Opinion ID: 2982178
Heading Depth: 2
Heading Rank: 3

Heading: Litigation Ensues

Text: Plaintiffs filed their complaint in the United States District Court for the Eastern District of Michigan on February 9, 2012, naming as defendants thirteen individual CCB officers and directors. 3 No 13-1444 Dailey v. Medlock On June 1, 2012, defendants filed a motion to dismiss, and plaintiffs then filed the First Amended Complaint. The FAC alleges five causes of action: (1) violation of Section 10(b) of the 1934 Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5; (2) violation of Section 20(a) of the Exchange Act; (3) violation of the Michigan Uniform Securities Act; (4) breach of fiduciary duty under Michigan law; and (5) silent fraud under Michigan law. The FAC alleges generally that the PPM “made statements about the financial condition of CCB that failed to correctly describe CCB's financial condition as of the fourth quarter of 2009, when Plaintiffs were deciding whether to purchase CCB Preferred Stock.” Specifically, plaintiffs allege that CCB represented in the PPM that the Bank was “well capitalized” and that its president painted a “rosy picture” about the Bank's performance in public statements, but that these statements were “inaccurate, misleading, or insufficient” due to various alleged material omissions. As to the alleged omissions, plaintiffs allege that defendants knew or should have known, but failed to disclose in the PPM or its supplements, that CCB intended to take the valuation loss and thus incur large losses for the fourth quarter of 2009; that the Bank was engaged in ongoing violations of law, rules, or regulations, as well as “risky banking practices”; and that defendants “failed to adequately disclose CCB's accurate financial condition” in the PPM, its supplements, and CCB's public filings. Defendants then filed a new motion to dismiss. On March 30, 2013, the district court entered an Opinion and Order granting defendants' motion to dismiss. The court organized the misrepresentations or omissions alleged by plaintiffs 4 No 13-1444 Dailey v. Medlock into nine categories: (1) that the Bank was “well capitalized”; (2) the failure to disclose the valuation allowance before it was taken; (3) the existence of the OFIR investigation; (4) the ongoing violations of law and regulations; (5) the ongoing risky banking practices; (6) negative projections for loan losses and analyses; (7) loan-to-collateral ratio; (8) defendant Widlak's statements; and (9) the overall financial health of the Bank. For each of these nine categories, the district court held that plaintiffs had failed to allege, with the requisite specificity, facts that would support a finding of falsity; facts that would establish a duty to disclose the alleged material omissions; or facts that would support a “strong inference” of scienter as required by the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The district court then held that, absent an adequately pleaded claim for a predicate securities law violation, plaintiffs could state no claim for control person liability under Section 20(a). Third, the court held that plaintiffs had not adequately pleaded a claim under the Michigan Uniform Securities Act, reasoning that the same analysis applicable to the federal claims controlled those state claims. Fourth, the court held that plaintiffs' claim for breach of fiduciary duty failed because the facts as pleaded established that defendants fulfilled the only duty owed to plaintiffs: to hold their money in escrow and then apply it to the purchase of the securities. Finally, the district court held that plaintiffs' claim for “silent fraud” under Michigan law was deficient because plaintiffs had failed to plead any affirmative duty on defendants' part to disclose the information plaintiffs alleged was improperly omitted. The district court then entered judgment in defendants' favor. 5 No 13-1444 Dailey v. Medlock Plaintiffs timely appealed. (Doc. 40).2