Rose v. Redwood Fin., Inc.

440 F.Supp.3d 1004

Dr. Patricia T. ROSE, Plaintiff,

v.REDWOOD FINANCIAL, INC., Defendant.

Civil No. 19-2960(DSD/ECW)

United States District Court, D. Minnesota.

Signed February 25, 2020

Douglas L. Elsass, Esq., Benjamin C. Johnson, Esq. and Nilan Johnson Lewis, PA, 120 South 6^th Street, Suite 400, Minneapolis, MN 55402, counsel for plaintiff.

Thomas Slattery, Esq. and Jones Walker LLP, 201 St. Charles Avenue, 50^th Floor, New Orleans, LA 70170; Barry M. Landy, Esq. and Ciresi Conlin, LLP, 225 South 6^th Street, Suite 4600, Minneapolis, MN 55402, counsel for defendant.

ORDER

David S. Doty, Judge

This matter is before the court upon the motion to dismiss by defendant Redwood Financial, Inc. Based on a review of the file, record, and proceedings herein, and for the following reasons, the motion is granted in part and the case is remanded to Hennepin County District Court.

BACKGROUND

This securities dispute arises from plaintiff Dr. Patricia T. Rose's sale of stock to Redwood. Redwood is a Minnesota corporation that wholly owns HomeTown Bank. Compl. ¶¶ 1, 9. Hometown Bank is Redwood's primary asset. Id. ¶¶ 9, 15. Rose owned at least 19,659 shares of Redwood stock.¹ Id. ¶ 4. On September 24, 2018, Rose sold all of her shares back to Redwood at a price of $55 per share.² Id. ¶ 4.

In the stock purchase agreement governing the sale, Rose acknowledged that she was a "sophisticated investor" knowledgeable about the "financial conditions and results of [Redwood's] operations" and "familiar with the industry in which [Redwood] operates." Breckinridge Decl. Ex. 4 § 4(g). Rose apparently undertook some due diligence in determining the price she offered to Redwood for the shares and represented that no additional disclosures were "needed ... to evaluate the sale." Id. Redwood denied knowing of any material misstatements or omissions in the disclosures Rose relied on in finalizing the sale. Id. § 5(d).

In January 2019, Rose learned that Redwood's stock price had "jumped precipitously and unexpectedly" to approximately $92 per share. Compl. ¶ 6. Rose does not allege exactly when between September 2018 and January 2019 that occurred. Throughout 2019, Redwood's share price averaged $95. Id.

Rose's attorney inquired with Redwood as to the share price increase, and specifically asked whether Redwood had withheld material information before the stock sale. Id. ¶ 7. Redwood's counsel denied knowing of any undisclosed fact that may have caused Redwood's share value to increase after the sale and speculated that the increase was due to unanticipated market transactions and possible market manipulation. Id. ¶ 8. He also acknowledged, however, that the increase was "atypical" for the banking industry during that time of year. Id.

Rose continued to investigate the matter and, in February 2019, discovered that HomeTown Bank had been in the process of converting from a national bank to a state charter bank at the time of the sale. Id. ¶¶ 9, 13. HomeTown approved the conversion in June 2018, filed the necessary paperwork with the Minnesota Department of Commerce in July, and applied for a waiver of publication of the conversion in August. Id. According to Rose, the Department of Commerce has confirmed that the waiver request was unusual and that, although it was granted, "the obligation to publish the conversion is both a state and federal requirement." Id. ¶ 9 n.1. The Department of Commerce approved the conversion on September 6, 2018, nearly three weeks before the stock sale. Id. ¶ 10. Redwood did not publicly disclose the conversion until November 1, 2018, after the stock sale. Id. ¶ 11.

Rose alleges that Redwood had an obligation to provide notice of the planned conversion and that its failure to do so constituted a material misrepresentation by omission. Id. ¶¶ 12, 15. She supports her allegation by asserting that banks routinely disclose conversions from a federal bank to a state charter bank in public filings. Id. ¶ 14. She also asserts that the conversion was especially material here because HomeTown is Redwood's primary asset. Id. ¶ 15. She alleges that she would not have entered into the stock purchase agreement had she known about the conversion. Id. ¶ 16.

Rose commenced this action in Hennepin County District Court on November 2, 2019, and Redwood timely removed. Rose alleges that Redwood engaged in fraudulent misrepresentation and violated Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and Minn. Stat. § 80A.68. Rose also asserts a claim for declaratory judgment. Redwood now moves to dismiss.

DISCUSSION

I. Standard of Review

To survive a motion to dismiss for failure to state a claim, " ‘a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.’ " Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ). "A claim has facial plausibility when the plaintiff [has pleaded] 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, 129 S.Ct. 1937 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). Although a complaint need not contain detailed factual allegations, it must raise a right to relief above the speculative level. Twombly, 550 U.S. at 555, 127 S.Ct. 1955. "[L]abels and conclusions or a formulaic recitation of the elements of a cause of action" are not sufficient to state a claim. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (citation and internal quotation marks omitted).

In § 10(b) and Rule 10b–5 actions, the Private Securities Litigation Reform Act (PSLRA) requires the complaint to identify the allegedly false statements or omissions of material fact and explain why they were misleading. 15 U.S.C. § 78u–4(b)(1). Moreover, a plaintiff must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Id. § 78u–4(b)(2).

The court does not consider matters outside the pleadings under Rule 12(b)(6). Fed. R. Civ. P. 12(d). The court may, however, consider matters of public record and materials that are "necessarily embraced by the pleadings." Porous Media Corp. v. Pall Corp., 186 F.3d 1077, 1079 (8th Cir. 1999) (citation and internal quotation marks omitted). Here, the court considers the stock purchase agreement.³

II. Federal Securities Fraud

Rose alleges that Redwood violated federal securities law by failing to disclose that it was converting from a national bank to a state charter bank at the time of the sale. Section 10(b) of the Exchange Act prohibits the use of "any manipulative or deceptive device or contrivance" in violation of the SEC's rules and regulations "in connection with the purchase or sale of any security." 15 U.S.C. § 78j(b). Rule 10b–5 makes it unlawful "for any person ... 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 light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b–5.

To state a claim under § 10(b) and Rule 10b–5, a plaintiff must allege "(1) a material misrepresentation or omission by the defendant; (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." Stoneridge Inv. Partners, LLC v. Scientific–Atlanta, Inc., 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008). The heightened pleading standard mandated by the PSLRA serves to "restrain securities fraud litigation abuses such as the practice of pleading by hindsight."

In re K-tel Int'l, Inc., Sec. Litig., 300 F.3d 881, 889 (8th Cir. 2002). As a result, on a motion to dismiss the court does not accept all allegations to be true, but rather disregards "catch-all or blanket assertions that do not live up to the [PSLRA's] particularity requirements." Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 660 (8th Cir. 2001) (internal quotations omitted).

Redwood argues that the complaint does not adequately allege any material misrepresentations or omissions, facts giving rise to a strong inference of scienter, or loss causation. The court will turn directly to the dispositive issue, scienter.

The PSLRA requires a plaintiff to allege facts giving rise to a strong inference of scienter. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). Merely plausible or reasonable inferences do not support a strong inference. Id. Although the court typically views all facts in a light most favorable to a plaintiff, securities fraud allegations will not survive a Rule 12(b)(6) motion to dismiss unless the allegations set forth in the complaint "collectively add up to a strong inference of the required state of mind." Fla. State Bd., 270 F.3d at 660. "Inferences of scienter do not survive if they are merely reasonable," they must be "both reasonable and ‘strong.’ " Id. (internal citation omitted).

An inference is strong only if a reasonable person would find it "cogent and at least as compelling as any opposing inference of nonfraudulent intent." Tellabs, 551 U.S. at 314, 127 S.Ct. 2499. A court's inquiry is "whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard." Id. at 323, 127 S.Ct. 2499 (emphasis in original); see also In re Ceridian Corp. Sec. Litig., 542 F.3d 240, 244 (8th Cir. 2008) ; Elam v. Neidorff, 544 F.3d 921, 928 (8th Cir. 2008).

Scienter "requires a showing of reckless or intentional wrongdoing" that can be established "(1) from facts demonstrating a mental state embracing an intent to...