Aiello v. Brown

21-0987-cv

Aiello v. Brown

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A

SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED

BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1.

WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY

MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE

NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY

OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated Term of the United States Court of Appeals for the Second Circuit, held at the

Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York on the

24th day of November, two thousand twenty one.

Present: ROSEMARY S. POOLER,

RICHARD C. WESLEY,

JOSEPH F. BIANCO,

Circuit Judges.

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JOSEPH AIELLO, MATTHEW DRAPKIN, ESTATE OF

DONALD DRAPKIN, MICHAEL J. PALMER, MICHAEL

J. PALMER AND VIRGINIA A. PALMER LIVING TRUST,

ADAM BERK, ROBERT SCHECTERSON, AMY GRABINO,

ANTHONY CAVALIERI, MELVIN GOLDBERG,

LAWRENCE KAYE, ANN KAYE, LAWRENCE G. KAYE

AND H. ANNE KAYE 1996 REVOCABLE LIVING TRUST,

TERRY WEBER, JOHN HELM, BRIAN KAFFEE, STUART

KAFFEE, KAFFEE CO. LLC, JASON PALMER, PAUL

SWISTAK, JAMES TISONY, DAVID SNIDER,

Plaintiffs-Appellants,

v. 21-0987-cv

HOWARD BROWN, MICHAEL BROWN, HITOUCH

NASHVILLE LLC, ARROWMARK COLORADO

HOLDINGS, LLC, DAVID CORKINS, STEVEN M.

GOLDMAN, JOHN EISINGER, MICHAEL NOVOSELLER,

SANJAI BHONSLE, KAREN REIDY, DANA STAGGS,

JOHN FRISK, ANDREW KOHN, MICHAEL CORNELL,

LES GOODMAN, ANDREW KOVACH, JAY NADEL,

RANDI SIDGMORE, BROWN (RI) INVESTMENT

COMPANY, LLC,

Defendants-Appellees. 1

_____________________________________________________

Appearing for Appellants: Andrew St. Laurent, Harris St. Laurent & Wechsler LLP, New

York, N.Y.

Appearing for Appellees: Adam H. Offenhartz, Gibson, Dunn & Crutcher LLP (Tyler H.

Amass, on the brief), for Defendants-Appellees ArrowMark

Colorado Holdings, LLC, HiTouch Nashville, LLC, Sanjai

Bhonsle, David Corkins, John Eisinger, Michael Novoseller, Karen

Reidy, and Dana Staggs, New York, N.Y.

Steven M. Kaplan, Rosenfeld & Kaplan, L.L.P. (Tab K. Rosenfeld,

on the brief), for Defendants-Appellees Howard Brown, Michael

Brown, Steven M. Goldman, John Frisk, Andrew Kohn, Michael

Cornell, Les Goodman, Andrew Kovach, Jay Nadel, and Randi

Sidgmore, New York, N.Y.

Appeal from the United States District Court for the Southern District of New York (Torres, J.).

ON CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, ADJUDGED,

AND DECREED that the order of said District Court be and it hereby is AFFIRMED.

Plaintiffs appeal from the March 31, 2021 order of the United States District Court for the

Southern District of New York (Torres, J.), granting Defendants’ motions to dismiss. We assume

the parties’ familiarity with the underlying facts, procedural history, and specification of issues

for review. Because the district court only considered the issue of statutory standing, our analysis

here will focus on the same.

This Court reviews de novo a district court’s Rule 12(b)(6) dismissal. Trs. of Upstate N.Y.

Eng’rs Pension Fund v. Ivy Asset Mgmt., 843 F.3d 561, 566 (2d Cir. 2016). Dismissal is

warranted unless the complaint “contain[s] sufficient factual matter, accepted as true, to ‘state a

claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A complaint must contain more than

“conclusory statements” or “naked assertions devoid of further factual enhancement.” Id.

(cleaned up). When a “complaint pleads facts that are merely consistent with a defendant’s

liability, it stops short of the line between possibility and plausibility of entitlement to relief.” Id.

(citation and internal quotation marks omitted).

To bring a claim under the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., a

plaintiff must meet the requirement of “statutory standing,” which is “simply a question of

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The Clerk of the Court is directed to amend the caption as above.

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whether the particular plaintiff ‘has a cause of action under the statute.’” Am. Psychiatric Ass’n

v. Anthem Health Plans, Inc., 821 F.3d 352, 359 (2d Cir. 2016) (quoting Lexmark Int’l, Inc. v.

Static Control Components, Inc., 572 U.S. 118, 128 (2014)). Although Section 10(b) of the Act

does not explicitly provide a right of action for civil remedies, the Supreme Court endorsed an

implied private right of action in Blue Chip Stamps v. Manor Drug Stores, limiting potential

plaintiffs under Section 10(b) to “purchaser[s] or seller[s] of securities.” 421 U.S. 723, 730, 749

(1975). In determining what types of transactions are considered a purchase or sale of securities,

the Blue Chip Stamps Court stated:

A contract to purchase or sell securities is expressly defined by [Section] 3(a) of

the 1934 Act, 15 U.S.C. § 78c(a), as a purchase or sale of securities for the purposes

of that Act. Unlike respondent, which had no contractual right or duty to purchase

Blue Chip’s securities, the holders of puts, calls, options, and other contractual

rights or duties to purchase or sell securities have been recognized as ‘purchasers’

or ‘sellers’ of securities for purposes of Rule 10b-5, not because of a judicial

conclusion that they were similarly situated to ‘purchasers’ or ‘sellers,’ but because

the definitional provisions of the 1934 Act themselves grant them such a status.

Id. at 750–51 (footnotes omitted).

Plaintiffs concede they did not exercise their preemptive rights to purchase securities

from any issuance of securities following their initial investment. Therefore, the issue here is

whether Plaintiffs, as holders of preemptive rights, qualify as purchasers or sellers of securities

such that they have statutory standing under Section 10(b) and Rule 10b-5.

The district court held that Plaintiffs have not demonstrated their statutory standing. We

agree. Plaintiffs’ preemptive rights are not securities as defined by the Securities Exchange Act:

“The term ‘security’ means any note, stock, treasury stock, security future, security-based swap,

bond, debenture, certificate of interest or participation in any . . . put, call, straddle, [or] option . .

. .” 15 U.S.C. § 78c(10). The definitional provisions make no mention of preemptive rights.

Plaintiffs argue that their preemptive rights are not so analytically different than the holder of an

option, and therefore, they should be considered similarly. But “the definitional provisions of the

1934 Act themselves grant” options holders statutory standing, not a “judicial conclusion that

they were similarly situated to purchasers or sellers.” Blue Chip Stamps, 421 U.S. at 751

(internal quotation marks omitted).

The district court correctly concluded that Plaintiffs lacked a contractual right to purchase

or sell a security because they did not “incur irrevocable liability.” Absolute Activist Value

Master Fund Ltd. v. Ficeto, 677 F.3d 60, 67 (2d Cir. 2012) (“[A] securities transaction occurs

when the parties incur irrevocable liability.”). Here, Plaintiffs were offered an opportunity to

purchase shares when Defendants transmitted the preemptive offer that Plaintiffs refused. But a

transaction does not occur until the parties are committed to one another. “‘Commitment’ is a

simple and direct way of designating the point at which, in the classic contractual sense, there

was a meeting of the minds of the parties; it marks the point at which the parties obligated

themselves to perform what they had agreed to perform even if the formal performance of their

agreement is to be after a lapse of time.” Id. at 68. The preemptive offer made to Plaintiffs was

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simply that—an offer. See Brown (RI) Investment Company LLC Fourth Amended & Restated

Operating Agreement §§ 4.3(a), App’x at 334 (“If the Board of Managers decides to cause the

Company to issue additional Units or other equity securities of any kind or nature . . . each

Common Member shall first be offered the opportunity to subscribe for such issuance of Equity

Securities . . . .” (emphasis added)).

We have considered the remainder of the Plaintiffs’ arguments and find them to be

without merit. Accordingly, the order of the district court hereby is AFFIRMED.

FOR THE COURT:

Catherine O’Hagan Wolfe, Clerk

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