Georgia Court of Appeals Affirms Dismissal of 'Holder Claim'
In the recent decision of Anderson v. Daniel, the Georgia Court of Appeals affirmed dismissal of securities misrepresentation claims because they were “holder claims” and the complaint did not allege “specific reliance” on “direct, face-to-face or telephone misrepresentations”; the “publicly disseminated” misrepresentations allegedly relied upon by plaintiffs did not suffice. The case is important because by actually dismissing the claims it goes a step further than the Georgia Supreme Court did in Holmes v. Grubman, which addressed holder claims but was an advisory opinion.
Plaintiffs make “holder claims” when they allege they have been damaged by their decision to forbear from selling a security (in other words, to hold the security) in reliance on the defendant’s misrepresentation or omission. Plaintiffs who make such claims do not allege that a misrepresentation or omission induced any purchase or sale. Under federal law, courts interpreting Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), have held that holder claims are not actionable pursuant to Rule 10b-5. The Georgia Supreme Court first addressed holder claims in Holmes, which was a certified question from the United States Court of Appeals for the Second Circuit. The court held that Georgia law permitted holder claims, but only where there is “direct communication” of a misrepresentation to shareholders and “specific reliance” by the shareholders on the misrepresentation. Holmes, 691 S.E.2d 196, 199-200 (Ga. 2010).
Anderson, No. A11A2106, __ S.E.2d __, 2012 WL 414465, (Ga. App. Feb. 10, 2012), is the first reported Georgia decision to address holder claims since Holmes. In Anderson, shareholders in a bank sued the bank’s directors. The complaint alleged that (i) plaintiffs purchased shares of the bank’s stock; (ii) the bank was later warned regarding its adverse financial condition; (iii) the directors failed to timely disclose this information and misrepresented the bank’s financial condition as sound; (iv) the directors’ misrepresentations and nondisclosures induced plaintiffs to hold their stock; (v) the bank later failed and the stock became worthless. The trial court dismissed the complaint for failure to state a claim, and the Court of Appeals affirmed.
The complaint stated a holder claim that could not succeed because it did not allege direct communication and specific reliance. As to the direct communication requirement, the court cited Newby v. Enron Corp., 490 F. Supp. 2d 784 (S.D. Tex. 2007), and Goldin v. Salomon Smith Barney, Inc., 994 So. 2d 517 (Fla. App. 2008), in stating that such communications must involve “personal contact between the plaintiff and the defendant, such as direct, face-to-face or telephone misrepresentations,” and “publicly disseminated” misrepresentations do not suffice. Anderson, 2012 WL 414465 at *2 (internal quotation marks omitted). As to the specific reliance requirement, the court cited Holmes in stating that “[t]he plaintiff must allege actions, as distinguished from unspoken and unrecorded thoughts and decisions, that would indicate that the plaintiff actually relied on the misrepresentations.” Id. The complaint in Anderson alleged that misrepresentations were made in communications to all of the bank’s shareholders, and said nothing about what plaintiffs would have done had they known the truth about the bank’s financial condition.
Anderson’s narrow interpretation of the direct communication requirement will be useful in defeating any holder claim that relies upon publicly disseminated statements. Furthermore, because Anderson (unlike Holmes) actually dismissed plaintiffs’ claims, it should be cited along with Holmes in defense of any Georgia claim based on forbearance from selling a security.