This case arises from the housing market crash. First Community Bank had purchased asset-backed securities primarily in the form of collateralized debt obligations (CDOs) and residential mortgage-backed securities (RMBSs) from a number of entities including First Tennessee Bank, Morgan Keegan & Company, Merrill Lynch, Pierce, Fenner & Smith, Inc., Bear Stearns & Company and Sun Trust Robinson Humphrey, Inc. and Keefe, Bruyette & Woods, Inc. The sale of each security was conditioned upon the receipt of a minimum rating, and all sales received the rating. While initially First Community Bank profited from these transactions, in August of 2008, after Moody’s downgraded the rating on a number of the investments, the bottom fell out. First Community Bank lost nearly 100 million dollars.
Trying to recoup some of its massive losses, First Community sued everyone involved: the rating agencies, the placement agents and the issuing entities. In its 207 page complaint, which was later amended and expanded to 260 pages, First Community Bank alleged fraud, constructive fraud, negligent misrepresentation, civil conspiracy, unjust enrichment and a violation of the Tennessee Securities Act. Procedurally, the case took some twists and turns. The defendants initially moved to dismiss on multiple grounds: statute of limitations, statute of repose, failure to plead with specificity, the losses were caused by general market conditions and, for some defendants, lack of personal jurisdiction. The trial court granted the motions to dismiss and First Community Bank appealed. The Court of Appeals upheld the dismissal of some of the defendants based on lack of personal jurisdiction. As to the other defendants, the Court of Appeals found the trial court had considered matters outside the pleadings thereby converting the motions to dismiss into motions for summary judgment. As such, First Community Bank was entitled to discovery. The remaining defendants appealed to the Tennessee Supreme Court who found the Court of Appeals had failed to consider the trial court’s alternative basis for dismissal i.e., the failure to state a claim upon which relief may be granted (other than statute of limitations or statute of repose). Accordingly, the case was remanded to the Court of Appeals for consideration of that lone issue. The Court of Appeals ultimately reversed the trial court’s decision on that issue and remanded for further proceedings.
Given the issue on appeal, the Court of Appeals’ analysis was limited to whether the complaint was legally sufficient as opposed to the strength of the plaintiff’s proof. Ultimately, after construing the complaint “liberally and presuming all factual allegations to be true and giving the plaintiff the benefit of all reasonable inferences”, the Court of Appeals concluded the amended complaint was sufficient to survive the motions to dismiss.
This 25-page opinion is detailed and largely case specific. However, if you have a case involving fraud, constructive fraud, negligent misrepresentation, civil conspiracy, unjust enrichment or the Tennessee Securities Act, the decision gives a nice recitation on the law for each claim. It also provides insight into the level of specificity and detail required to properly state a claim. Notably, the fact that the complaint allegations against multiple defendants are similar or even a “verbatim recitation of the claim against the preceding defendant” does not, in and of itself, mean the claim should be dismissed for failure to state a claim.