 7]. In May 2019, the parties first entered into an Indication of Interest Agreement, and the agreement was extended several times [Id. ¶¶ 8, 12]. In March 2020, defendants executed an Letter of Intent, which was also extended, stating that plaintiffs would acquire Civis from defendant Volunteer in either a stock purchase or asset purchase transaction, and Civis would thereafter merge into Citizens National Bank [Id. ¶¶ 15, 17, 20]. The Letter of Intent and subsequent extensions had an exclusivity provision that defendants would not negotiate or discuss a sale with other persons, and if discussion regarding a purchase occurred, defendants were to notify plaintiffs [Id. ¶ 18]. This provision was extended through November 30, 2020 [Id. ¶ 23]. The parties continued discussions and preparations, and on December 18, 2020, plaintiffs provided their signature page for the Stock Purchase Agreement [Id. ¶ 26]. Plaintiffs learned defendants had entered into a letter of intent with another interested entity and would not be entering into the Agreement with plaintiffs [Id. ¶ 28]. Plaintiffs allege defendants concealed a scheme to defraud plaintiffs related to the transaction [Id. ¶ 32] and bring suit alleging violations of Section 10(b) of the 1934 Securities Act and Rule 10b-5 promulgated thereunder, in addition to asserting a variety of state law claims, including breach of contract, fraud, intentional misrepresentation, unjust enrichment, and the Tennessee Securities Act [Id. pp. 8-12].

II. Standard of Review

Defendants move to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). Federal Rule of Civil Procedure 8(a) sets out a liberal pleading standard. Smith v. City of Salem, 378 F.3d 566, 576 n.1 (6th Cir. 2004). Thus, pleadings in federal court need onlycontain "'a short and plain statement of the claim showing that the pleader is entitled to relief,' in order to 'give the [opposing party] fair notice of what the . . . claim is and the grounds upon which it rests.'" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). Detailed factual allegations are not required, but a party's "obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions." Id. (alterations in original). "[A] formulaic recitation of the elements of a cause of action will not do," nor will "an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 555, 557).

In deciding a Rule 12(b)(6) motion, the court must determine whether the complaint contains "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570; accord Directv, Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007). This assumption of factual veracity, however, does not extend to bare assertions of legal conclusions, Iqbal, 556 U.S. at 679, nor is the Court "bound to accept as true a legal conclusion couched as a factual allegation." Papasan v. Allain, 478 U.S. 265, 286 (1986). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678. Determining whether a complaint states a plausible claim for relief is ultimately "a context-specific task that requires [the Court] to draw on its judicial experience and common sense." Id. at 679. In conducting this inquiry, the Court "must construe the complaint in a light most favorable to plaintiff[], accept all well-pledfactual allegations as true, and determine whether plaintiff[] undoubtedly can prove no set of facts in support of those allegations that would entitle [her] to relief." Bishop v. Lucent Techs., Inc., 520 F.3d 516, 519 (6th Cir. 2008) (citing Harbin-Bey v. Rutter, 420 F.3d 571, 575 (6th Cir. 2005)).

III. Analysis

Section 10(b) of the Securities Exchange Act and Rule 10b-5, promulgated thereunder, "prohibit fraudulent, material misstatements in connection with the sale or purchase of a security." Ind. State Dist. Council of Laborers and Hod Carriers Pension & Welfare Fund v. Omnicare, Inc., 583 F.3d 935, 942 (6th Cir. 2009). To succeed on a private cause of action for violations thereof, a plaintiff must prove six elements: "(1) a material misrepresentation or omission . . . ; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37-38 (2011) (internal quotations and citations omitted).

In the motion to dismiss, defendants attack several of the elements and argue the Second Amended Complaint lacks factual allegations to support the requirements that (1) there was a "purchase" or "sale" of a security, (2) there is a connection between the alleged misrepresentations or omissions and the purchase or sale, (3) the fraudulent misstatements or omissions were pled with particularity, and (4) plaintiffs have sufficiently alleged scienter. The Court will address each argument in turn.

A. "Purchase" or "Sale" of a Security

Defendants argue that that the Second Amended Complaint does not allege a "purchase" or "sale" of a security and therefore fails to state a claim [Doc. 20 p. 2]. "[I]t is well-accepted that in order to assert a claim for damages based on a violation of the federal securities laws, the plaintiff must be either a purchaser or seller of securities in connection with the securities claims." Gaff v. Fed. Deposit Ins. Corp., 814 F.2d 311, 318 (6th Cir. 1987). The Securities and Exchange Act defines "purchase" and "sale" as including a contract to buy, purchase, or otherwise acquire and a contract to sell or otherwise dispose of, respectively. 15 U.S.C. §§ 78c(a)(13), (14). To qualify, the contract must be enforceable. Forte v. McQuiggan, No. 08-15206, 2010 WL 3464316, at *10 (E.D. Mich. Aug. 30, 2010) (citing Kagan v. Edison Bros. Stores, Inc., 907 F.2d 690, 691 (7th Cir. 1991) ("a contract for purposes of the securities laws means an enforceable contract") (emphasis original)).

Defendants state that "if the parties never entered into a binding agreement to purchase or sell securities, plaintiff has no 10b-5 claim regardless of any alleged fraud in the negotiation of such an agreement." Chariot Grp., Inc. v. Am. Acquisition Partners, L.P., 751 F. Supp. 1144, 1149 (S.D.N.Y. 1990), aff'd sub nom. Chariot Grp. v. Am. Acquisition LP, 932 F.2d 956 (2d Cir. 1991). "It is not enough to prove breach of a commitment to negotiate in good faith until a contract to purchase securities was finally executed, because such a commitment could not by itself be deemed either a security or a contract to buy or sell a security." Id. "The language the parties use in their draftagreements and in their contemporaneous communications is the most important indication of whether a signed writing is required before the parties are bound." Chariot Grp., 751 F. Supp. at 1149. "[I]f the parties intend not to be bound until they have executed a formal document embodying their agreement, they will not be bound until then." V'Soske v. Barwick, 404 F.2d 495, 499 (2d Cir. 1968).

Defendants argue the language of three documents makes clear that the parties did not intend to be bound until a final definitive agreement had been executed. The Indication of Interest states

[t]he final and binding terms for any Proposed Transaction between Volunteer and CNB shall be set forth in a mutually acceptable, final definitive agreement . . . to be negotiated between, and executed by, the parties, subject to the approval of our respective Boards of Directors. It is further understood that this IOI is not intended to constitute a binding agreement by and between CNB and Volunteer to enter into the definitive agreement referred to herein, and no liability or obligation of any nature whatsoever is intended to be created hereunder, except as expressly set forth in this IOI.

[Doc. 17-1 p. 3, emphasis added]. The Letter of Intent includes nearly identical language and further states that "[n]o contract or agreement providing for any transaction involving Civis Bank shall be deemed to exist between Volunteer and CNB and any of its affiliates unless and until a final Definitive Agreement has been executed and delivered by and between the parties" [Doc. 17-3 p. 3]. The "execution version" of the proposed Stock Purchase Agreement includes a section titled "No Contract until Execution" and states

this Agreement shall become valid and binding only after it is executed and delivered by the Parties, and its enforceability shall be subject to the requisite approval of the

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