New York’s Southern District Dismisses Alleged Class Action Against Loan Company for Failure to Adequately Allegate Misrepresentation | Shearman & Sterling LLP

On October 14, 2020, Judge Alison J. Nathan of the United States District Court for the Southern District of New York, prejudicially dismissed a putative class action lawsuit asserting claims under the Securities Exchange Act of 1934 against a company loan and some of its leaders. Burr v. Equity Bancshares, Inc., n ° 19-cv-4346 (AJN), op. (SDNY October 14, 2020). The plaintiffs alleged that the company did not disclose issues with its larger credit relationship – involving two companies that ultimately filed for Chapter 11 bankruptcy – and that its loan loss reserves in its SEC disclosures were false and misleading. The court ruled that the plaintiffs failed to adequately allege any actionable inaccuracy or omission.

With respect to the allegations regarding loan loss reserves, the Court explained that a company’s estimate of required loan loss reserves is a statement of opinion. Therefore, such statements can only give rise to action under securities laws if they are subjectively false or if factual information omitted makes the statement misleading to a reasonable investor; these statements are not, however, misleading, simply because a lender fails to disclose facts that go against their valuation. Identifier. at 8. The court ruled that the plaintiffs did not sufficiently allege the subjective falsity, as there was another explanation for the company’s statements that was at least as plausible – that the company actually believed it would recover the value. of its loans through the liquidation of companies. assets. Identifier. at 9. The Court also observed that the company had received significant concessions from borrowers (in the form of individual promissory notes) which supported the belief that the value of the loan would be recovered. Identifier. at 9-10. The court further found that the company’s loan loss reserves did not involve specific facts about company knowledge or borrowers’ cash flows, and that the information provided by the company described an open process involving various factors that management may take into account in establishing loss reserves. Therefore, a reasonable investor would understand that management can determine that a loan is not impaired even if the borrower has cash flow problems because other factors may cause management to believe that repayment is probable. Identifier. at 10-11.

Complainants also complained about statements by the company suggesting that it would never compromise its “financial integrity” or that it “sets the standard for best practice in risk management techniques”. However, the court determined that these statements were vague, non-prosecutable antics, as they only bragged about the business philosophy or performance of the company in the most general terms. Identifier. at 12.

Finally, the Court rejected the complainants’ argument that it was misleading for the company to state on an earnings call that it had downgraded a credit relationship to “to watch” and to “substandard”. for unspecified loans of $ 19 million and $ 9 million, without specifically indicating that the downgrade related to the company’s “greatest single credit relationship” and the fact that the borrowers had filed for bankruptcy under of chapter 11. Identifier. at 13. The Court held that these omissions did not make 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 enabled a investor to determine the share of the new downgraded loans were unclassified, ranked or total loans of the company. Identifier. The court also found that the company’s statement was not misleading as it did not specifically refer to the bankruptcy proceeding, especially since the company said it did not anticipate credit impairment because the borrower was in the process of restructuring or liquidating his business. Identifier. to 13.

As the plaintiffs had already amended their complaint once and had failed to demonstrate how a further modification could remedy the flaws in the complaint, the court concluded that any further effort to modify would be in vain and dismissed the action with prejudice. Identifier. at 14-15.

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Burr v. Equity Bancshares, Inc.

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