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Axar Master Fund, Ltd. v. Bedford

United States District Court, S.D. New York

March 29, 2018

AXAR MASTER FUND, LTD. and MAN GLG SELECT OPPORTUNITIES MASTER LP, Plaintiffs,
v.
BRYAN K. BEDFORD, et al, Defendants.

          Geoffrey Coyle Jarvis Nathan Hasiuk Sharan Nirmul Kessler Topaz Meltzer & Check, LLP Attorneys for Plaintiffs

          Jay B. Kasner Scott D. Musoff Tansy Woan Skadden, Arps, Slate, Meagher & Flom LLP Attorneys for Defendants

          MEMORANDUM OPINION

          LEWIS A. KAPLAN, United States District Judge

         This is a securities fraud case against officers and directors of Republic Airways Holdings Inc. ("Republic"). The matter is before the Court on defendants' motion to dismiss the complaint pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) [DI 26]. Defendants' motion is granted.

         Facts

         The following facts are alleged in the complaint and the documents referenced therein, [1] the truth of which the Court is bound to assume when considering a motion to dismiss.[2]

         A. The Parties

         Plaintiffs Axar Master Fund, Ltd. ("Axar") and Man GLG Select Opportunities Master LP ("Man GLG") are investment funds and minority shareholders of Republic, [3] which is a regional airline that carries passengers for United Airlines, Inc. ("United"), Delta Air Lines, Inc. ("Delta"), and American Airlines Group, Inc. ("American").[4] It owns and operates a fleet of aircraft and provides scheduled regional passenger services through fixed fee code share agreements with United, Delta, and American (together, the "Codeshare Partners").[5] These code share agreements and business relationships with Codeshare Partners generate substantially all of Republic's operating revenue.[6]

         During the relevant time period, defendant Bryan K. Bedford was the chairman of Republic's board of directors (the "Board") and Republic's president and chief operating officer. Joseph P. Allman was Republic's senior vice president and chief financial officer. Neal S. Cohen was the lead independent director of the Board. Robert L. Colin served as a director on the Board and chairman of the Board's audit committee. Daniel P. Garton and Mark L. Plaumann both served as directors and as members of the Board's audit committee.[7]

         B. Republic's Pilot Staffing Issues and Contract Dispute with Delta

         In early 2015, Republic began experiencing a shortage of qualified pilots as a result of new regulations concerning pilot qualifications and a dispute with its pilots' union, the International Brotherhood of Teamsters ("Teamsters").[8] The shortage was sufficiently dramatic that Republic approached its Codeshare Partners in early 2015 to discuss reducing the scheduled amount of flying hours under their respective code share agreements.[9] At the same time, Republic endeavored also to increase operational efficiency by phasing out smaller airplane types (specifically the ERJ-145 aircraft) from its fleet.[10]

         Delta early on rejected Republic's efforts to both reduce its flying hours and phase out its smaller aircrafts.[11] In January 2015, Republic proposed to Delta that, beginning in 2015, Republic no longer operate a full schedule of flights under its ERJ-145 Agreement with Delta. Delta did not agree that the pilot shortage excused Republic's performance under the ERJ-145 Agreement and rejected Republic's proposal.[12] Then, in February 2015, Republic announced plans to wind down its ERJ-145 operations after May 31, 2016, when its ERJ-145 Agreement with Delta was set to expire. Delta claimed a right to extend its agreement with Republic for another five years.[13]Finally, in April 2015, Republic demanded another significant reduction in scheduled flying hours, this time of its ERJ-170 and ERJ-175 aircrafts, for the months of June, July, and August 2015. Delta rejected this demand as well and claimed that Republic was in breach of the requirement under the ERJ-170/175 Agreement to maintain adequate pilot staffing levels at all times.[14]

         C. Initial Disclosures by Republic

         On May 8, 2015, Republic filed its first quarter Form 10-Q with the SEC. The Form, which was signed by Bedford, disclosed that:

"As a result of pilot supply constraints exacerbated by industry regulatory changes, our ongoing labor dispute and other factors, the Company's operational performance in 2015 has deteriorated. We have agreed with our [Codeshare] [P]artners to reduce schedules to improve our operational performance in the second half of 2015. We continue to work with our [Codeshare] [P]artners on these issues."[15]

         During an earnings call for the first quarter, which took place also on May 8, 2015, Bedford affirmed this point, stating:

"There's really no point in speculating as to whether or not our ongoing labor dispute is driving escalated levels of crew cancellations. Regardless, we are convinced that the most expedient way to get back to our historically high levels of performance is to reach a successful outcome at the bargaining table. Unfortunately, until this happens, we expect our operational reliability will remain challenged. And in light of that reality, we have asked our partners to reduce our levels of flying this summer. Thankfully, we're getting their support. We're grateful to our partners for their collaboration working with us during this challenging period."[16]

         During the same call, Bedford acknowledged also Delta's purported extension of the ERJ-145 Agreement. He stated that Delta's response had been "unexpected, " and that:

"In terms of the single fleet. . . that's still subject to . . . working through a minor, I think, scope related issue with Delta as a partner. So we're working through that right now, and again, I think there's collaboration there. Delta certainly understands that there's value in our fleet and operational simplification in terms of meeting their longer term needs for cost-effective reliable service."[17]

         D. Ongoing Pilot Shortages Lead to Delta Lawsuit

         The shortage of pilots worsened through the first half of 2015 so much so that Republic had to ask its Codeshare Partners for further reductions in flying hours.[18] Republic knew as early as August 2015 that it would have to ask for major concessions from its Codeshare Partners and compensate them accordingly.[19] Indeed, In Republic's second quarter Form 10-Q, filed on August 7, 2015, it stated:

"The Company has initiated discussions with its CPA partners to further reduce flying schedules during the second half of 2015 and early 2016. The reduced level of flying with our partners may result in adverse effects on our operating results."[20]

         Accordingly, at some point in August 2015, Republic informed Delta that it would not place into service at least two out of the nine additional ERJ-170 aircraft required under an amendment to the ERJ-170/175 Agreement.[21] Nonetheless, as of August 7, 2015, the company's leadership appeared optimistic. During the second quarter earnings call on August 7, 2015, one analyst, assuming that Republic was in breach of its code share agreements "based on [its] performance as of late, " asked whether any of Republic's major carriers had withheld any cash. Bedford responded that:

"We are not in breach on any of our agreements. We're not in default under any of the operational [sic], given the fact that we believe [sic] able to reach consensual understandings with the partners on some operational reductions over the course of the summer."

         During the same call, Allman reiterated the point. Referring to Republic's Codeshare Partners, he stated, "Everybody has been performing under the contract."[22]

         The company announced in September 2015 that it at last had reached a tentative agreement with the Teamsters.[23] By that time, however, Republic had begun negotiations with United to "comprehensively restructure the parties' relationship."[24] And, on October 5, 2015, Delta filed an action for breach of contract against Republic, alleging over $1 million in damages as a result of Republic's past and future staffing shortages because Delta had been forced to cancel flights and prevented from scheduling flights that it would have otherwise scheduled.[25]

         E. Republic's Disclosures in Response to the Delta Action

         Republic initially responded to Delta's lawsuit in a press release issued on October 7, 2015. It stated that Republic had been made aware of the complaint filed by Delta and that:

"The Company has not been served and has not received the full complaint and therefore cannot comment further on the matter at this time. Republic can confirm that the Company is not in breach of any of its capacity purchase agreements with any of its mainline partners, including both Delta Connection Agreements."[26]

         Republic subsequently made several statements asserting its belief that Delta's lawsuit was without merit.

         In a subsequent a press release issued on November 4, 2015, Republic stated, "We believe the allegations are unfounded and without merit."[27] The following day, Republic filed its Form 10-Q for the third quarter of 2015, in which it disclosed that:

"On October 5, 2015, Delta . . . filed suit against the Company alleging that the Company was in breach of its contractual obligations under both Delta Connection Agreements. Delta alleges, among other things, that Shuttle America breached the Agreements by failing to operate all of Delta's flights, and claims damages. We believe the allegations are unfounded and without merit and intend to pursue our rights, remedies and defenses in the litigation. Delta has withheld in excess of $10.0 million of contractual payments through September 30, 2015, which has resulted in past due receivables on the Company's balance sheet. The Company disputes Delta's right to withhold payments and intends to seek their recovery. The Company has deferred recognition of this revenue until this dispute can be resolved."[28]

         Republic addressed also Delta's purported extension of the ERJ-145 Agreement. It stated that:

"On February 26, 2015, Delta Air Lines purported to exercise a right to extend aircraft under the El45 code-share agreement from May 2016 to May 2021. The Company disputes the validity of the purported extension, which is contrary to the parties' previous communications and understanding. As the agreement does not contain any terms for an extension period, any such purported extension would be subject to mutual agreement on rates, terms, and conditions. No such mutual agreement has been reached and the Company believes that Delta has not made any good-faith efforts to engage in such discussions. Absent such an agreement it would expire by its terms on May 31, 2016."[29]

         F. The Bankruptcy Case

         Republic filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on February 25, 2016.[30] Bedford conveyed, both in a press release announcing the filing[31] and in a declaration filed with the bankruptcy court on the same day, [32] that the lawsuit with Delta was among the reasons that Republic had filed the petition. Bedford stated in the declaration that, "[a]lthough there was no merit to Delta's lawsuit, unfortunately, the existence of the litigation and the uncertainty of its resolution became an impediment to reaching resolutions with the other Codeshare Partners."[33]

         On March 24, 2016, Republic filed a motion in bankruptcy court for authorization to restructure its relationship with Delta and grant Delta an unsecured claim for $ 170 million "as part of a global resolution between Delta and Republic that include[d] both a settlement of the Delta Litigation . . . and the new agreements that [would] provide Republic with substantially enhanced economics."[34] Republic said in its motion that "[t]he proposed settlement [was] the product of extensive negotiations between Republic and Delta that began over four months ago."[35] The settlement was approved by the bankruptcy court[36] and then the district court over Axar's and Man GLG's objections.[37]

         Republic moved for approval of similar settlements with United on May 27, 2016 and American on September 2, 2016, which granted unsecured claims of $193 million[38] and $250 million, [39] respectively. Both settlements subsequently were approved.[40] They were reached in order to reimburse the Codeshare Partners for Republic's breaches of contract and to modify the business relationships between the parties.[41]

         G. The Complaint

         Plaintiffs filed this action on January 20, 2017. They assert securities and common law fraud claims against Bedford and Allman and control person liability against all defendants. Defendants move to dismiss the complaint for failure to plead with particularity and failure to state a claim.

         Discussion

         A. Pleading Standard

         To survive a motion to dismiss under Rule 12(b)(6), a plaintiff must allege "sufficient factual matter ... 'to state a claim to relief that is plausible on its face.'"[42] A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."[43] The Court reviews a motion to dismiss "accepting all factual allegations in the complaint as true and drawing all reasonable inferences in the plaintiffs' favor."[44]

         To plead both common law fraud and fraud under Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder, a complaint must satisfy Rule 9(b)[45] by stating with particularity "the circumstances constituting fraud."[46] Rule 9(b) requires that a complaint "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent."[47] To state a fraud claim under Section 10(b) and Rule 10b-5, the complaint must satisfy also the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which requires the complaint to '"specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.'"[48]

         B. Exchange Act Claims

         1. Rule 10(b) and Rule 10b-5 Claims

         Section 10(b) of the Exchange Act makes it unlawful to "use or employ, in connection with the purchase or sale of any security... any manipulative or deceptive device or contrivance in contravention" of SEC rules and regulations.[49] Rule 10b-5, which was promulgated by the SEC to implement Section 10(b), makes it unlawful to "make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading."[50] To recover for alleged violations of Section 10(b) and Rule 10b-5, a private plaintiff "must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation."[51]

         a. Material Misrepresentations and/or Omissions

         As this Court has stated in the past, "[a] plaintiff who brings a securities fraud claim under Section 10(b) and Rule 10b 5 must clear a number of hurdles."[52] The first requires plaintiffs adequately to allege that defendants made a "material misrepresentation or omission."[53] As discussed below, in order sufficiently to do so, a plaintiff must plead facts that, if true, would be sufficient to show that the defendant either (1) made "an untrue statement of a material fact, " or (2) "omit[ted] to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading."[54] A fact will be considered material if "there is a substantial likelihood that a reasonable person would consider it important in deciding whether to buy or sell shares [of stock]."[55]

         Different issues arise depending on whether a complaint alleges an untrue statement of material fact or a material omission. A complaint alleging that a defendant made an untrue statement of a material fact must plead facts that, if true, are sufficient to show that the statement alleged was "false at the time it was made."[56] To that end, a plaintiff "must do more than simply assert that a statement is false they must demonstrate with specificity why that is so."[57]

         In contrast, a complaint alleging an omission of material fact need not allege falsity. Rather, such a complaint "must plead facts that, if true, would be sufficient to show that the defendant had a duty to disclose the omitted information and failed to do so."[58] "Such a duty may arise expressly, pursuant to a statute or regulation, or implicitly 'as a result of the ongoing duty to avoid rendering existing statements misleading by failing to disclose material facts.'"[59]

         The pleading standard is different yet for a complaint alleging that a statement of opinion constituted an untrue statement of material fact or a material omission. For a statement of opinion or belief to be actionable as an untrue statement of a material fact, a complaint must plead facts sufficient to show that the defendant "did not hold the belief. . . professed."[60] To allege adequately that a defendant omitted to state a fact or facts necessary to make a statement of opinion or belief not misleading, a complaint must plead facts that '"call into question the issuer's basis for offering the opinion.'"[61] A plaintiff may not do so by "offer[ing] bare 'conclusory allegation[s]' that the issuer 'lacked reasonable grounds for the belief it stated;'"[62] it '"must identify particular (and material) facts going to the basis for the issuer's opinion facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.'"[63]

         The complaint here alleges that defendants Bedford and/or Allman made material misrepresentations or omissions on eight different occasions, which may be divided into three categories, namely:

         First, the complaint alleges Bedford made materially false or misleading statements of fact in that he falsely asserted that Republic's Codeshare Partners all had agreed to allow Republic to reduce its flying hours.

         Second, the complaint alleges Bedford and Allman made materially false or misleading statements in August 2015 by falsely stating that Republic was not in breach of contract.

         Third, the complaint alleges that Bedford and Allman (1) falsely opined that the breach of contract action brought by Delta was without merit, and (2) failed to disclose Republic's potential liability to all three Codeshare Partners in violation of FASB Accounting Standards Codification 450 20 ("ASC 450") and Item 303 of SEC Regulation S-K ("Item 303").[64]The Court takes each of these points in turn.

         I. Agreements with Codeshare Partners

         Plaintiffs allege that Bedford's statements in Republic's first and second quarter Form 10-Qs and during Republic's first quarter earnings call that Republic had reached agreements with its Codeshare Partners were materially false. Assuming materiality, plaintiffs fail sufficiently to allege falsity as to any of these statements.

         First, in the first quarter Form 10-Q, which was filed on May 8, 2015, the company disclosed that it had agreed with its Codeshare Partners to reduce its flying hours to improve its operational performance in the second half of 2015.[65] Plaintiffs allege, however, only that Delta rejected Republic's proposals to reduce flying hours in January and April 2015 and, in the case of the latter, only with respect to the months of June, July, and August 2015.[66] These allegations, even if true, would not be sufficient to show that Delta, or any other Codeshare Partner, had not agreed with Republic by May 8, 2015, which is the operative date, to reduce flying hours in the second half of 2015. As this Court has stated previously:

"[A] claim for relief must be more than merely possible. It must be plausible. Where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, or where there are obvious alternate explanations, that standard is not met."[67]

         Second, during the first quarter earnings call on May 8, 2015, Bedford stated that the company was "getting . . . support" from its Codeshare Partners to reduce Republic's flying levels during the summer of2Ol5.[68] As discussed above, the allegations that Delta had rejected Republic's proposals in January and April 2015 are insufficient to make out a sufficient basis for the assertion that the statement made in May 2015 was false when it was made. Moreover, just before Bedford made that statement on May 8, 2015, he said that "the most expedient way to get back to our historically high levels of performance is to reach a successful outcome at the bargaining table" and that "until this happens, we expect our operational reliability will remain challenged."[69] This statement made clear that, although Republic might have been "getting . . . support" from its partners, it had not yet reached "a successful outcome at the bargaining table." Thus, even if there were not yet deals by May 8, Bedford's statement, taken in context, was not misleading.

         Finally, in Republic's second quarter Form 10-Q, filed on August 7, 2015, the company disclosed only that it had "initiated discussions with its [Codeshare] [P]artners to further reduce flying schedules."[70] By the same logic applicable to the first quarter Form 10-Q and earnings call, plaintiffs' allegations as to the falsity of this statement are insufficient.

         ii. Breach of Contract

         Plaintiffs' allegations that the statements made during Republic's second quarter call and in its October 7, 2015 press release that Republic was not in breach of contract were materially false are insufficient as well.

         The first set of false statements alleged in this category occurred during Republic's second quarter earnings call on August 7, 2015, when both Bedford and Allman stated that Republic was not in breach of any of its contracts.[71] Republic issued also a press release on October 7, 2015 which stated, "Republic can confirm ...


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