Erickson v. Jernigan Capital, Inc.

Background

John R. Erickson brought a proposed class action against Jernigan Capital, Inc., Mark Decker, James Dondero, Howard Silver, Harry Thie, and Rebecca Owen. He alleged violations of federal securities law, including Section 14(a) of the Securities Exchange Act of 1934, based on allegedly incomplete proxy materials for Jernigan’s sale.

Jernigan’s shareholders voted to sell the company to affiliates of NexPoint Advisors, L.P. for $900 million. The transaction closed on November 6, 2020, and shareholders received $17.30 per share. Erickson alleged that the proxy failed to disclose Extra Space’s participation in the transaction, including its provision of $300 million in exchange for seats on the new entity’s board and rights to Jernigan’s properties. He contended that this omission allowed the defendants to obtain a lower purchase price and sought damages measured by the difference between the shares’ fair value and the $17.30 transaction price.

The proposed class included shareholders who held Jernigan common stock on September 11, 2020—the record date for voting eligibility—and who ultimately sold their shares for $17.30 each when the transaction closed. The proposed class excluded the defendants, Jernigan’s officers and directors, their immediate family members and legal representatives, heirs, successors and assigns, and entities in which the defendants had or had had a controlling interest.

Class-Certification Recommendation and Objections

Magistrate Judge Katharine H. Parker recommended granting class certification under Federal Rule of Civil Procedure 23. She concluded that the proposed class met Rule 23(a)’s requirements and Rule 23(b)(3)’s requirements that common issues predominate over individual issues and that a class action be superior to other methods of resolving the dispute.

The recommendation found Erickson adequate to represent the class. It relied on his participation in the litigation, relevant industry experience, and ability to supervise the case and class counsel. The magistrate judge also rejected arguments that Erickson had surrendered control of the litigation, lacked diligence, or was disqualified because he had not negotiated a cap on his counsel’s contingency fee. An error in his declaration about the amount of stock he held had been corrected and did not show an overall lack of diligence.

The magistrate judge also concluded that common questions about liability and damages predominated. The class members’ claims depended on the same alleged proxy misstatements and omissions, the same theory of loss causation, and similar methods of measuring damages. She determined that Erickson’s proposed damages theories were consistent with his claim that the proxy supported a sale price that did not reflect Jernigan’s true value. She concluded that questions about whether the damages assumptions were too speculative were better addressed at summary judgment than at the class-certification stage.

The defendants objected on two grounds. First, they argued that Erickson’s damages methodology did not match his liability theory. They characterized his liability theory as assuming shareholders would have rejected the transaction if they had known about Extra Space, while characterizing his damages model as assuming that the transaction closed. Second, they argued that benefit-of-the-bargain damages were unavailable and lacked a classwide calculation method.

Court’s Analysis

Judge Rochon reviewed the objected-to portions of the recommendation anew and reviewed the unobjected-to portions for clear error. On the first objection, the court rejected the defendants’ description of Erickson’s theory. The court explained that Erickson was not claiming that shareholders would necessarily have rejected every version of the transaction. Instead, his theory was that fuller disclosure would have caused shareholders to insist on higher consideration or a modification of the deal.

The court held that Erickson’s proposed damages—the difference between Jernigan’s fair value and the $17.30 per-share transaction price—were consistent with that theory. The proposed model measured the alleged harm from using incomplete proxy materials to obtain a lower purchase price. The court also held that the damages did not need to be calculated exactly at the certification stage and could be proved, if proved, with common evidence. It rejected the defendants’ argument that hypothetical post-rejection scenarios would require different calculations for individual shareholders.

On the second objection, the court agreed with the magistrate judge that Erickson could seek benefit-of-the-bargain damages as an alternative to out-of-pocket damages. Benefit-of-the-bargain damages compensate for the value a party would have received if full disclosure had been made. The court stated that such damages are available under Section 14(a) if they can be established with reasonable certainty. Erickson could potentially meet that requirement by showing that shareholders did not receive the true value of their shares, including through his allegation that Jernigan’s directors valued the company at more than the disclosed price.

The court further held that benefit-of-the-bargain damages could be measured on a classwide basis. It reasoned that the valuation method would apply equally to shareholders regardless of how many shares they held and therefore satisfied Rule 23(b)(3)’s predominance requirement.

Disposition

The court adopted the magistrate judge’s report and recommendation in full and granted Erickson’s motion to certify the class. The Clerk of Court was directed to terminate the class-certification motion at ECF No. 76. This opinion addressed class certification rather than deciding whether the defendants ultimately violated Section 14(a) or whether Erickson would recover damages.