Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca6-16-01135/USCOURTS-ca6-16-01135-0/pdf.json

Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 

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NOT RECOMMENDED FOR FULL-TEXT PUBLICATION 

File Name: 17a0076n.06 

Case No. 16-1135 

UNITED STATES COURT OF APPEALS 

FOR THE SIXTH CIRCUIT 

WILLIAM BEAUMONT HOSPITAL SYSTEM 

 Plaintiff-Appellant, 

v. 

MORGAN STANLEY & CO., LLC and GOLDMAN 

SACHS & CO., 

 Defendants-Appellees. 

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ON APPEAL FROM THE 

UNITED STATES DISTRICT 

COURT FOR THE EASTERN 

DISTRICT OF MICHIGAN 

OPINION

BEFORE: NORRIS, GIBBONS, and ROGERS, Circuit Judges. 

JULIA SMITH GIBBONS, Circuit Judge. Plaintiff William Beaumont Hospital 

(“Beaumont”) and defendants Morgan Stanley and Goldman Sachs entered into a structureddebt-issuance agreement for auction-rate securities (“ARS”) in March 2006 to finance a hospitalrenovation project. 

Defendants, as underwriters for the debt, agreed to purchase and to make a public 

offering of the ARS. Pursuant to the agreement and related disclosures, defendants had a 

practice of submitting cover bids in the ARS market. In 2007, many ARS auctions failed as the 

economy slowly deteriorated leading up to the 2008 financial crisis. None of the ARS auctions 

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involving Beaumont’s debt securities failed, but demand for Beaumont’s ARS declined, and it 

was forced to pay investors higher interest rates than it had previously. Defendants then, 

consistent with their broker-dealer agreement, ceased making bids in Beaumont’s ARS auctions. 

On January 28, 2014, Beaumont filed suit in federal district court and also filed an 

arbitration action with the Financial Industry Regulatory Authority (“FINRA”). FINRA, and 

then the district court, held that the applicable Michigan six-year statute of limitations barred 

Beaumont’s claims because the limitations period began running in March 2006 when the 

contract was signed and the debts were issued. Ruling in the alternative, the district court also 

dismissed Beaumont’s claims on Rule 12(b)(6) grounds for failure to state a claim. 

Beaumont appeals the dismissal of its claims, arguing that the statute of limitations did 

not begin to run until it suffered damages when the markets crashed in 2008. It also argues that 

the district court erred in granting defendants’ 12(b)(6) motion. For the reasons that follow, we 

affirm the district court’s dismissal of Beaumont’s claims. 

I. 

 William Beaumont Hospital (“Beaumont”) is a Michigan nonprofit corporation that 

operates three hospitals in southeastern Michigan. In 2005, Beaumont began negotiations with 

Morgan Stanley & Co. and Goldman Sachs & Co. (collectively, “defendants”) to finance 

renovations of one of its hospitals and for the construction of a new facility. Beaumont had 

worked previously with Morgan Stanley on its overall financing structure and with investment 

banker Bette Kraus, prior to her starting at Goldman Sachs.

 Beginning in summer 2005, and continuing until the debt issuance in March 2006, 

Beaumont met with defendants and their representatives to negotiate the structuring of a 

financing deal. Beaumont looked to defendants to serve as underwriters and broker-dealers for 

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the issuance of auction-rate securities (“ARS”), which are long-term variable-rate bonds with 

interest rates that reset based on short-term “Dutch auctions.” Interest rates are dependent on the 

sale of all of the ARS offered at a particular auction. ARS auctions are generally held every 7, 

28, or 35 days, and broker-dealers “buy” and “sell” orders and then forward them to the 

designated auction agent that administers the auction. If bids received by the auction agent are 

insufficient to purchase all of the ARS offered for sale at a particular auction, the auction “fails” 

and all ARS holders within that auction are unable to sell their securities. At this point, the 

interest rate on all ARS associated with the failed auction jumps to the contractual maximum 

rate, as determined by the offering documents.

In June 2005, Beaumont’s Board of Directors approved a resolution authorizing the 

hospital system to enter into swap transactions with defendants’ affiliates in an amount not to 

exceed $600 million. The resolution was approved on the recommendation of defendants. After 

a December 2005 committee meeting discussing the available structures for the 2006 bond 

issuance, including “either . . . synthetic or traditional fixed rate basis,” defendants advised 

Beaumont to issue its “new money bonds in 2006 on a synthetic fixed rate basis.” 

 Defendants continued to “provide advice and recommendations as to the structure of the 

2006 financing” through “regular in-person meetings, telephone calls, and email conversations” 

as the parties negotiated their deal over the next four months. However, Beaumont looked 

elsewhere for more objective financial advice on the ARS broker-dealer market and regarding 

their negotiations with defendants. Beaumont hired independent financial advisor, Kaufman 

Hall, “to provide advice regarding the swap and to serve as a consultant on the bond issuance.” 

In structuring the 2006 bond issuance, defendants advised Beaumont to use a fixed 

maximum rate of 12 percent. As detailed in the disclosures submitted to Beaumont by the 

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defendants, and as reiterated in Beaumont’s own disclosures pursuant to the parties’ agreement, 

defendants would place support “cover” bids in the ARS auctions in order to prevent failures in 

any auction in which they were lead broker-dealers. “Cover” bidding meant that defendants 

would purchase orders for “the entirety of an ARS issue for which they acted as the sole or lead 

broker-dealer” to prevent auction failure, which would result in increased costs to Beaumont.

The parties entered into a final agreement in March 2006, pursuant to which Beaumont 

issued $206.7 million in bonds, with $128.225 million as ARS combined with an interest-rate 

swap. After the 2006 bond issuance, defendants became the broker-dealers on the bonds and 

earned broker-dealer fees, equal to 25 basis points (approximately $320,000 annually). From 

2006 to early 2008, Beaumont’s ARS performed as predicted. Beaumont and defendants 

regularly communicated about the bond issuance, “in a concerted effort to maintain and 

strengthen the investment banks’ relationships with the hospital system.” The parties, using their 

established relationship, also negotiated other deals and worked on potential investment ventures 

entirely separate from the 2006 bond issuance. 

By August 2007, as the financial market was headed toward a crash, a number of ARS 

auctions issued by corporations and closed-end funds, a different sector of the ARS market, 

failed. Banks began to limit inventory exposure to ARS and discuss “exit strategies” regarding 

the ARS market. During this time, defendants continued to manage Beaumont’s ARS, “carefully 

monitoring their inventory and assessing the likelihood of auction failures in the ARS market” 

and “convening regular meetings to discuss the volatile ARS market.” Based on the declining 

market, defendants had to increasingly “cover” bids in their ARS auctions. 

Defendants met with Beaumont during 2007 to discuss the health of the ARS market, 

including a “Capital Markets Discussion” in August and a “Market Update Conference Call” in 

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November. Many of these meetings were part of the parties’ dealings regarding separate 

business and investment ventures. In December 2007, the parties met to negotiate a deal based 

on a new type of financing created to capitalize on the market’s increasing instability, and 

defendants noted to Beaumont that the ARS market remained volatile—something that was 

reported throughout the financial industry. Defendants continued to manage Beaumont’s ARS 

pursuant to their 2006 agreement, which included within its disclosures that defendants could 

stop making support bids to cover the market.

The financial market continued to erode into early 2008. In February, ARS brokerdealers, including defendants, stopped submitting support bids in municipal ARS auctions, 

leading the ARS market into a downward spiral. While Beaumont’s ARS auctions never failed, 

following the overall ARS-market crash, traditional ARS investors “fled the market,” and 

demand for ARS decreased. Decreased demand meant Beaumont was left paying investors a 

higher fixed-interest rate. 

Following the 2008 ARS-market crash, Beaumont alleged that, during their 2005 and 

2006 negotiations, defendants fraudulently misrepresented the fundamental structure of the ARS 

market and withheld information about their support-bidding practices. This alleged fraud 

induced Beaumont to enter into the 2006 bond structure and pay defendants higher broker-dealer 

fees. Beaumont also alleges that in 2007 and early 2008 defendants withheld critical information 

regarding the vitality of the ARS market, causing Beaumont to suffer damages during the 2008 

financial crash. 

Beaumont filed suit against defendants on January 28, 2014. Simultaneously, Beaumont 

filed arbitration proceedings before FINRA. The district court stayed the case until the 

resolution of FINRA arbitration. FINRA dismissed Beaumont’s claims, finding them ineligible 

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for arbitration on the grounds that the limitations period had run. Defendants then filed a Motion 

to Dismiss the Second Amended Complaint with the district court on April 24, 2015. Following 

a hearing on the motion, the district court dismissed Beaumont’s claims on two independent 

grounds. First, the six-year Michigan statute of limitations had run on Beaumont’s claims. 

Second, the court granted defendants’ motion to dismiss on the basis of Rule 12(b)(6), finding 

that Beaumont failed to state a claim for relief. This appeal followed. 

II. 

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

under Rule 12(b)(6). Phil. Indem. Ins. Co. v. Youth Alive, Inc., 732 F.3d 645, 649 (6th Cir. 

2013). We “constru[e] the record in the light most favorable to the non-moving party and 

accept[] all well-pled factual allegations as true” to determine whether the complaint, as pled, 

contains “sufficient factual matter, accepted as true, to state a claim to relief that is plausible on 

its face.” Id. (quoting Republic Bank & Tr. Co. v. Bear Stearns & Co., Inc., 683 F.3d 239, 246–

47 (6th Cir. 2012)). We may, however, “affirm on any grounds supported by the record, even 

though they may be different from the grounds relied on by the district court.” La. Sch. Emps.’ 

Ret. Sys. v. Ernst & Young, LLP, 622 F.3d 471, 479 (6th Cir. 2010). 

Fraud and misrepresentation claims are held to a higher pleading standard under Rule 

9(b). Fed. R. Civ. P. 9(b). Rule 9(b) states that claims of fraud “must state with particularity the 

circumstances constituting [the] fraud,” id., which this circuit has interpreted to mean a plaintiff 

must “(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.” Frank v. Dana Corp., 547 F.3d 564, 570 (6th Cir. 2008); see also Rautu v. 

U.S. Bank, 557 F. App’x 411, 414 (6th Cir. 2014); Ram Int’l, Inc. v. ADT Sec. Servs., Inc., 555 F. 

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App’x 493, 498 (6th Cir. 2014). Rule 9(b) applies with equal force to fraud claims premised on 

an omission or a failure to disclose. See Republic Bank, 683 F.3d at 255–56; Gilmore v. First 

Am. Title Ins. Co., No. 07-12123, 2009 WL 2960703, at *3 (E.D. Mich. Sept. 11, 2009). 

A. 

Beaumont has failed to adequately plead a cause of action upon which relief could be 

granted and dismissal under Rule 12(b)(6) was proper. In order to successfully plead a claim of 

fraud or misrepresentation in Michigan, a plaintiff must allege: 

(1) that the defendant made a material representation, (2) that was false, 

(3) that the defendant knew was false, or that was made recklessly without 

any knowledge of its truth, (4) that the defendant made it with the intention 

that the plaintiff would act upon it, and (5) the plaintiff acted in reliance 

upon it, and (6) suffered damages. 

Fransworth v. Nationstar Mortg., LLC, 569 F. App’x 421, 426–27 (6th Cir. 2014); see also HiWay Motor Co. v. Int’l Harvester Co., 247 N.W.2d 813, 815–16 (Mich. 1976). 

Beaumont’s claims are also subject to the heightened pleading standards for fraud and 

misrepresentation under Rule 9(b), which require a plaintiff to allege specific facts about alleged 

misrepresentations, including the statements made and by whom, when and where they were 

made, and to whom they were made. See Frank, 547 F.3d at 569–70. Vague allegations of 

generic misrepresentations or omissions are not sufficient to survive a Rule 12(b)(6) challenge. 

See id. “At a minimum, [p]laintiffs must allege the time, place and contents of the 

misrepresentations upon which they relied.” Id. at 570 (citing Bender v. Southland Corp., 

749 F.2d 1205, 1216 (6th Cir. 1984)). 

 None of Beaumont’s claims of fraud and misrepresentation meet Rule 9’s heightened 

pleading standard. Beaumont cites multiple instances of alleged fraud and misrepresentation 

within its two-count complaint, but they boil down to three chief issues with the 2006 financing 

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deal: (1) defendants withheld information about the structure of the ARS market and their 

support-bidding practices; (2) defendants misrepresented the availability of fixed-versusformulaic rate structures in order to achieve a higher broker-dealer fee; and (3) defendants failed 

to warn Beaumont about the deteriorating ARS market in 2007 and 2008. Based on the 

information pled in Beaumont’s complaint, each of these allegations of misrepresentation can 

easily be dismissed under Rules 12(b)(6) and 9(b). 

 First, the overarching theory of Beaumont’s complaint is that, had defendants disclosed 

that they engaged in support-bidding practices in their ARS auctions and that they retained the 

discretion to stop placing cover bids as the ARS market required, it would not have signed the 

2006 bond issuance as is. This argument fails, because as Beaumont itself acknowledged in its 

2006 Official Statement regarding the bond issuance (affirming almost identical language 

provided to Beaumont by defendants): 

Broker-[d]ealers . . . routinely place[] one or more bids in auctions generally 

to prevent a failed auction or a clearing rate it believes is not a market rate. 

While they may do so with respect to the Bonds, they are not obligated to 

do so and may elect not to do so . . . . Broker-[d]ealers may submit Orders 

for their own accounts in an Auction in order to prevent the Auction from 

failing, [but] they are not obligated to do so, and there is no assurance that 

any one or more Auctions will not fail. 

Beaumont also acknowledged in its statement that if “the number of Bonds offered for sale 

exceeds the number offered to be purchased in any Auction, the Auction will fail and beneficial 

owners may not be able to sell their Bonds at that time . . . . The relative buying and selling 

interest of market participants in Bonds, both within and outside of an Auction, will vary over 

time.” This is exactly the information Beaumont alleges defendants withheld from it during their 

dealings leading up to the March 2006 issuance. Simply put, Beaumont’s allegations of 

misrepresentation and fraud, in light of the specific disclosures in the record, are not actionable. 

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Without more specific allegations that would satisfy Rule 9(b)’s heightened pleadings, 

Beaumont’s claims of fraudulent inducement fail. 

 Second, the claim that defendants withheld information about the availability of formulabased maximum interest rates and instead promoted a fixed-rate interest maximum for the 2006 

bonds is, likewise, not actionable. Beaumont’s complaint does not meet Rule 9(b) standards—all 

allegations regarding this claim involve vague accusations of fraud and misrepresentation rather 

than the specific, identifiable statements required by this circuit. See Frank, 547 F.3d at 569–70. 

Nowhere in its complaint does Beaumont allege any specific misstatement made at a certain time 

and place, including the “contents of the misrepresentation(s) upon which [it] relied.” Rautu, 

557 F. App’x at 414. 

 Third, although Beaumont relies solely on common-law theories of fraud and 

misrepresentation, it attempts with its claims to impose the duties of a financial advisor on 

defendants. This is misguided, and Beaumont’s theory does not survive 12(b)(6) and 9(b) 

review. Again, Beaumont does not allege enough specific information about any misstatements 

or omissions to survive the heightened standard of Rule 9(b). Beaumont would need to provide 

the names of representatives who participated in the conversations and ran the presentations from 

which Beaumont’s allegations of misrepresentation arise. Further, it appears that defendants did

apprise Beaumont to the volatility in the ARS market. And this volatility was widely-known 

within the financial markets. 

 As a final point, Beaumont has also failed to establish that defendants had any ongoing 

duty to disclose information about the health of the ARS market. Without a duty to disclose, 

there can be no fraud by omission. And, in any event, the meetings during which defendants 

allegedly failed to disclose information about the ARS market were meetings unrelated to the 

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2006 bond issuance. Beaumont has failed to demonstrate that defendants fraudulently omitted 

any information pertaining to the ARS market or the 2006 bond issuance. Thus, we affirm the 

district court’s dismissal on Rules 12(b)(6) and 9(b) grounds. 

B. 

 The district court also dismissed Beaumont’s claims because it found that the applicable 

statute of limitations had run, but because we affirm the district court on 12(b)(6) and 9(b) 

grounds, we need not address its ruling on the Michigan statute of limitations. 

III. 

For the reasons stated above, we affirm the judgment of the district court. 

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