Hutchison v. Deutsche Bank Securities Inc.
2011 U.S. App. LEXIS 15310
| 2d Cir. | 2011Background
- CBRE filed an IPO in September 2006 offering 9.6 million shares at $14.50; underwriters could purchase up to 1.44 million more.
- Two Triton mezzanine loans totaling $51.5 million were outstanding at the IPO, collateralized by Rodgers Forge and Monterey condo projects in Maryland.
- Plaintiffs allege CBRE knew Triton loans were impaired and failed to disclose this in the Registration Statement, contrary to Item 303 disclosures.
- Freemont Investment and Loan had an intercreditor agreement with CBRE requiring notification of potential defaults, including out-of-balance conditions.
- CBRE later announced non-performing/under watch status for the Triton loans and foreclosed on the Monterey and Rodgers Forge loans, incurring impairment charges.
- The district court dismissed the Second Amended Complaint under Rule 12(b)(6) as immaterial, prompting this appeal arguing materiality standards were misapplied.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Materiality under Sections 11/12(a)(2) governing omissions | Hutchison argues Triton loans’ impairment was material under Item 303. | CBRE argues collateralization negates materiality; no impairment evident at IPO. | No, materiality cannot be decided solely by collateralization; qualitative factors apply. |
| Approach to materiality: quantitative versus qualitative analysis | Plaintiffs rely on JP Morgan’s portfolio-wide 5% threshold to show materiality. | Defendant asserts materiality can be established by segmental impact or quantitative measures. | Panel adopts a combined approach: consider portfolio-wide quantitative impact plus qualitative SAB No. 99 factors. |
| Whether Triton Loans were a material part of CBRE’s business | Triton Loans constituted a significant slice of CBRE’s mezzanine/overall portfolio. | Mezzanine loans are not a primary, investor-focused segment; overall portfolio dictates materiality. | Triton Loans not material to CBRE's total portfolio; no materiality under Item 303. |
| Effect of leave to amend on futility | Plaintiffs sought a Proposed Third Amended Complaint to cure pleading deficiencies. | District court denied leave as futile since materiality could not be established. | Amendment would be futile; the complaint remains deficient under SAB No. 99. |
| Section 15 liability tied to §11 failure | If §11 is satisfied, §15 should attach for control liability. | No §11 claim, hence §15 fails. | No §11 claim, so §15 liability cannot attach. |
Key Cases Cited
- JP Morgan Chase & Co. v. All Jurisdiction, 553 F.3d 187 (2d Cir. 2009) (quantitative/materiality framework with qualitative SAB No. 99 factors)
- Blackstone Group v. 127, 634 F.3d 711 (2d Cir. 2011) (qualitative materiality, flagship segment importance can matter)
- Ganino v. Citizens Utils. Co., 228 F.3d 154 (2d Cir. 2000) (rejects formulaic materiality; emphasizes holistic assessment)
- Johnson v. Rowley, 569 F.3d 40 (2d Cir. 2009) (notice-pleading standard; rejection of heightened fraud pleading here)
- In re Initial Pub. Offering Sec. Litig., 483 F.3d 70 (2d Cir. 2007) (absolute liability for §11/12; reliance on misstatements/omissions)
- ECA & Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009) (quantitative materiality; SAB No. 99 guidance)
- In re Morgan Stanley , 592 F.3d 347 (2d Cir. 2010) (materiality standards for §11/12 with fraud considerations)