Burr v. Equity Bancshares, Inc.

Background

Between 2015 and 2018, Equity Bancshares, Inc. loaned approximately $29.5 million to Gigi’s Cupcakes and Mr. Gatti’s Pizza, businesses that were experiencing financial difficulties. In 2018, Equity Bancshares restructured and extended the loans. Gigi’s and Gatti’s entered Chapter 11 bankruptcy in January 2019. Equity Bancshares later recorded a $14.5 million loss provision for the credit relationship, and its stock price declined by approximately 16% after that announcement.

Purchasers of Equity Bancshares securities filed a proposed class action against the corporation and several officers. They alleged that the defendants used an “extend-and-pretend” scheme to conceal the troubled loans, causing Equity Bancshares to report inadequate loan-loss allowances and misleading information to investors.

Claims and Motion

The investors asserted claims under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5. They also asserted control-person liability under Section 20(a) of the Exchange Act. The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim.

The alleged misrepresentations fell into three categories: financial metrics, general statements about Equity Bancshares’ financial outlook and lending practices, and statements made during the January 24, 2019 earnings call. The investors argued that the company should have recorded loan losses earlier and should have disclosed more information about the Gigi’s and Gatti’s loans, including the companies’ bankruptcy filings.

Court’s Analysis

The court held that loan-loss reserves are statements of opinion because they reflect management’s judgment about how much of a loan may ultimately be uncollectible. Such statements can be actionable if they are subjectively false or omit information that makes them misleading, but the court found that the investors had not plausibly alleged either circumstance.

The court concluded that the complaint’s “extend-and-pretend” theory was not sufficiently supported. The allegations also supported other explanations for the 2018 loans, including Equity Bancshares’ expectation that it could recover loan value through a sale or liquidation of the businesses. The court noted that the loan arrangements included collateral, cross-collateralization, and personal guarantees.

The court also held that the company’s general statements that its credit quality was “strong,” its growth was “responsible,” and its lending was conducted wisely were too general to be actionable. These statements were nonactionable puffery—general promotional language that a reasonable investor would not ordinarily rely on as a precise statement of fact.

Regarding the January 2019 earnings call, the court found that Equity Bancshares disclosed the amounts of the downgraded loans and that they involved the same operator. The investors did not adequately explain why the company also had to identify those loans as its largest credit relationship. The court likewise found that the statement that Equity Bancshares did not expect credit impairment, based on the collateral and circumstances, was an opinion and was not rendered actionable merely because the company later recorded a loss.

Because the investors failed to state a primary securities-law violation, the court also rejected their control-person liability claim against the officers.

Disposition

The investors had already amended their complaint once and did not identify what additional allegations they would add. The court found that another amendment would be futile and denied leave to amend. Judge Alison J. Nathan granted the defendants’ motion to dismiss, dismissed all claims with prejudice, and directed the clerk to close the case.

Classification

This is a procedural order because the case was disposed of on a Rule 12(b)(6) motion to dismiss for failure to state a claim, even though the court analyzed why the alleged securities-law theories were legally insufficient.