2nd Circuit Gives Second Bite Out Of Apple REIT Class Action

April 24, 2014

Few financial products have proven as controversial as Real Estate Investment Trusts, and few REITS have grabbed their share of negative headlines as much as those bearing the "Apple" name.  Last year, it appeared that the contentious Apple REIT class action had finally died a tortured death. Now a zombie has arisen to claim that life but, frankly, there just doesn't appear to be all that much meat left on the old litigation bones and the original plaintiffs may have been given a second life but without much reason to live. Still -- litigators and class actions being what they are, the upcoming second round may still offer some entertainment.

EDNY Dismissal

As the BrokeAndBroker Blog reported in April 2013, in a dramatic Eastern District of New York ("EDNY") Opinion by Judge Matsumoto, the Apple REITs class action Defendants' Motion to Dismiss was granted and David Lerner Associates and the Apple REITs emerged victorious in this contentious and high-profile class action.  Read the Memorandum and Order. In Re Apple REITs Litigation (EDNY,11-CV-2919, April 4, 2013). As 
EDNY noted on page 44 of its  Opinion:

Here, however, Plaintiffs have failed to proffer an actionable theory of loss.

In sum, Plaintiffs' belabored Complaint appears only to confirm that the Apple REITs are currently functioning in exactly the manner that was anticipated and disclosed in the REITs' prospectuses and other offering documents. . .

In similarly stark and dismissive language, EDNY stated on page 47 of its Opinion:

As the court previously discussed, Plaintiffs have failed to sufficiently plead any damages as a result of Defendants' purported misrepresentations or omissions with respect to the Apple REITs. To the contrary, the Complaint alleges that Plaintiffs have in fact consistently earned money from the Apple REITs. (See Compl. ¶ 183 (discussing the REITs' "consistent 7-8% distributions").) Accordingly, Plaintiffs' claim for common law breach of fiduciary duty must be and is dismissed.

Second Circuit

Plaintiffs-Appellants appealed to the Second Circuit  from the April 11, 2013, EDNY dismissal of their class action. Berger v. Apple REIT Ten, Inc. (2nd Circuit, Summary Order, 13-1395, April 23, 2014).

Appellants argued that the lower court had erred in dismissing their Securities Act and state securities law claims on the ground that the complaint failed to state any actionable misstatements or omissions. The Circuit concurred with EDNY's finding that none of the allegedly misleading statements were actionable and affirmed the dismissal of the plaintiffs' state and federal securities law claims.

As to Appellants' contention that EDNY failed to address their allegation that the Apple REITs' offering documents were misleading because the defendants failed to follow their stated policy concerning distributions to shareholders, the Circuit also sustained the lower court.

Although the Circuit found that EDNY had correctly determined that the offering documents did not include any material misstatements or omissions, the higher court disagreed that the Complaint had failed to allege that the plaintiffs have suffered a cognizable loss. The EDNY found the fact that investors had received monthly distribution payments and had never received less than $11 per share; and, as such, the lower court deemed such circumstances as precluding a finding of loss. In contradistinction, the Circuit noted that beyond the pleading of an out-of-pocket loss:

the lack of a public market, and thus a market price, for the Apple REIT shares does not prevent the plaintiffs from showing that the value of the shares at the time of their lawsuit was less than the $11 per share they initially paid. As we have held, "[t]he value of a security is not unascertainable simply because it trades in an illiquid market and therefore has no ‘actual market price.' Indeed, valuing illiquid assets is an important (and routine) activity for asset managers . . . ." Id. at 167. Here, the plaintiffs have alleged facts-including recent statements by an independent market participant indicating a market value of Apple REIT shares less than $11-that plausibly suggest a decline in the true value of Apple REIT shares. Thus, the district court erred in finding that the plaintiffs failed to allege a cognizable loss.

The Circuit affirmed in part and vacated and remanded in part for further proceedings consistent with its Order.