On August 24, 2017, Judge Alison J. Nathan of the United States District Court for the Southern District of New York dismissed with prejudice a putative securities class action against hotel chain La Quinta Holdings, Inc. (“La Quinta”), certain of its officers and directors, and La Quinta’s majority shareholder. Police and Fire Retirement System of the City of Detroit v. La Quinta Holdings, Inc. et al, No. 16-cv-3068 (S.D.N.Y. Aug. 24, 2017). Plaintiff claimed that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, based on various alleged misstatements and omissions that allegedly hid from the public operational and other difficulties facing La Quinta, including at the time of La Quinta’s secondary public offerings in November 2014 and April 2015. The Court dismissed the second amended complaint in its entirety with prejudice, holding that the plaintiff failed to adequately plead a material misrepresentation or omission.
The Court considered four categories of purported misstatements or omissions alleged by the plaintiff: (i) failure to disclose the impact that declining oil prices were having on the hotel chain’s business; (ii) failure to disclose the need for renovations and the lack of necessary repairs of the hotels; (iii) failure to disclose disruptions arising from La Quinta’s transition of its call center to a new provider; and (iv) representations concerning La Quinta’s sales of certain hotels as a “win-win-win” and as providing for “built-in gains,” when the transactions resulted in losses and impairment write-downs.
The Court addressed each of these categories of alleged misrepresentations and omissions in turn. First, the Court concluded that La Quinta’s public disclosures, combined with information available in the public domain, adequately apprised investors of the risks arising from the decline in oil prices. The Court found that La Quinta’s disclosure that “given [its] concentration of hotels in Texas, a downturn in the oil and gas industry could have an adverse effect on our business,” combined with the publicly available oil price information, was sufficient to warn the plaintiff, and other investors, of any risks.
The Court next determined that La Quinta had no affirmative duty or obligation to disclose its need for renovations and, in any event, had specifically disclosed in certain documents — of which the Court took judicial notice — that renovations were required “cyclically” and were necessary “from time to time.” The Court rejected the plaintiff’s argument that La Quinta’s 2016 creation of an “accelerated renovation program” should have been disclosed, finding instead that defendants’ disclosures that repairs would be needed within a three-year period were sufficient.
The Court similarly found that La Quinta had no affirmative duty to disclose any issues with its call center transition. The Court recognized that when a corporation chooses to speak it has a duty to be both accurate and complete, but noted that the plaintiff had not identified any affirmative statement that defendants made that would be misleading without further disclosures related to the call center. The Court further found that, in any event, La Quinta had, in fact, made sufficient disclosures regarding its call center transition, and that the plaintiff’s argument that those disclosures should have been made earlier was insufficient to state a claim, as “the timing of disclosure is a matter for the business judgment of the corporate officers entrusted” with management within the disclosure requirements.
Finally, the Court rejected the plaintiff’s contention that La Quinta’s chief executive officer’s characterization of a hotel sale as a “win-win-win” — even though the sale subsequently resulted in a loss — was misleading. The Court held that the statement was an expression of the CEO’s expectations for the sale and not an objective fact, and was therefore an opinion, for which a defendant could be liable only if the plaintiff demonstrated that the speaker did not hold that belief, the supporting facts supplied were untrue, or information that made the statement misleading was omitted. The Court found that none of these factors were adequately alleged, noting among other things that the full context of the quote made clear that the sale was not purported to be a “win” due to profit, but rather because it freed up capital that could be used elsewhere. The Court also found that another purported misstatement — that a subset of hotels, being considered for sale, had “built-in gains” — was not misleading when considered in context, because the statement was in response to a general question about hypothetical tax consequences of a sale.
Accordingly, the Court found that the plaintiff failed to allege an actionable misstatement or omission and, after noting that the plaintiff had been given notice and an opportunity to amend its complaint and that further amendment would be futile, dismissed all of the plaintiff’s claims with prejudice.
The decision provides a thorough and methodical example of the elements and standards which a plaintiff must meet to adequately allege material misstatements or omissions when purporting to bring federal securities claims, and the various factors that a court will examine, including: the availability of publicly available information; the full context of alleged false or misleading statements; whether a defendant had a duty to disclose the allegedly omitted information; and when statements of opinion may be actionable under Omnicare and its progeny.