19-3078

St. Clair-Hibbard v. American Finance Trust, Inc.

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. 

CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS 

PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 

32.1 AND THIS COURT=S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER 

IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE 

FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION 

ASUMMARY ORDER@). A PARTY CITING TO A SUMMARY ORDER MUST SERVE 

A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL. 

At a stated term of the United States Court of Appeals for the Second Circuit, 

held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the 

City of New York, on the 5th day of May, two thousand twenty.

PRESENT:

GUIDO CALABRESI,

RICHARD C. WESLEY,

RICHARD J. SULLIVAN,

Circuit Judges.

_____________________________________

Carolyn St. Clair-Hibbard, Individually 

and on Behalf of All Others Similarly 

Situated,

Plaintiff-Appellant,

v. 19-3078

American Finance Trust, Inc., American 

Finance Advisors, LLC, AR Global 
Investments, LLC, Nicholas S. Schorsch, 

William M. Kahane,

Defendants-Appellees.

_____________________________________

For Plaintiff-Appellant: OLIMPIO LEE SQUITIERI, Squitieri & 

Fearon, LLP, New York, NY.

For Defendant-Appellee American 

Finance Trust, Inc.:

PETER D. DOYLE (Matthew J. Morris, 

Shiloh A. Rainwater, on the brief), 

Proskauer Rose LLP, New York, NY.

For Defendants-Appellees American 

Finance Advisors, LLC, AR Global 

Investments, LLC, Nicholas S. 

Schorsch, and William M. Kahane:

AUDRA J. SOLOWAY (Daniel S. Sinnreich, 

Naomi D. Morris, on the brief), Paul, 

Weiss, Rifkind, Wharton & Garrison 

LLP, New York, NY.

Appeal from the United States District Court for the Southern District of 

New York (Lorna G. Schofield, J.).

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, 

ADJUDGED, AND DECREED that the judgment of the district court is

AFFIRMED.

Plaintiff-Appellant Carolyn St. Clair-Hibbard appeals from an opinion and 

judgment of the district court (Schofield, J.) dismissing her Second Amended 

Complaint for failure to state a claim. We assume the parties’ familiarity with the 

underlying facts, procedural history, and issues on appeal.
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Plaintiff is a shareholder of American Finance Trust, Inc. (“AFIN”), a real 

estate investment trust (“REIT”) incorporated under the laws of Maryland. Since 

its founding, AFIN has been “externally managed,” meaning that its day-to-day 

operational, managerial, and financial activities are run by an external advisor. In 

this case, that advisor is American Finance Advisors, LLC (“AF Advisors”), which 

is a wholly-owned subsidiary of AR Global Investments, LLC (“Global”). 

Nicholas S. Schorsch and William M. Kahane are significant shareholders of 

Global.

In September 2016, AFIN executed a definitive merger agreement to acquire

another REIT for a combination of cash and stock. In connection with the 

proposed merger, AFIN and AF Advisors agreed to a new advisory agreement 

(the “New Advisory Agreement”), which would permit AFIN to internalize the 

services offered by AF Advisors for a fee. Execution of the New Advisory 

Agreement was contingent upon AFIN’s shareholders approving the proposed 

merger.

Over late 2016 and early 2017, AFIN issued proxy materials soliciting 

shareholder votes in favor of the two agreements. Among other things, AFIN 
4

stressed that the merger agreement and the New Advisory Agreement would 

provide AFIN with a path to internalizing its management structure, enhanced 

liquidity, and the possibility of a future public listing (although AFIN was publicly 

registered at that time, it did not begin trading publicly until July 2018).

On February 13, 2017, its shareholders approved the merger and the New 

Advisory Agreement. Thereafter, Plaintiff sued, alleging that the proxy materials 

were materially misleading, and that AF Advisors breached its fiduciary duty to 

AFIN and AFIN’s shareholders.

Discussion

We review the district court’s grant of a motion to dismiss de novo, 

“accepting all factual allegations in the complaint and drawing all reasonable 

inferences in the plaintiff’s favor.” Kleinman v. Elan Corp., 706 F.3d 145, 152 

(2d Cir. 2013) (internal quotation marks omitted). In so doing, we may also 

consider documents attached to or incorporated by reference in the complaint, 

legally required public disclosure documents filed with the SEC, and documents 

on which the plaintiff relied in bringing suit. Id.
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I. Section 14(a) Proxy Fraud Claim

To state a claim under Section 14(a) of the Securities Exchange Act of 1934, 

and Rule 14a-9 promulgated thereunder, a shareholder must, at the very least,

identify a materially misleading misrepresentation or omission in the proxy 

materials. See Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 383–85 (1970); see also Bond 

Opportunity Fund v. Unilab Corp., 87 F. App’x 772, 773 (2d Cir. 2004). A fact is 

material if there is “a substantial likelihood” that it would have “significantly 

altered the total mix of information made available” to the market. Seinfeld v. 

Gray, 404 F.3d 645, 650 (2d Cir. 2005) (internal quotation marks omitted). Here, 

Plaintiff has not identified any materially misleading misrepresentations or 

omissions in AFIN’s proxy materials; as a result, her proxy fraud claims must be 

dismissed.

First, the proxy materials did not mislead AFIN’s shareholders about the 

desirability of AFIN’s external management structure. Plaintiff admits that 

externally managed REITs have been generally disfavored in the industry “as far 

back as 2007.” J. App’x at 123–24. In fact, credit rating agencies, industry 

analysts, and the SEC have all issued bulletins since then warning investors that 
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externally managed REITs often labor under significant conflicts of interest and 

trade at a discount as compared to their internally managed peers. AFIN had no 

duty to disclose information that its shareholders (and the general market) already 

knew. See Seibert v. Sperry Rand Corp., 586 F.2d 949, 952 (2d Cir. 1978). Even so, 

AFIN warned its shareholders about the drawbacks of its management structure, 

having disclosed (multiple times) that AF Advisors face “significant conflicts[,] . . . 

which could negatively impact [AFIN’s] operating results.” J. App’x at 513.

Second, AFIN exhaustively described the internalization fee and its possible 

effect on the company. AFIN both distributed the New Advisory Agreement to 

its shareholders and summarized its terms, explaining what the internalization fee 

was and how it would be calculated. AFIN also warned that the internalization 

terms could harm the company from a financial perspective by, among other 

things, “discourag[ing] a third party from making an offer for [AFIN] at a 

premium price.” J. App’x at 250. 

Lastly, AFIN did not mislead its shareholders as to the expected trading 

price of its shares in the event of a public listing following the merger. As already 

discussed, AFIN’s shareholders can be assumed to have known, based on public 
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information and AFIN’s disclosures, that AFIN’s external management structure

and the associated cost of internalization could cause the company to trade at a 

discount. See Kahn v. Wien, 842 F. Supp. 667, 676 (E.D.N.Y.), aff’d, 41 F.3d 1501 (2d 

Cir. 1994) (“A proxy statement need not negatively characterize all the facts that 

are disclosed or expressly verbalize all adverse inferences from those facts.”). 

Moreover, AFIN expressly cautioned its shareholders that there was no guarantee 

that its shares, if publicly listed, would trade in line with AFIN’s estimated net 

asset value. Indeed, Plaintiff essentially conceded that this risk was adequately

disclosed when she filed her complaint before AFIN was publicly listed. See J. 

App’x at 143–44 (“Continuation and the virtual permanence of the external 

management structure at AFIN will adversely affect AFIN’s plans for a public 

listing and in any public listing the market value will likely reflect a discount for 

external management and a further discount due to the enormous internalization 

penalty.”). If Plaintiff had enough information to predict that AFIN might trade 

at a discount, so did AFIN’s other shareholders.

Accordingly, Plaintiff has failed to state a claim under Section 14(a) or 

Rule 14a-9. Plaintiff’s secondary claim for control person liability under 
8

Section 20(a) of the Exchange Act must also be dismissed. See Rombach v. Chang, 

355 F.3d 164, 177–78 (2d Cir. 2004).

II. Breach of Fiduciary Duty Claim

Under Maryland law,1 whether a claim for breach of fiduciary duty is direct 

or derivative in nature depends on (1) the nature of the wrong alleged and (2) the 

relief sought. Shenker v. Laureate Educ., Inc., 983 A.2d 408, 425 (Md. 2009). “To 

assert a direct claim, a plaintiff must have suffered a ‘distinct injury’ separate from 

any harm suffered by the corporation.” Oliveira v. Sugarman, 152 A.3d 728, 742 

(Md. 2017). Likewise, the remedy sought “must benefit the shareholder as an 

individual, not the corporate entity.” Id. Here, both the nature of Plaintiff’s 

alleged injury and her proposed remedy demonstrate that her breach of fiduciary 

duty claim is derivative, which forecloses her from proceeding directly against AF 

1 Although the New Advisory Agreement states that it “shall be construed and interpreted in 

accordance with the laws of the State of New York . . . without regard to the principles of conflicts 

of law thereof,” J. App’x at 887, the law of AFIN’s state of incorporation, Maryland, applies to the 

threshold issue of Plaintiff’s standing to sue, see NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 

772 F.3d 740, 743 n.2 (2d Cir. 2014); Howe v. Bank of N.Y. Mellon, 783 F. Supp. 2d 466, 476 

(S.D.N.Y. 2011) (“Plaintiff cites no law to support his contention that a [contractual] choice of law 

provision can govern standing, which is . . . governed by the laws of the state of incorporation.”).
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Advisors.2

Plaintiff alleges that AF Advisors breached its fiduciary duties to AFIN and 

its shareholders by “destroy[ing] AFIN shareholder value; imped[ing] a public 

listing at fair value; and misappropriat[ing] AFIN value from shareholders.” J. 

App’x at 148. In a nutshell, the harm that Plaintiff seeks to redress is AF Advisors 

forcing AFIN into an onerous contract that sapped value from AFIN, thereby

depressing its share price. Plaintiff’s only “personal” injury then is the decrease

in the value of her shares. But as Maryland law makes clear, a mere “decline in 

stock value does not give rise to a direct claim.” Oliveira, 152 A.3d at 748.

The relief that Plaintiff seeks only further supports this conclusion. 

Specifically, Plaintiff requests “damages,” “[r]escinding the [New] Advisory 

Agreement and forcing [AF Advisors] to disgorge the benefits received as a 

result,” or, alternatively, “[d]eclaring void the non-cancellable terms and 20 year 

2 To be sure, a claim “belonging to [a shareholder] personally” may be prosecuted directly in 

most instances. Oliveira, 152 A.3d at 742 n.15 (quoting Citigroup Inc. v. AHW Inv. P’ship, 140 A.3d 

1125, 1126–27 (Del. 2016)). But where a shareholder seeks to vindicate a breach of a fiduciary 

duty – even where, as here, that fiduciary duty is owed to shareholders – she may proceed directly 

only if she has suffered an injury distinct from the corporation. See id.; see also Citigroup, 140 A.3d 

at 1138 n.66 (acknowledging that even where a fiduciary duty is owed to a shareholder, the 

shareholder must suffer an injury distinct from the corporation to bring a direct claim).
10

term of the [New] Advisory Agreement and the internalization fee.” J. App’x 

at 148–49. Each of these remedies would flow to AFIN, not its shareholders.

Perhaps not surprisingly, Plaintiff pivots to reframe the direct/derivative 

analysis by arguing that she is pursuing a “dilution” claim, which Maryland courts 

have recognized may sometimes be prosecuted directly. E.g., Oliveira, 152 A.3d 

at 747 (noting that a stock dilution claim can “support a direct shareholder claim 

under some circumstances”). Dilution occurs when existing shareholders’ 

economic or voting rights are diluted by the corporation’s issuance of new shares. 

But while Plaintiff’s complaint makes a single stray reference to the merger being 

“dilutive,” J. App’x at 140, her case has nothing to do with share dilution. Indeed, 

she “fail[s] to allege any facts detailing the impact of such dilution” such as “by 

[indicating] how much [her] shares were allegedly diluted, what effect that 

dilution had on [her] voting power, if any, or what financial loss [she] might have 

suffered due to such dilution.” Oliveira, 152 A.3d at 749–50.

To the extent that Plaintiff’s breach of fiduciary duty claim can be styled as 

one for the breach of the duty of candor, that too fails. Setting aside whether such 

a claim even exists under Maryland law, it suffers the same defect as Plaintiff’s
11

proxy fraud claim: Plaintiff has not identified any materially misleading 

misrepresentations or omissions in the proxy materials.

As a result, Plaintiff has not alleged a cognizable claim for breach of 

fiduciary duty. Her secondary aiding and abetting claim must also be dismissed. 

See Schandler v. N.Y. Life Ins. Co., No. 09-cv-10463 (LMM), 2011 WL 1642574, at *13 

(S.D.N.Y. Apr. 26, 2011); Schlossberg v. Nadel, C.A. No. 16-100 (PX), 2016 WL 

4205772, at *5 (D. Md. Aug. 10, 2016).

Conclusion

We have reviewed the remainder of Plaintiff’s arguments and find them to 

be without merit. Accordingly, we AFFIRM the judgment of the district court.

FOR THE COURT: 

Catherine O’Hagan Wolfe, Clerk of Court