On October 14, 2020, Judge Alison J. Nathan of the United States District Court for the Southern District of New York dismissed with prejudice a putative class action asserting claims under the Securities Exchange Act of 1934 against a lending company and certain of its executives. Burr v. Equity Bancshares, Inc., No. 19-cv-4346 (AJN), slip op. (S.D.N.Y. Oct. 14, 2020). Plaintiffs alleged that the company failed to disclose problems with its largest credit relationship—involving two companies that ultimately declared Chapter 11 bankruptcy—and that its loan loss reserves in its disclosures to the SEC were false and misleading. The Court held that plaintiffs failed to adequately allege any actionable misstatement or omission.
With respect to allegations regarding the loan loss reserves, the Court explained that a company's estimate of necessary loan loss reserves is a statement of opinion. Therefore, such statements can be actionable under the securities laws only if they are subjectively false or if omitted factual information makes the statement misleading to a reasonable investor; such statements are not misleading, however, simply because a lender fails to disclose facts that cut against its assessment. Id. at 8. The Court held that plaintiffs failed to adequately allege subjective falsity, because there was another explanation for the company's statements that was at least as plausible—that the company truly believed it would recoup the value of its loans through liquidation of the companies' assets. Id. at 9. The Court also observed that the company had received meaningful concessions from the borrowers (in the form of individual promissory notes) that supported a belief that the loan value would be recouped. Id. at 9-10. The Court further concluded that the company's loan loss reserves did not imply specific facts about the company's knowledge or the borrowers' cashflow, and that the company's disclosures described an open-ended process involving various factors management could consider in setting loss reserves. As a result, a reasonable investor would understand that management might determine a loan was not impaired even if the borrower had cashflow problems because other factors might cause management to believe that repayment was likely. Id. at 10-11.
Plaintiffs also complained about statements that the company made suggesting it would never compromise its "financial integrity," or that it "set the standard for best practices in risk management techniques." However, the Court determined these statements were vague non-actionable puffery, because they merely touted the company's business philosophy or performance in the most general terms. Id. at 12.
Finally, the Court rejected plaintiffs' argument that it was misleading for the company to state on an earnings call that it had downgraded a credit relationship to "watch" and "substandard" for unspecified $19 million and $9 million loans, without specifically stating that the downgrade related to the company's "largest single credit relationship" and that the borrowers had entered Chapter 11 bankruptcy. Id. at 13. The Court held these omissions did not render the company's statement misleading, noting that details disclosed in the company's annual report, such as the amount of its classified and unclassified loans, could have allowed an investor to determine how large a share the newly downgraded loans were of the corporation's unclassified, classified, or total loans. Id. The Court also concluded that the company's statement was not misleading for not specifically referencing the bankruptcy proceeding, particularly as the company stated that it did not anticipate a credit impairment because the borrower was working to restructure or liquidate its business. Id. at 13.
As plaintiffs had already amended their complaint once and failed to show how further amendment could cure the defects in the complaint, the Court concluded that any further effort to amend would be futile and dismissed the action with prejudice. Id. at 14-15.
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