Bass, Berry & Sims attorney Chris Lazarini provided insight on the case of Bender vs. Logan in which the court denied the plaintiffs' claim of federal securities fraud finding that the plaintiffs could not establish justifiable reliance on defendants' alleged oral misrepresentations because plaintiff failed to read documents provided her by defendants and failed to inquire into their contents. Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.
Bender vs. Logan, No. 14-3647 (6th Cir., 4/28/15)
A Plaintiff who fails to read documents available to him which would lead to detection of the alleged fraud will have a very difficult time establishing that he justifiably relied on oral representations contrary to the documents.
Plaintiffs and Defendants, both married couples, agreed to form a corporation to open a cosmetology school. According to Plaintiffs, the parties agreed that Trina Bender and Julie Logan would be co-owners with equal control over the school, Defendants would provide the initial financing and oversee the school's finances, and Plaintiffs would manage the school's daily operations. Without reading them, Trina Bender signed documents given to her by Defendants that appointed her as an officer and director of the school and gave her nonvoting shares amounting to a 50% ownership stake. Just over a year later, again without reading them, Mrs. Bender signed a second set of documents given to her by Defendants. In these documents, Mrs. Bender sold her 50% stake to Mrs. Logan and resigned as an officer and director of the company. Defendants subsequently terminated Plaintiffs' employment with the school and threatened to hold Mrs. Bender liable for one half of the school's debts if she refused to sign a settlement agreement. Plaintiffs brought this action, alleging federal securities fraud. The District Court granted Defendants' motion for summary judgment, holding that Plaintiffs failed to present evidence permitting the jury to find that Defendants' alleged misrepresentations were the proximate cause of any losses or that Plaintiffs justifiably relied on Defendants' alleged misrepresentations.
The Court of Appeal affirms. The Court examines whether Mrs. Bender's claimed reliance on Defendants was justifiable under a recklessness standard, looking at these relevant factors: (1) the sophistication or expertise of the plaintiff in securities matters; (2) the existence of long standing business or personal relationships; (3) access to the relevant information; (4) the existence of a fiduciary relationship; (5) concealment of the fraud; (6) the opportunity to detect the fraud; (7) whether the plaintiff initiated the transaction or sought to expedite it; and (8) the generality or specificity of the misrepresentations.
Focusing on Mrs. Bender's access to the relevant information and her opportunity to detect the fraud, the Court finds that as a small business owner, even one not experienced in matters of investment or finance, it was unreasonable for Mrs. Bender not to read the initial set of documents to better understand her role in the company. The Court describes the sales transaction as a closer call, because Mr. Logan occupied a position of trust, since he controlled the school’s finances – although the Court did not find him to have fiduciary obligations – and described the documents as "no big deal" when presenting them to Mrs. Bender. These factors were not enough, however, to persuade the Court that Mrs. Bender's decision to sign the documents without reading them and without making even a minimal inquiry into their contents was anything other than a reckless act rendering her claimed reliance unjustified. Having affirmed the District Court's decision on the issue of justifiable reliance, the Court declines to address the loss causation issues.
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