Financial SEC. Assur., Inc. v. Stephens, Inc.

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
________________________ ELEVENTH CIRCUIT
SEPTEMBER 18, 2007
No. 04-14894 THOMAS K. KAHN
________________________ CLERK

D. C. Docket No. 00-03181-CV-JOF-1

FINANCIAL SECURITY ASSURANCE, INC.,

Plaintiff-Appellant,

versus

STEPHENS, INC.,
HAYES, JAMES & ASSOCIATES, INC.,

Defendants-Appellees.

________________________

Appeal from the United States District Court
for the Northern District of Georgia
_________________________

(September 18, 2007)

ON PETITION FOR REHEARING

Before TJOFLAT and KRAVITCH, Circuit Judges, and LAWSON,* District
Judge.

*
Honorable Hugh Lawson, United States District Judge for the Middle District of
Georgia, sitting by designation.
PER CURIAM:

Stephens, Inc.’s (“Stephens”) petition for panel rehearing is GRANTED.

We VACATE our prior opinion in this case, 450 F.3d 1257 (11th Cir. 2006), and

substitute the following in its place.

I.

The plaintiff, Financial Security Assurance, Inc. (“FSA”), appeals the

district court’s orders dismissing its Rule 10b-5 claim and granting summary

judgment in favor of defendants Stephens and Hayes, James & Associates, Inc.

(“Hayes James”) on its claims for common law fraud and negligent

misrepresentation. The primary issue presented in this case is whether an insurer

of municipal bonds that becomes the owner of those bonds upon default has

standing pursuant to § 10(b) of the Securities Exchange Act of 1934 (the

“Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17

C.F.R. § 240.10b-5. We conclude that, under the facts of this case, they do not.

After thorough review, we affirm the district court’s dismissal of the Rule 10b-5

claim and grant of summary judgment on the fraud and negligent misrepresentation

claims.

II. Facts

In the early 1990s, Crisp County, Georgia approved plans for a regional

2
solid waste processing facility (the “Facility”), which would extend the life of a

newly-opened landfill by removing recyclable material from waste before dumping

the remainder into the landfill. The County established the Solid Waste

Management Authority of Crisp County (the “Authority”) to construct and operate

the Facility. To finance its initial construction, the Authority obtained

approximately $53 million in short-term bank loans in 1996 (the “Bank

Financing”).

Once constructed, the Authority would obtain revenue for the Facility by

accepting waste from cities, counties and private companies and by selling

materials of value (“MOV”) from the waste it collected. Accordingly, before the

Facility was built, the Authority contracted with more than thirty of these entities

(the “Participants”), each of which agreed to make minimum payments to the

Authority based on the expected tonnage of waste the Authority would collect or

the number of households the Authority would service in the city or county. They

executed “put or pay” contracts. The Authority also contracted with TransWaste

Services LLC (“TransWaste”), a waste hauler, to pick up the Participants’ waste

and deliver it to the Facility, paying a tipping fee for each ton delivered.

TransWaste agreed to deliver enough waste for the Authority to break even. In

turn, the Authority agreed that TransWaste would receive a rebate from the

3
Authority’s revenues from the sale of recyclable MOV.

The Authority contracted with defendant Hayes James for civil engineering

services, including the conduct of a feasibility study based on the Bank Financing

and the preparation of a report on the results of an Acceptance Test that Hayes

James had developed for the Facility’s equipment.

The Authority hired Stephens to act as underwriter for a bond financing for

the Facility. In early 1998, Stephens prepared a Request for Proposal (“RFP”) for

potential credit enhancers, including FSA. The RFP included a pro forma financial

representation (the “Pro Forma”). The RFP’s disclaimer instructed potential credit

enhancers to perform their own due diligence.

FSA assigned one of its employees, Margaret Gifford, to analyze the RFP

and make a recommendation as to whether FSA should insure the bonds. Gifford

toured the Facility and obtained information about the equipment, the quantities of

waste delivered and processed, and the amount of MOV recovered. She

recommended that FSA insure the bonds. Gifford’s report noted that the

Authority’s contracts were the ultimate security for the bond issue. She reviewed

only one sample contract between the Authority and a Participant, however, and

she did not request copies of the contracts with TransWaste or with Crisp County.

Gifford testified in her deposition that she did not perform any due diligence after

4
July 28, 1998.

FSA submitted a bid in late July 1998, which was later accepted. The bid

was conditioned on full review of all legal documentation pertaining to the deal.

The RFP indicated that the Facility would be subjected to an Acceptance

Test to ensure that the Facility met its design specifications. Hayes James supplied

the Acceptance Test’s design specifications for inclusion in the RFP, based on the

original contract created in connection with the Bank Financing. Hayes James

made a few minor changes to these specifications and then provided them to

Stephens for inclusion in the RFP. The Acceptance Test was administered after

FSA agreed to insure the bonds. FSA never requested a copy of the test results,

nor did it inquire as to how the Facility performed.

After Stephens accepted FSA’s bid, Stephens’s counsel prepared a

Preliminary Official Statement (the “POS”) for the Authority. Though her duties

were officially finished by that point, Gifford testified that she did “glance at” the

POS when it was provided to FSA. Ron Millet, in-house counsel for FSA, also

testified that he read and made suggestions regarding at least one draft of the POS.

In October 1998, at the request of TransWaste, the Authority and

TransWaste executed an amendment to their contract. The amendment extended

the period for which TransWaste was eligible for its rebate based on MOV receipts

5
and delayed enforcement of the break-even guarantee requirement. Stephens did

not notify FSA of this amendment or the conversations that led to it. Also in

October, Stephens, Hayes James, and the Authority prepared a first-year budget for

the Authority, which was sent to FSA. Hayes James also provided a budget

certification letter (the “BCL”), certifying that the budget was reasonable.

The bond transaction closed on November 12, 1998 (the “Bond Closing”).

The final version of the Official Statement (the “OS”) was delivered to FSA just

prior to the closing. Within two months of the Bond Closing, the Authority

informed FSA that it was revising its budget and cash flow analysis. FSA

terminated Gifford’s employment shortly thereafter, based in part on her

performance in this transaction. The Authority and TransWaste then further

amended their contract by reducing the tipping fee and relieving TransWaste of its

tonnage guarantee. Eventually, the Authority exhausted its debt service reserve

fund and was unable to continue making payments on the bonds.

In anticipation of litigation, the parties to this action entered into a tolling

agreement on March 29, 2000. On December 1, 2000, FSA brought the present

action in the United States District Court for the Northern District of Georgia,

alleging federal securities fraud under Rule 10b-5 against Stephens and state law

claims for fraud and negligent misrepresentation against both Stephens and Hayes

6
James. The district court later granted Stephens’s Rule 12(b)(6) motion to dismiss

the federal securities claim. After a period of discovery, the defendants moved for

summary judgment on the state law claims, which the district court granted, based

primarily on FSA’s failure to meet the due diligence requirements for justifiable

reliance under Georgia law. FSA then filed the instant appeal.

III. Discussion

A. 10b-5 Standing

The district court dismissed FSA’s Rule 10b-5 claim on the ground that FSA

was not a purchaser or seller of securities as required by the Rule’s authorizing

statute, § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and thus lacked standing

to bring the claim.

We review de novo a district court’s dismissal of a complaint for failure to

state a claim upon which relief could be granted, accepting the allegations in the

complaint as true and construing them in the light most favorable to the plaintiff.

Roberts v. Fla. Power & Light Co., 146 F.3d 1305, 1307 (11th Cir. 1998).

Furthermore, “a complaint should not be dismissed for failure to state a claim

unless it appears beyond doubt that the plaintiff can prove no set of facts in support

of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-

46 (1957). “The threshold of sufficiency that a complaint must meet to survive a

7
motion to dismiss for failure to state a claim is, as we have stated previously,

‘exceedingly low.’” Ancata v. Prison Health Servs., Inc., 769 F.2d 700, 703 (11th

Cir. 1985) (citing Quality Foods de Centro Am., S.A. v. Latin Am. Agribusiness

Dev., 711 F.2d 989, 995 (11th Cir. 1983)). That said, “while notice pleading may

not require that the pleader allege a ‘specific fact’ to cover every element or allege

‘with precision’ each element of a claim, it is still necessary that a complaint

‘contain either direct or inferential allegations respecting all the material elements

necessary to sustain a recovery under some viable legal theory.’” Roe v. Aware

Woman Ctr. for Choice, Inc., 253 F.3d 678, 683 (11th Cir. 2001) (quoting In re

Plywood Antitrust Litig., 655 F.2d 627, 641 (5th Cir. Unit A Sept. 8, 1981)).

In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), the

Supreme Court endorsed the standing rule created by Birnbaum v. Newport Steel

Corp., 193 F.2d 461, 464 (2d Cir. 1952), which permits only purchasers and sellers

of securities, and those with contracts to purchase and sell securities, to bring suit

under Rule 10b-5. The Blue Chip Stamps Court noted that three principal

categories of plaintiffs are excluded from standing: (1) “potential purchasers of

shares . . . who allege that they decided not to purchase because of” the alleged

violations; (2) “actual shareholders in the issuer who allege that they decided not to

sell their shares because of” the alleged violations; and (3) “shareholders, creditors,

8
and perhaps others related to an issuer who suffered loss in the value of their

investment due to corporate or insider activities in connection with the purchase or

sale of securities which violate Rule 10b-5.” Blue Chip Stamps, 421 U.S. at 737-

38. Stephens contends that FSA is thus excluded.

FSA contends that it has standing on four independent grounds: (1) as the

true party at risk in this transaction, it was effectively the purchaser of the bonds;

(2) it is entitled to standing as a guarantor of the bonds; (3) it actually purchased

the securities pursuant to the terms of the insurance policy; and (4) it is fully

subrogated to the rights of the individual bondholders and therefore entitled to

bring suit based on their purchases.

i. Party At Risk

FSA suggests that as the true “party at risk” in the bond transaction, it should

have standing to assert a claim under Rule 10b-5. That is, FSA argues that it

satisfies the purchaser-seller requirement set forth in Birnbaum and endorsed by

the Supreme Court in Blue Chip Stamps, because, as the insurer of the bonds, it

bore the risk that a purchaser would ordinarily bear. FSA is mistaken, however, in

interpreting the purchaser-seller requirement to entail a functional, and not a

formal, inquiry. Although the Supreme Court discussed the functional aspects of

the rule in its reasoning, the Court deliberately endorsed a standing rule that would

9
not be subject to “endless case-by-case erosion” by courts employing a functional

analysis to every new group of potential plaintiffs. See Blue Chip Stamps, 421 U.S.

at 755. Accordingly, FSA’s assumption of risk in the bond transaction does not

provide it with Rule 10b-5 standing.

ii. Guarantor Standing

FSA argues that it also has standing as a guarantor of the bonds. FSA first

contends that it has standing as a guarantor because a guarantor qualifies as a

purchaser of securities. This is not so. Granting standing to a guarantor as a

purchaser would contravene the rule that this court announced in Pelletier v.

Stuart-James Co., Inc., 863 F.2d 1550 (11th Cir. 1989), that, consistent with Blue

Chip Stamps, a plaintiff must have actually purchased or sold, or entered into an

enforceable contract to purchase or sell, securities to have standing under Rule

10b-5. Id. at 1554-55.

FSA next advances the novel theory that, in insuring the bonds, it sold a

security, that is, a guaranty. This argument fails because a guaranty does not

qualify as a security for Rule 10b-5 purposes. Section 3(a)(10) of the Exchange

Act defines a “security” as follows:

The term “security” means any note, stock, treasury stock, bond,
debenture, certificate of interest or participation in any profit-sharing
agreement or in any oil, gas, or other mineral royalty or lease, any
collateral-trust certificate, preorganization certificate or subscription,

10
 transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, or in general, any instrument
commonly known as a “security”; or any certificate of interest or
participation in, temporary or interim certificate for, receipt of, or
warrant or right to subscribe to or purchase, any of the foregoing . . . .

15 U.S.C.A. § 78c(a)(10). As the foregoing definition does not include a guaranty,

FSA lacks standing as a guarantor of the bonds.

iii. Contract to Otherwise Acquire the Bonds

FSA further argues that its insurance policy constitutes a contract to

purchase the Bonds, qualifying FSA as a purchaser pursuant to Blue Chip Stamps.

Notably, § 3(a)(13) of the Exchange Act defines the term “purchase” to include

“any contract to buy, purchase, or otherwise acquire” securities. See 15 U.S.C.

§ 78c(a)(13) (emphasis added). The policy provides that

[u]pon disbursement in respect of a Bond, [FSA] shall become the
owner of the Bond, any appurtenant coupon to the Bond or right to
receipt of payment of principal of or interest on the bond and shall be
fully subrogated to the rights of the Owner, including the Owner’s
right to receive payments under the Bond, to the extent of any
payment by [FSA] hereunder.

Accordingly, FSA contends that it acquired a contingent interest in the bonds

because the policy constitutes a contract to otherwise acquire them upon the

occurrence of a specified contingent event, that is, default.

Stephens counters that FSA failed to allege a crucial element of a Rule 10b-5

action in its complaint — that it had purchased or sold a security. As Stephens

11
notes, FSA did not specifically allege that it had entered into a contract to acquire

the bonds. Nor did FSA attach the insurance policy or quote relevant terms of the

policy in its complaint. Indeed, on reading the allegations in FSA’s complaint, one

could understand FSA to be advancing a theory of standing based solely on the fact

that it suffered economic harm as a result of the defendant’s alleged fraud, a basis

that was rejected in Blue Chip Stamps.

Ordinarily, we do not consider anything beyond the face of the complaint

and documents attached thereto when analyzing a motion to dismiss. Brooks v.

Blue Cross & Blue Shield of Fla., Inc., 116 F.3d 1364, 1368 (11th Cir. 1997).

This court recognizes an exception, however, in cases in which a plaintiff refers to

a document in its complaint, the document is central to its claim, its contents are

not in dispute, and the defendant attaches the document to its motion to dismiss.

Harris v. Ivax Corp., 182 F.3d 799, 802 n.2 (11th Cir. 1999); Brooks, 116 F.3d at

1368-69. Here, FSA refers to the existence of the insurance policy and relies on

the effect of the policy — that FSA is thereby required to make payments to the

bondholders — though it does not quote from the policy or discuss its specific

provisions. The question, then, is whether the policy is nevertheless “central” to

FSA’s federal securities claim.

In considering this question, the First Circuit has held, with respect to a

12
complaint alleging libel and other related claims, that a magazine article referred to

in the complaint and attached to the defendant’s motion to dismiss was central to

the plaintiffs’ claim because “Plaintiffs unquestionably would have had to offer a

copy of the article in order to prove their case.” Fudge v. Penthouse Int’l, Ltd.,

840 F.2d 1012, 1015 (1st Cir. 1988). According to that standard — whether the

plaintiff would have had to offer the document in order to prove its case — the

policy would appear to be central to FSA’s claim, for FSA would ultimately have

to offer a copy of the policy to prevail under any conceivable theory of its case.

This case, however, presents a closer question than most cases in which this

issue arises. The potential harm that courts are mindful of in these situations is the

lack of notice that the attached document may be considered by the court. See,

e.g., Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002)

(“[G]enerally, the harm to the plaintiff when a court considers material extraneous

to a complaint is the lack of notice that the material may be considered.”). Because

Stephens attached the policy to its motion to dismiss, we cannot find that Stephens

lacked notice that the district court or this court might consider the document.

Accordingly, we will consider the policy appended to Stephens’s motion to dismiss

as part of the pleadings because it is referred to in the complaint, it is central to

FSA’s federal securities claim, its consideration comports with the requirements of

13
notice pleading, and neither party challenges its authenticity.

Even considering the insurance policy, we conclude that FSA did not

“otherwise acquire” a “security,” and, therefore, FSA does not have standing to

bring a claim under Rule 10b-5. Although by the insurance policy’s own terms

FSA acquired the bonds upon default by the Authority, we conclude that at the

time of such transfer the instruments FSA acquired were no longer “securities” as

required for standing under Rule 10b-5.

“[T]o reach the question of an alleged violation of the anti-fraud provisions

of the Securities Acts, the transaction at issue must involve a ‘security’ as defined

in [the] 1934 Act[].” Home Guaranty Ins. Corp. v. Third Fin. Servs., Inc. 667 F.

Supp. 577, 579 (M.D. Tenn. 1987). The Supreme Court has articulated three tests

to determine whether an instrument is a “security” that is protected under the

federal securities laws by means of being an “investment contract,” “stock,” or

“note.” First, an instrument is an “investment contract” if it “involves an

investment of money in a common enterprise with profits to come solely from the

efforts of others.” SEC v. W.J. Howey Co., 328 U.S. 293, 301, 66 S. Ct. 1100,

1104 (1946). Second, the characteristics typically associated with “stock” are that

it grants “the right to receive dividends contingent upon an apportionment of

profits”; is negotiable; grants “the ability to be pledged or hypothecated”;

14
“confer[s] [] voting rights in proportion to the number of shares owned”; and has

“the capacity to appreciate in value.” Landreth v. Landreth Timber Co., 471 U.S.

681, 686, 105 S. Ct. 2297, 2302 (1985). Third, the factors to consider when

determining if an instrument is a “note” are whether “the buyer is interested

primarily in the profit the note is expected to generate[,] . . . it is an instrument in

which there is ‘common trading for speculation or investment,’” the investing

public reasonably expects the instrument to be a note, and no other “regulatory

scheme significantly reduces the risk of the instrument.” Reves v. Ernst & Young,

494 U.S. 56, 66-67, 110 S. Ct. 945, 949 (1990).

In this case, the very terms of the insurance policy and the OS regarding the

revenue bonds explain why we conclude that FSA did not otherwise acquire a

“security.” Under the insurance policy, FSA was obligated to disburse “that

portion of the principal of an interest on the Bonds that shall be Due for Payment

but shall be unpaid by reason of Nonpayment by the Issuer.” 1 Once FSA disbursed

the amount due for payment because of the Authority’s non-payment, the insurance

agreement specified that FSA became “owner of the Bond, any appurtenant coupon

1
Under the insurance policy, “Due for Payment” means “(a) when referring to the
principal of a Bond, payable on the stated maturity date thereof or the date on which the same
shall have been duly called for mandatory sinking fund redemption and does not refer to any
earlier date on which payment is due by reason of call for redemption (other than by mandatory
sinking fund redemption), acceleration or other advancement of maturity . . . and (b) when
referring to interest on a Bond, payable on the stated date for payment of interest.”

15
to the Bond or right to receipt of payment of principal of or interest on the Bond

. . . to the extent of any payment by Financial Security hereunder.” According to

FSA, this transfer of the bonds satisfied Rule 10b-5’s requirement that they

“otherwise acquired” a “security” through the insurance contract. We do not

disagree that FSA acquired the bonds through operation of the insurance policy.

However, although FSA became the “owner” of the bonds, it did not acquire a

“security” because, by the OS’s own terms, FSA acquired no right to receive

interest or principal in the bonds after disbursement.2 Under the OS, once the

bonds or a portion of the bonds were redeemed, the owners of such bonds or

portions thereof ceased to be entitled to any benefit or security under the Bond

Resolution.

On the date so designated for redemption . . . Series 1998 Bonds or
portions of Series 1998 Bonds so called for redemption will become

2
This case is distinguishable from those in which a bank accepts securities as collateral
for a loan, because here, FSA cannot recover monies from the “bonds” once acquired. See
Rubin v. United States, 449 U.S. 424, 429-31 (1981) (holding that pledging securities as
collateral for a loan constitutes an “offer or sale” under § 17(a) of the Securities Act); Marine
Bank v. Weaver, 455 U.S. 551, 554 n.2 (1982) (indicating, in a Rule 10b-5 case, that Rubin
resolved the circuit split over whether “a pledge of stock is equivalent to a sale for the purposes
of the antifraud provisions of the federal securities laws” and making no distinction between the
Securities Act and the Exchange Act for these purposes). Although both FSA and a bank using
securities as collateral are impacted by default, the bank is relying on the value of the securities
to recover some of their loss. And although it may be true that occasionally a bank will recover
nothing from the collateral because the securities have lost all of their value, the bank did not
enter into the contract assuming such. Here, when FSA entered into the insurance contract, the
terms were clear regarding the lack of value of the bonds after disbursement. As such, it cannot
be said that FSA entered into the insurance contract assuming it could recover some of its losses
from a default through liquidation of the bonds it had acquired.

16
 and be due and payable at the Redemption Price provided for
redemption of such Series 1998 Bonds or portions thereof on such
date and . . . such Bonds or portions thereof will cease to be entitled to
any benefit or security under the Resolution and the Owners of such
Bonds or portions thereof will have no rights in respect thereof except
to receive payment of the Redemption Price thereof and the accrued
interest and to the extent provided in the Resolution, and to receive
Series 1998 Bonds for any unredeemed portions of Series 1998
Bonds.

As such, after FSA acquired the bonds it had no right to past payments of principal

and interest because the obligation to pay those portions of the bond had been

discharged by FSA’s disbursement of the amount that was “due for payment.”

Furthermore, FSA had no right to future payments. First, FSA owned the

bonds only “to the extent of any payment” by FSA, and FSA has not disbursed

future payments. Second, as the bonds for which disbursement had been made by

FSA were no longer entitled to “any benefit or security under the Resolution” and

the new owner, FSA, had no “rights in respect thereof,” FSA was not entitled to

any future payments on the bonds.

The “bonds” that FSA acquired at default, therefore, were not “securities”

because they failed to satisfy the definitions of either an “investment contract,”

“stock,” or “note” as articulated by the Supreme Court. First, the “bonds” were not

an “investment contract” because FSA did not acquire any “profit to come solely

from the efforts of others” through the “bonds.” W.J. Howey Co., 328 U.S. at 301.

17
FSA’s profit in this transaction came from the consideration paid by the Authority

for the issuance of the insurance policy, not from the bonds issued by the

Authority. Second, the “bonds” were not “stocks” because they did not confer the

right to vote or receive dividends and were not negotiable or transferable.

Landreth Timber Co., 471 U.S. at 686. Third, the “bonds” were not “notes”

because FSA was not “interested primarily in the profit the note is expected to

generate.” Reves, 494 U.S. at 66-67. As discussed above, it does not appear that

the bond had the potential to generate any profit for FSA because FSA discharged

the debt obligations. Furthermore, FSA issued the policy in return for

consideration from the Authority, not to invest in the bonds. Although “most

instruments bearing [] a traditional title are likely to be covered by the definition

[of a security] . . . the label . . . is not of itself sufficient to invoke the coverage of

the Acts.” Landreth Timber Co., 471 U.S. at 686. Rather, the “economic realities”

of the instrument actually conveyed ultimately govern whether the insurance

contract is a security. Reves, 494 U.S. at 62. Because the “bonds” that FSA

acquired under the insurance policy were not “securities” within the meaning of the

Exchange Act, 15 U.S.C. § 78c(a)(1), the “bonds” did not confer standing for FSA

to allege a violation of Rule 10b-5.

18
 iv. Subrogation

Finally, FSA argues that it has standing based on subrogation. “Subrogation

is ‘[t]he substitution of one person in the place of another with reference to a

lawful claim, demand or right, so that he who is substituted succeeds to the rights

of the other in relation to the debt or claim, and its rights, remedies, or securities.’”

Jones Motor Co. v. Anderson, 602 S.E.2d 228, 230 (2004) (quoting Black’s Law

Dictionary 1427 (6th ed. 1990)); see also Pearlman v. Reliance Ins. Co., 371 U.S.

132, 136-37 (1962). Subrogation is either “legal” or “conventional.” Legal

subrogation is an equitable doctrine and arises by operation of the law without any

agreement to that effect between the parties; conventional subrogation rests on

contract, arising where “an agreement is made that the person paying the debt shall

be subrogated to the rights and remedies of the original creditor.” Gilbert v. Dunn,

128 S.E.2d 739, 740 (Ga. 1962) (citation omitted); see also State Farm Mut. Auto.

Ins. Co. v. Cox, 515 S.E.2d 832, 833 (Ga. 1999). FSA argues that it has standing

as a subrogee under both varieties of subrogation because: (1) it was obligated by

contract to make interest and principal payments on the bonds, and it alleged that it

was doing so; and (2) the insurance policy expressly stated that upon disbursement,

FSA becomes “fully subrogated to the rights of the [bondholder].”

Stephens does not dispute that had FSA properly pleaded a subrogation

19
claim, it might be entitled to standing.3 Stephens argues, however, that FSA cannot

recover under this theory because it failed to allege every element of a bondholder

claim, as it must according to Georgia law. See, e.g., S. Nitrogen Co. v. Stevens

Shipping Co., 151 S.E.2d 916, 921 (Ga. 1966) (holding that, when proceeding

upon the theory of conventional subrogation, it is essential that a plaintiff “allege

facts showing the existence of a cause of action on the part of [the subrogor]

against the defendant”).

It appears clear that the bondholders in this case would have standing to

bring a claim under Rule 10b-5, as they were the actual purchasers of the bonds. In

its complaint, however, FSA failed to allege harm to the bondholders caused by the

misrepresentations of Stephens. Instead, FSA alleged that Stephens “deceive[d]

FSA” and “made material misrepresentations . . . for the purpose and effect of

inducing FSA to insure the Bonds issued by the Authority.” FSA goes on to allege

that, as a result, “FSA could not properly assess the risk factors associated with

insuring the Bonds.” As a subrogee, FSA cannot file a complaint based on the

harm it suffered itself. See Liberty Nat’l Ins. Holding Co. v. Charter Co., 734 F.2d

545, 554 (11th Cir. 1984). We conclude, therefore, that FSA did not have standing

3
Amicus, the Bond Market Association asserts that there is no automatic subrogation to
Rule 10b-5 rights. However, the Association fails to cite any controlling authority to that effect.
Instead, the Association cites three district court opinions, two of which are unpublished, from
outside of this circuit.

20
to bring a claim under Rule 10b-5 for harms it suffered, rather than harm suffered

by the bondholders, under the theory of subrogation.

B. Statute of Limitations and Due Diligence

Stephens argues that, regardless of whether FSA has standing, FSA’s Rule

10b-5 claim is time-barred and FSA’s failure to perform due diligence bars it from

bringing a Rule 10b-5 action. As we have already concluded that FSA lacks

standing to bring a claim under Rule 10b-5, we need not address these issues.

C. State Law Fraud and Negligent Misrepresentation Claims

The district court granted summary judgment in favor of Stephens and

Hayes James on FSA’s common law fraud and negligent misrepresentation claims,

holding that: (1) Stephens and Hayes James did not owe FSA a duty to disclose,

(2) the alleged misrepresentations were not actionable, and (3) FSA did not

justifiably rely on any alleged misrepresentations because it failed to exercise due

diligence as a matter of law.

We review the district court’s grant of summary judgment de novo, drawing

all inferences in favor of the non-moving party. Korman v. HBC Fla., Inc., 182

F.3d 1291, 1293 (11th Cir. 1999).

Under Georgia law, a plaintiff alleging fraud must demonstrate: (1) a false

representation by the defendant, (2) the defendant’s knowledge that the

21
information is false (scienter), (3) intention to induce the plaintiff to act or to

refrain from acting, (4) justifiable reliance by the plaintiff, and (5) damage to the

plaintiff. See, e.g., Avery v. Chrysler Motors Corp., 448 S.E.2d 737, 739 (Ga. Ct.

App. 1994). To prove negligent misrepresentation, a plaintiff must establish:

“(1) the defendant’s negligent supply of false information to foreseeable persons,

known or unknown; (2) such persons’ reasonable reliance upon that false

information; and (3) economic injury proximately resulting from such reliance.”

See Hardaway Co. v. Parsons, Brinckerhoff, Quade & Douglas, Inc., 479 S.E.2d

727, 729 (Ga. 1997). In advancing either claim, therefore, a plaintiff must

establish that the defendant made false representations on which the plaintiff

justifiably relied.

i. Claims Against Hayes James

FSA argues that it justifiably relied on both Hayes James’s BCL and the

description of Hayes James’s Acceptance Test contained in the RFP. To establish

reasonable reliance under Georgia law as to either fraud or negligent

misrepresentation, a plaintiff must show that it exercised due diligence. White v.

BDO Seidman, LLP, 549 S.E.2d 490, 494 (Ga. Ct. App. 2001) (negligent

misrepresentation); Bogle v. Bragg, 548 S.E.2d 396, 400-01 (Ga. Ct. App. 2001)

(fraud). Georgia law places a significant due diligence burden on sophisticated

22
parties engaged in arms-length transactions, such as the bond transaction at issue

here. See, e.g., William Goldberg & Co. v. Cohen, 466 S.E.2d 872, 877 (Ga. Ct.

App. 1995). Although questions of due diligence are generally for the jury to

decide, a court can find that a party has failed to exercise due diligence as a matter

of law where due diligence failures are particularly egregious. See, e.g., Wender &

Roberts, Inc. v. Wender, 518 S.E.2d 154, 159 (Ga. Ct. App. 1999).

Because FSA failed to put forth any evidence that any of its employees had

actually read the Hayes James BCL,4 we agree with the district court that FSA

cannot prove that it justifiably relied on any alleged misrepresentation or omission

in that document.

Likewise, we find that FSA did not justifiably rely on any alleged

misrepresentation contained in the description of the Acceptance Test found in the

RFP. FSA failed to perform any due diligence with respect to the Acceptance Test.

FSA did not ask Hayes James or Stephens any questions regarding the Acceptance

Test and did not even inquire as to whether the Facility passed the test. Nor did

FSA request a copy of the report prepared in connection with the Acceptance Test.

Accordingly, we hold as a matter of law that FSA failed to meet its due diligence

4
Ron Millet, FSA’s in-house counsel, stated in an affidavit that he “relied on [the BCL]
to the extent that [he] knew FSA required its receipt prior to the bond closing.” That statement,
however, does not help FSA. Because Millet did not rely on the contents of the BCL, he could
not have relied on any alleged misrepresentations contained therein.

23
burden, both with respect to the BCL and the description of the Acceptance Test

contained in the RFP. Because we conclude that FSA failed to exercise due

diligence with respect to either of the above documents, we need not consider

whether Hayes James owed FSA a duty to disclose or whether Hayes James’s

alleged misrepresentations were actionable.

ii. Claims Against Stephens

FSA claims that Stephens committed fraud and made negligent

misrepresentations under Georgia law in four documents: the RFP, the POS, the

OS, and the BCL. Because we have already held that FSA did not justifiably rely

on the BCL, we will address only the alleged misrepresentations and omissions in

the remaining three documents.5

As an initial matter, we note that the district court excluded the evidence

offered by FSA regarding due diligence standards in the bond insurance industry.

As FSA has not appealed that ruling, we do not consider the testimony of FSA’s

experts regarding those standards.

Regardless of whether the RFP, the POS, and the OS contained material

misrepresentations, FSA cannot prevail on its fraud and negligent

5
The district court ruled that FSA failed to introduce competent evidence that anyone at
FSA read the OS. However, in light of FSA’s argument that in reviewing drafts of the POS,
Millet effectively reviewed the OS (which is dated as of the closing date), we will assume for
purposes of this appeal that Millet reviewed both the POS and the OS.

24
misrepresentation claims due to its abject failure to satisfy its due diligence

burden.6 FSA failed to perform any due diligence regarding the tonnage figures in

the RFP, the POS, and the OS, instead relying entirely on Stephens’s

representations. FSA could have discovered the discrepancies in tonnage figures

that it now cites had it requested tonnage reports for the months preceding the

Bond Closing. In addition, Gifford could have contacted the Authority,

TransWaste or the Participants to confirm the actual tonnage figures. Furthermore,

Stephens notes that some of the information that FSA received, including

quotations in articles accompanying the RFP to the effect that the Facility would

require 1,250 tons of waste per day to break even, should have prompted FSA to

investigate further. In fact, FSA failed to seek any information regarding the

Facility’s performance in the months leading up to the Bond Closing. Had it done

so, it could have discovered the alleged misrepresentations relating to the Facility’s

MOV recovery rates and its operational problems.

Most important, perhaps, FSA failed to perform any due diligence relating to

TransWaste. Gifford identified the Participants’ put or pay contracts as the

6
FSA argues that the question of whether a party justifiably relied on alleged
misrepresentations “should not be decided on summary judgment if there is any evidence
showing the person exercised due diligence.” Potts v. UAP-GA AG CHEM, Inc., 567 S.E.2d
316, 320 (Ga. Ct. App. 2002) (citations omitted; emphasis added). However, Potts did not
involve sophisticated parties engaged in an arms-length transaction. See id. Georgia law
imposes a much heavier due diligence burden on parties like FSA. See, e.g., William Goldberg
& Co. v. Cohen, 466 S.E.2d 872, 877 (Ga. Ct. App. 1995).

25
ultimate security for the bonds, but she failed to recognize the importance of

TransWaste’s contribution to the success of the Facility. TransWaste was

responsible for a significant portion of the Facility’s revenue, yet Gifford failed to

discuss the Facility with TransWaste, inquire into TransWaste’s financial

wherewithal (to assess its ability to meet its performance guaranty) or, for that

matter, review its contract. We hold that this due diligence failure was so

egregious that FSA could not have reasonably relied on any representation relating

to TransWaste.

We therefore agree with the district court that the facts regarding FSA’s due

diligence efforts, taken together, failed to create a triable issue of fact as to whether

FSA justifiably relied on Stephens’s representations. Because we hold that FSA

did not reasonably rely on any of the alleged misstatements or omissions made by

Stephens, we need not consider whether, and to what extent, Stephens owed FSA a

duty of disclosure or whether its alleged misrepresentations were actionable.

IV. Conclusion

For the foregoing reasons, we AFFIRM the district court’s grant of

summary judgment on FSA’s state law claims and the dismissal of FSA’s federal

securities claim.

26