Palm Beach Maritime Museum, Inc. v. Hapoalim Securities USA, Inc. ( 2020 )

19-1384-cv
Palm Beach Maritime Museum, Inc. v. Hapoalim Securities USA, 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 “SUMMARY 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 14th
day of April, two thousand twenty.
Present:
JOSÉ A. CABRANES,
GERARD E. LYNCH,
Circuit Judges,
CHRISTINA REISS,
District Judge *
PALM BEACH MARITIME MUSEUM, INC.,
A FLORIDA NOT FOR PROFIT CORPRATION,
DBA PALM BEACH MARITIME ACADEMY,
Plaintiff-Appellant,
v. No. 19-1384-cv
HAPOALIM SECURITIES USA, INC.,
A FOREIGN CORPORATION, EDWARD CHAN,
PATRICIA AGUIAR, FABIO D’ASCOLA, AND
BILL BURCKHART,
Defendants-Appellees.
*Judge Christina Reiss, of the United States District Court for the District of Vermont, sitting by
designation.
For Plaintiff-Appellant: JERMAINE LEE, Hernandez Lee
Martinez, LLC, Miami, FL (Scott Zarin,
Zarin & Associates, New York, NY, on
the brief)
For Defendant-Appellees: DARLENE B. FAIRMAN, Herrick,
Feinstein LLP, New York, NY (Carol
Michele Goodman, Michael
Berengarten, and Scott Corey Ross,
Herrick, Feinstein LLP, New York, NY;
Stephen Bernard Gillman, Shutts &
Bowen LLP, Miami, FL; Brian O’Keeffe
Kennedy, Law Office of Brian
Kennedy, New York, NY; and Marko
Cerenko, Kluger, Kaplan, Silverman,
Katzen & Levine, P.L., Miami, FL, on
the brief)
Appeal from an order of the United States District Court for the Southern District
of New York (Preska, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the order entered on April 10, 2019, is AFFIRMED in part,
VACATED in part, and REMANDED for further proceedings consistent with this
Summary Order.
Plaintiff-Appellant Palm Beach Maritime Museum, Inc. (“PBMM”) contends
that the United States District Court for the Southern District of New York (Preska,
J.) improperly dismissed with prejudice its claims of federal securities fraud under
the Securities Exchange Act of 1934 (the “Exchange Act”) and Securities and
Exchange Commission Rule 10b-5 against Defendants Hapoalim Securities USA,
Inc. (“Hapoalim”), Edward Chan, Patricia Aguiar, Fabio D’Ascola, and Bill
Burckhart (collectively, “Defendants”). We assume the parties’ familiarity with the
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relevant facts, procedural history, and arguments on appeal, to which we refer
only as necessary to explain our decision.
This case involves a conduit financing transaction which enables a nonprofit
corporation or private company to raise capital by accessing the municipal bond
market for projects that are expected to foster economic development. In a conduit
financing transaction, (1) municipal bonds are sold by a public authority in a bond
offering (the “Bond Offering”); (2) the proceeds of the Bond Offering are then lent
by the public authority to a private or non-profit entity (the “Borrower”) in
exchange for a debt instrument pursuant to which the Borrower pays principal and
interest; and (3) in the event of a default, the bondholders are limited to the assets
of the Borrower instead of having recourse against the public authority that issued
the bonds.
In its Complaint, PBMM alleges federal securities fraud claims, asserting it
was a “seller” of a “security” under the Exchange Act based on bonds it either
issued or caused to be issued to finance real estate projects for its charter school.
On appeal, PBMM admits that it did not issue the bonds in question and shifts its
theory of liability to argue that its tender of promissory notes to the Public Finance
Authority of Wisconsin (the “PFA”) rendered it a “seller” of “securities.” PBMM
first advanced this alternate theory of liability in opposing Defendants’ motions to
dismiss before the District Court; there is no mention of it in its Complaint.
In this appeal, we are asked to determine whether the District Court
properly dismissed PBMM’s Complaint when it ruled that PBMM was “neither a
purchaser nor a seller of securities with respect to all [D]efendants, and therefore
[PBMM] fails to state a claim under the [Exchange] Act.” (Op. at 12.) Because we
find dismissal was appropriate on other grounds, we affirm that determination
without adopting the District Court’s rationale. Because we also find the District
Court should not have dismissed PBMM’s claims with prejudice and should have
considered whether to grant leave to amend, we vacate and remand that portion of
the District Court’s decision.
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I. Procedural History
On May 7, 2018, PBMM brought suit in the United States District Court for
the Southern District of Florida against Defendants, alleging federal securities
fraud claims as well as state-law claims based on Defendants’ alleged
misrepresentations and self-dealing in connection with a Bond Offering.
Defendant Hapoalim moved to dismiss the Complaint and to transfer the case to
the Southern District of New York. Defendants Chan and D’Ascola joined in
Hapoalim’s motion to dismiss and filed their own motions to dismiss. Defendant
Chan additionally joined in Hapoalim’s motion to transfer. PBMM was unable to
effect service of process on Defendants Patricia Aguiar and Bill Burckhart.
On January 30, 2019, the case was transferred to the Southern District of New
York without a determination of the pending motions to dismiss. Upon transfer,
citing Fed. R. Civ. P. 12(b)(1), the District Court dismissed PBMM’s federal
securities fraud claims with prejudice based on its conclusion that PBMM “was
neither a purchaser nor a seller of securities” and therefore failed to “state a claim
under” the Exchange Act. (Op. at 12.) The District Court did not grant leave to
amend and declined to exercise supplemental jurisdiction over PBMM’s state law
claims. We review the District Court’s decision de novo. See Gamm v. Sanderson
Farms, Inc., 944 F.3d 455, 462 (2d Cir. 2019).
II. The Allegations of PBMM’s Complaint
PBMM is a nonprofit corporation that operates a charter school in Palm
Beach County, Florida. It alleges that its investment bankers, a consultant, and
members of its Board of Directors made fraudulent misrepresentations in
connection with a 2014 Bond Offering made on PBMM’s behalf. The purpose of
the Bond Offering, as stated in the offering documents presented to PBMM’s
Board, was to raise funds to finance the purchase and development of two
properties that PBMM leased for its school operations. According to the
Complaint, Defendants knew, but did not disclose, that PBMM’s then-CEO
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intended to use some of the Bond Offering proceeds to finance additional real
estate transactions to which he had secretly committed PBMM without the Board’s
knowledge or consent.
PBMM asserts that Defendants advanced their private interests at the
expense of PBMM’s and, in doing so, were aware that PBMM needed to limit its
financial obligations because of its strained economic circumstances. PBMM
contends that it did not uncover Defendants’ purported wrongful conduct until
2017 when discovery in a separate lawsuit revealed Defendants’ alleged securities
fraud and tortious activities.
III. Dismissal of PBMM’s Federal Securities Fraud Claims
Neither § 10(b) of the Exchange Act nor Rule 10b-5 “expressly creates” a
private right of action for securities fraud; however, the Supreme Court has long
recognized that “‘a private right of action is implied under § 10(b).’” Janus Capital
Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011) (quoting Superintendent
of Ins. of N.Y. v. Bankers Life & Cas. Co., 404 U.S. 6, 13 n.9 (1971)). This private right
of action is available only to “purchasers or sellers of securities[,]” and in “dealing
with a private cause of action which has been judicially found to exist, and which
will have to be judicially delimited one way or another unless and until Congress
addresses the question[,]” the Court has cautioned against an “endless case-by-case
erosion” of the purchaser-or-seller requirement through “shifting and highly fact-
oriented” inquiries. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 736, 749,
755 (1975). As a result, the private right to bring a federal securities fraud claim is
accorded “narrow dimensions.” Janus Capital Grp., Inc., 564 U.S. at 142 (quoting
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 165 (2008)).
In contrast, a “security” “is construed in a ‘flexible’ manner[]” to encompass
the variety of “‘schemes devised by those who seek the use of the money of others
on the promise of profits.’” Caiola v. Citibank, N.A., N.Y., 295 F.3d 312, 325 (2d Cir.
2002) (quoting SEC v. W.J. Howey Co., 328 U.S. 293, 299 (1946)).
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In its Complaint, PBMM alleges that it issued bonds or, alternatively, caused
Hapoalim and Chan to issue bonds and, on that basis, was a “seller” of a
“security.” See, e.g., App. at 44, ¶ 192 (alleging that PBMM’s Board authorized
“Hapoalim and Chan to issue the bond[]”); id. at 47, ¶ 209 (alleging that PBMM
itself “issued the [b]ond and suffered and continues to suffer economic losses”).
The District Court correctly concluded that PBMM was not the issuer of the bonds
and could not ground its federal securities fraud claims on that status. We do not
disturb that conclusion, and in this appeal, PBMM makes no attempt to defend the
theory that it should be treated as a “seller” of “securities” because it issued or
caused to be issued bonds.
The District Court went further, however, and considered an argument
raised for the first time in PBMM’s opposition to the motions to dismiss. There,
PBMM argued that it was a “direct seller of promissory notes to the [PFA].” (Op.
at 10) (citing Chan Opp’n Br. at 5 n.8). It appears that the District Court did not
squarely reject PBMM’s notes-based theory of liability, that because it directly
issued promissory notes, PBMM was a “seller” of “securities.” PBMM advances this
same theory of liability on appeal. See, e.g., Appellant’s Br. at 12 (“[PBMM’s]
transfer of the notes[] . . . is a ‘sale’ under the [Exchange Act], with [PBMM] as
‘seller’ thereunder.”). PBMM’s Complaint, however, is bereft of any mention of its
issuance, conveyance, or sale of promissory notes and does not allege a violation of
the Exchange Act on that basis.
Whatever the merits of the District Court’s analysis of whether PBMM was a
“seller” of a “security” based upon PBMM’s alleged sale of promissory notes, we
find that the District Court’s dismissal of the Complaint was proper because a
complaint may not be amended by advocating a different theory of liability in an
opposition brief wholly unsupported by factual allegations in the complaint. See
Wright v. Ernst & Young LLP, 152 F.3d 169, 178 (2d Cir. 1998) (holding a party may
not amend its complaint by advancing a new theory of liability for the first time in
its opposition to a motion to dismiss). The Court thus AFFIRMS the District
Court’s dismissal of PBMM’s Complaint on an alternative basis. See Gmurzynska v.
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Hutton, 355 F.3d 206, 210 (2d Cir. 2004) (“An appellate court is free to affirm a
district court decision on any grounds for which there is a record sufficient to
permit conclusions of law, even grounds not relied upon by the district court.”)
(internal quotation marks and citation omitted). In so ruling, we express no view
on whether the conveyance of promissory notes in the circumstances presented in
this case rendered PBMM a “seller” of “securities.”
IV. Dismissal with Prejudice and Denial of Leave to Amend
In opposing the motions to dismiss, PBMM asked the District Court to grant
it leave to amend in the event it found dismissal appropriate. Defendants did not
affirmatively oppose PBMM’s request for leave to amend although some
Defendants sought dismissal with prejudice.
District courts should “freely give leave” to amend “when justice so
requires[,]” Fed. R. Civ. P. 15(a)(2); however, denial of leave to amend may be
warranted “for good reason, including futility, bad faith, undue delay, or undue
prejudice to the opposing party.” TechnoMarine SA v. Giftports, Inc., 758 F.3d 493,
505 (2d Cir. 2014) (internal quotation marks omitted). “[O]utright refusal to grant
. . . leave without any justifying reason appearing for the denial is not an exercise
of discretion; it is merely abuse of that discretion and inconsistent with the spirit of
the Federal Rules.” Foman v. Davis, 371 U.S. 178, 182 (1962).
The District Court did not explain why it denied PBMM leave to amend and
we cannot divine a reason for that denial. See Ronzani v. Sanofi S.A., 899 F.2d 195,
198-99 (2d Cir. 1990) (vacating dismissal of complaint with prejudice where district
court did not provide an explanation for its denial of leave to amend and where
appellate record did not permit an independent determination of futility). The
District Court also did not explain why dismissal with prejudice was warranted.
See City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173, 188 (2d
Cir. 2014) (finding dismissal with prejudice appropriate because plaintiffs had
already amended their complaint and it was “unlikely that the deficiencies raised
with respect to the Amended Complaint were unforeseen by plaintiffs when they
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amended[]” and because “plaintiffs have identified no additional facts or legal
theories—either on appeal or to the District Court—they might assert if given leave
to amend”).
Because the District Court failed to address PBMM’s request for leave to cure
any deficiency in its Complaint by amendment, we VACATE the District Court’s
dismissal with prejudice and REMAND to the District Court to address whether
granting PBMM leave to amend is appropriate under Fed. R. Civ. P. 15.
V. Conclusion
For the reasons stated above, we AFFIRM the District Court’s dismissal of the
Complaint, VACATE the dismissal with prejudice, and REMAND the case to the
District Court for further proceedings consistent with this Summary Order.
FOR THE COURT:
Catherine O’Hagan Wolfe
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