United States District Court, E.D. New York
SUSAN MOSES, on behalf of herself and all others similarly situated, Plaintiff,
APPLE HOSPITALITY REIT INC., GLADE M. KNIGHT, BRYAN PEERY, KENT COLTON, GLENN BUNTING, JR., RONALD A. ROSENFELD, ANTHONY FRANCIS KEATING, III, LISA B. KERN, BRUCE H. MATSON, MICHAEL S. WATERS, and ROBERT M. WILY; Defendants.
MEMORANDUM & ORDER
DORA L. IRIZARRY, District Judge.
Plaintiff Susan Moses ("Plaintiff") filed the instant action against defendants Apple Hospitality REIT Inc. ("Apple Hospitality"), Glade M. Knight, Bryan Peery, Kent Colton, Glenn Bunting, Jr., Ronald A. Rosenfeld, Anthony Francis Keating, III, Lisa B. Kern, Bruce H. Matson, Michael S. Waters, and Robert M. Wily (the "Individual Defendants") (Apple Hospitality and the Individual Defendants are referred to collectively as "Defendants"), alleging various claims against Defendants arising out of Defendants' creation and management of a Dividend Reinvestment Program ("DRIP") for Apple Hospitality's shareholders. ( See First Am. Compl. ("FAC"), Dkt. Entry No. 9.) Defendants move to strike portions of the FAC pursuant to Rule 12(f) of the Federal Rules of Civil Procedure, and to dismiss the FAC under Rule 12(b)(6) of the Federal Rules of Civil Procedure. ( See Mem. of L. in Supp. of Defs.' Mot. to Dismiss ("Defs.' Mem."), Dkt. Entry No. 13.) Plaintiff opposes and moves for leave to amend the complaint. ( See Pl.'s Opp'n, Dkt. Entry No. 14.)
For the reasons set forth in greater detail below, Defendants' motion is to strike is denied. Defendants' motion to dismiss is granted. Plaintiff's motion for leave to amend is granted in part and denied in part.
Plaintiff filed this action on behalf of herself and all then-existing and former shareholders of Apple Hospitality's REITs Seven and Eight, who purchased shares of REITs Seven and Eight under the DRIP between July 17, 2007 and February 12, 2014. (FAC ¶ 1.) The gist of the FAC is that Plaintiff and her purported class members "purchased shares in connection with the DRIP [that] were set unilaterally by Defendants who represented that the REITs were being sold at fair market value, while ignoring both internal and third-party reports that the actual value of these shares was much less." (Id. at ¶ 3.) The S-3 public filings that created the DRIP ("Forms S-3"), indicated that shares of Apple Hospitality's REITs Seven and Eight would be priced by one of two methods: "(a) the most recent price at which an unrelated person had purchased our units represents the fair market value of our units or, if the price is not indicative of fair value then; (b) in its good faith judgment, our board determines that there are other factors relevant to such fair market value." (Id. at ¶ 4 (quotation marks omitted).) Plaintiff alleges that Apple Hospitality ignored these metrics in setting the share price. (Id. at ¶¶ 5-6.) The FAC cites to, and at times quotes from, a February 12, 2014 Order Instituting Cease and Desist Proceedings by the Securities and Exchange Commission ("SEC") against Apple Hospitality that was entered into by the parties during litigation of the case before the SEC captioned, In the Matter of Apple REIT Six Inc., et al., Admin. Proc. No. 3-15750 ("SEC Order"). (FAC ¶¶ 8-12, 66-74.)
Upon learning of the alleged improprieties regarding share pricing, Plaintiff filed the instant action against Apple Hospitality and the Individual Defendants, all of whom were officers or directors of Apple Hospitality. (Id. at ¶¶ 18-27.) In the FAC, Plaintiff asserts claims for breach of fiduciary duty, unjust enrichment, constructive trust, and, in the alternative, breach of contract. (Id. at ¶¶ 87-118.)
I. Motion to Strike
Defendants' ask the Court to strike any portion of the FAC that cites to or relies on the SEC Order on the ground that such consent judgments cannot be used as evidence in a subsequent litigation, and, thus, are immaterial and may not form the basis for any subsequent complaint. (Defs.' Mem. at 5-7.) Under Rule 12(f) of the Federal Rules of Civil Procedure, "[t]he court may strike from a pleading... any redundant, immaterial, impertinent, or scandalous matter." Fed.R.Civ.P. 12(f). The Second Circuit has cautioned that "courts should not tamper with the pleadings unless there is a strong reason for so doing." Lipsky v. Commonwealth United Corp., 551 F.2d 887, 893 (2d Cir. 1976). The Second Circuit has emphasized further that Rule 12(f) is "designed for excision of material from a pleading, not for dismissal of claims in their entirety." Day v. Moscow, 955 F.2d 807, 811 (2d Cir. 1992) (citation omitted). Notwithstanding the Second Circuit's caution to avoid tampering with complaints, in Lipsky, the Circuit struck portions of the complaint at issue that referenced material contained in an earlier enforcement proceeding. See Lipski, 551 F.2d at 892-94 (affirming district court's decision striking portions of a complaint that referenced a consent judgment). In doing so, the Circuit explained, "we hold that neither a complaint nor references to a complaint which results in a consent judgment may properly be cited in the pleadings under the facts of this case. " Lipsky, 551 F.2d at 893 (emphasis added).
Defendants tether their motion to strike to the Lipsky holding, which some courts have read to require courts to strike as immaterial any "references to preliminary steps in litigations and administrative proceedings that did not result in an adjudication on the merits of legal or permissible findings of fact." In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., 218 F.R.D. 76, 78 (S.D.N.Y. 2003); accord Loreley Fin. (Jersey) No. 3 Ltd v. Wells Gargo Secs. LLC, 2013 WL 1294668, at *14 (S.D.N.Y. Mar. 28, 2013) ("However, SEC settlements and consent judgments are generally not admissible as evidence and thus are not a proper basis for a complaint." (citing Lipsky, 551 F.2d at 891-94)). Other courts have rejected such a broad reading of Lipsky, noting that "[a] close reading of Lipsky reveals that it does not mandate the elimination of material from a complaint simply because the material is copied from another complaint." VNB Realty, Inc. v. Bank of Am. Corp., 2013 WL 5179197, at *3 (S.D.N.Y. Sept. 16, 2013) (denying motion to strike); accord In re Bear Stearns Mort'g Pass-Through Certs. Litig., 851 F.Supp.2d 746, 768 n.24 (S.D.N.Y. 2012) (rejecting defendants' argument that Lipsky mandates that courts strike portions of consent judgments from subsequent complaints in favor of a case-by-case approach as "[n]either Circuit precedent nor logic supports such an absolute rule"). The Court declines to wade into this debate as this action can be resolved on other, well settled grounds. Accordingly, Defendants' motion to strike is denied.
II. Motion to Dismiss
A. Legal Standards
Under Rule 8(a) of the Federal Rules of Civil Procedure, pleadings must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Pleadings are to give the defendant "fair notice of what the claim is and the grounds upon which it rests." Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 346 (2005) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957), overruled in part on other grounds by Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)). "The pleading standard Rule 8 announces does not require detailed factual allegations, ' but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555). "A pleading that offers labels and conclusions' or a formulaic recitation of the elements of a cause of action will not do.'" Id. (quoting Twombly, 550 U.S. at 555)).
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a defendant may move, in lieu of an answer, for dismissal of a complaint for "failure to state a claim upon which relief can be granted." To resolve such a motion, courts "must accept as true all [factual] allegations contained in a complaint, " but need not accept "legal conclusions." Iqbal, 556 U.S. at 678. For this reason, "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice" to insulate a claim against dismissal. Id. "[A] complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'" Id. (quoting Twombly, 550 U.S. at 570). Notably, courts may only consider the complaint itself, documents that are attached to or referenced in the complaint, documents that the plaintiff relied on in ...