Republic Bank & Trust Company v. Bear Stearns & Company., Inc.
683 F.3d 239
6th Cir.2012Background
- Republic Bank sued Bear Stearns and an employee for fraud, negligent misrepresentation, and Kentucky Blue Sky Law violations related to mortgage-backed securities purchased in 2003 and 2006.
- The 2003 purchases were made without reviewing prospectus supplements; the 2006 purchases involved offerings with available supplements.
- Bear Stearns underwrote the securities, which carried AA/AAA ratings, but the underlying loans were alleged to be imprudent or nonconforming.
- Republic alleged misrepresentations and omissions in prospectuses and supplements about underwriting standards, predatory lending, loan quality, credit enhancement, and market liquidity.
- The district court dismissed all claims with prejudice; Republic appealed the ruling, challenging pleading sufficiency and timeliness.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Rule 9(b) pleading (and PSLRA) applies to Kentucky fraud claims | Republic argues heightened pleading applies due to fraud. | Bear Stearns argues standard varies by claim and by state law. | Yes; Rule 9(b) applies to fraud claims, PSLRA applies to Rule 10b-5-like claims. |
| Whether Bern’s misrepresentation about safety of certificates supports a fraud claim | Barney’s statement misrepresented present facts about safety and underwriting. | Statements were opinion/puffery or disclosed risks. | Could be actionable as misrepresentation or deception exception; but needs particularity. |
| Whether Republic adequately pleaded fraud by omission | Republic asserts omissions of underwriting, predatory lending, and default risk. | Offering documents disclosed risks; omissions not pled with specificity. | Claims fail under Rule 9(b) and due to disclosure in offering documents. |
| Whether 2003 certificates are time-barred under Kentucky law | Discovery rule tolls may apply; suit timely. | Limitations began when fraud could have been discovered; 2003 claims barred by five years. | 2003 claims time-barred; dismissed. |
| Whether Kentucky Blue Sky Law claims survive against the offerings | Blue Sky claims independent from federal pleading standards. | Claims flawed for lack of causation/standing and time-barred. | Blue Sky claims fail; no private cause of action for § 292.320; others barred. |
Key Cases Cited
- Twombly, Bell Atl. Corp. v. Diehl et al., 550 U.S. 544 (U.S. 2007) (pleading must be plausible, not merely possible)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (heightened pleading standard for fraud claims)
- Omnicare, Inc. v. Labourers Pension Fund, 583 F.3d 935 (6th Cir. 2009) (Rule 9(b) specificity required for fraud allegations)
- Nomura Asset Acceptance Corp. v. Nomura Credit & Capital, Inc., 632 F.3d 762 (1st Cir. 2011) (Rule 9(b) pleading in mortgage-backed securities case requires specifics)
- Flegles, Inc. v. TruServ Corp., 289 S.W.3d 544 (Ky. 2009) (misrepresentation must relate to a past/present material fact; puffery limits apply)
- McHargue v. Fayette Coal & Feed Co., 283 S.W.2d 170 (Ky. 1955) (sales talk/puffing generally not actionable; duty to exercise common sense)
- Vokes v. Eaton, 85 S.W. 174 (Ky. 1905) (puffery generally not actionable, unless falsified facts)