Source: http://openjurist.org/346/f3d/660
Timestamp: 2014-12-18 01:14:47
Document Index: 568574735

Matched Legal Cases: ['§ 78', '§ 78', '§ 240', '§ 78', '§ 78', '§ 240', '§ 78', '§ 78', '§ 78', '§ 78', '§ 78', '§ 78', '§ 78']

346 F3d 660 Miller v. Champion Enterprises Inc | OpenJurist
346 F. 3d 660 - Miller v. Champion Enterprises Inc	Home346 f3d 660 miller v. champion enterprises inc
346 F3d 660 Miller v. Champion Enterprises Inc 346 F.3d 660
Joel MILLER; Gary Kissiah; Simche Margulies, individually and on behalf of all others similarly situated, Plaintiffs-Appellants,v.CHAMPION ENTERPRISES, INC., a Michigan corporation; Walter Young, Defendants-Appellees.
No. 01-1955.
Argued June 20, 2003.
Decided and Filed October 8, 2003.
Petition for Rehearing Denied En Banc: December 30, 2003 Pursuant to Sixth Circuit Rule 206.
ARGUED: Lionel Z. Glancy (briefed), Robin Howald, (argued and briefed), GLANCY & BINKOW, Los Angeles, California, E. Powell Miller (briefed), Mantese Miller & Shea, Troy, MI, for Plaintiffs-Appellants. Donna L. McDevitt, SKADDEN, ARPS, SLATE, MEAGHER & FLOM, Chicago, Illinois, for Appellees.
ON BRIEF: Andrew J. McGuinness (briefed), Dykema Gossett, Ann Arbor, Michigan, Carl H. Von Ende (briefed), Miller, Canfield, Paddock & Stone, Detroit, Michigan, Timothy A. Nelsen (briefed), Donna L. McDevitt (argued and briefed), Skadden, Arps, Slate, Meagher & Flom, Chicago, Illinois, for Defendants-Appellees.
Before: DAUGHTREY and ROGERS, Circuit Judges; QUIST, District Judge.*
Plaintiff Joel Miller, a shareholder of Champion Enterprises, Inc. ("Champion"), appeals from the dismissal of his complaint, referred to as the "CAC,"1 pursuant to Rule 12(b)(6), Federal Rules of Civil Procedure, and the Private Securities Litigation Reform Act (the "PSLRA"), 15 U.S.C. § 78u-4 et seq. Plaintiff sued Champion and its Chief Executive Officer for securities fraud under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission (the "SEC"), alleging that the defendants made various false or misleading statements related to the bankruptcy of its largest customer. The district court dismissed the CAC because (1) it failed to meet the heightened pleading requirements for scienter of the PSLRA, (2) a number of the alleged misleading statements qualified as "forward-looking statements" protected by the PSLRA's safe harbor provision, and (3) the CAC failed to give rise to a strong inference that Champion or its CEO knowingly or recklessly misstated or omitted any material facts.
Plaintiff also appeals from the district court's denial of leave to file a proposed amended complaint, referred to as the "SASC."2 The district court denied plaintiff's leave to file the SASC on two grounds: (1) the PSLRA restricts Rule 15 of the Federal Rules of Civil Procedure, thereby barring repeated amendments to a complaint governed by the PSLRA, and (2) the proposed amendments were futile. For the following reasons, we AFFIRM the judgment of the district court.
Plaintiff brought this securities fraud action against Champion and Walter Young, President, Chairman of the Board of Directors, and Chief Executive Officer of Champion, for making allegedly false or fraudulent statements concerning Champion's relationship with Ted Parker Home Sales, Inc. ("Parker Homes"), and especially with regard to Parker Homes's filing for bankruptcy on July 22, 1999. Champion, headquartered in Michigan, is the largest producer of manufactured housing in the nation, and one of the largest retailers, although it sells the manufactured homes through both its own 280 retail stores and 3,500 independent retailers. Parker Homes, headquartered in North Carolina, was Champion's largest independent retailer, accounting for 3.5 percent of the 70,000 homes sold by Champion in 1998.
Prior to 1998, Champion, through two of its subsidiaries, entered into agreements with Parker Homes whereby Parker Homes would receive substantial volume discounts for inventory purchases (the "Bonus Program"). Parker Homes would also receive an additional $1,000 or $2,000 for each single-section or multi-section home purchased under the Bonus Program. Parker Homes did not purchase the homes in its inventory directly. Instead, the homes were purchased through third-party finance companies, which charged Parker Homes interest on the amount financed. When Parker Homes sold a home, it paid the finance company from the proceeds of the sale. However, if a home remained unsold for 12 to 15 months and if the retailer — Parker Homes — went bankrupt or defaulted, Champion was obligated by the finance company to repurchase the home. Champion recognized revenue once financing was obtained, and Parker Homes received the advances under the Bonus Program at the same time. Parker Homes was required to repay these advances if Champion repurchased the home. However, according to the plaintiff, this contingency was unlikely because Champion would only repurchase the home if Parker Homes went bankrupt or otherwise defaulted, in which case Parker Homes would be unable to repay the advances.
Ted Parker was the original owner of Parker Homes. In December of 1998 he sold a controlling interest of 60 percent in Parker Homes to two professional investors, GE Investment Private Placement Partners II, L.P. ("GE Partners"), and Ardhouse, L.L.C. ("Ardhouse"). In the course of the transaction two holding companies (the "Holding Companies") were created through which Ardhouse and GE Partners invested approximately $42 million in Parker Homes. Champion asserts in its brief that Ted Parker's purpose in undertaking this transaction was to provide funding to Parker Homes for the opening of 26 new retail centers.
Prior to this transaction between Parker Homes, GE Partners, and Ardhouse, Champion and Parker Homes had entered into agreements (the "revolving loan agreement") whereby Champion would lend Parker Homes $250,000 for each new sales center that Parker Homes opened, and Champion would credit $50,000 toward repayment of these loans for each year a sales center purchased $5 million in inventory. These loans by Champion were unsecured and could not exceed $8 million. These agreements were renewed on May 5, 1999, and also on that date, Champion agreed to advance to Parker Homes an additional $2.25 million pursuant to these agreements.
According to the plaintiff, beginning in the first quarter of 1999, Parker Homes's inventory became significantly overstocked. He cites as evidence of the overstocked inventory a statement in GE Partners and Ardhouse's complaint in their lawsuit against Ted Parker and others for fraud with respect to the sale of the 60% controlling interest. The statement alleges that Parker Homes's "inventory build-up was so large that the Company was unable to fit all the homes it purchased on its sales sites and, as a result, had to convert extra lots into storage centers." The plaintiff also points to a due diligence report that was undertaken by PricewaterhouseCoopers, L.L.P., on behalf of GE Partners and Ardhouse prior to their purchase of the controlling interest in Parker Homes. This report showed that (1) Parker Homes's inventory that was older than 15 months had increased from 4.9% to 10% from December 31, 1997, to September 18, 1998; (2) the average value of the inventory at each of Parker Homes's sales centers had increased over the 18 months that ended June 30, 1998; and (3) inventory turnover had decreased from an adjusted turnover rate of 1.7 on December 31, 1996, to 1.4 on June 30, 1998.3
According to the plaintiff, Champion was aware or should have been aware of the overstock of inventory by Parker Homes in the first quarter of 1999. He refers to several instances when the defendants stated that they had been monitoring inventory levels, both as a general matter and specifically as to Parker Homes. The plaintiff also notes several statements by industry experts that speak of the excess inventory in the manufactured home market.
Plaintiff also argues that several other facts, not included in the CAC, but outlined in detail in the SASC, show that Champion knew that Parker Homes was both overstocked and in some financial danger during the first quarter of 1999. A former Parker Homes sales manager in North Carolina, John Trapaso, said that one of Champion's local manufacturing plants "stayed in business because Ted [Parker] kept the excess inventory going." Plaintiff also states that a former Champion employee, unnamed, estimated that Champion sold $3 million to $4 million worth of unfinanced homes without purchase orders to Parker Homes sometime around May 1999. This same employee went on to say that "[a]t the end, Parker did not order a ton of houses. We forced them down his throat to keep the plants running." According to this employee, "everyone at the plant" was talking about this situation, including upper management.
Plaintiff further asserts that Parker Homes's sales and storage facilities became so overstocked that Champion had to store more than 200 homes at one of its wholly-owned subsidiary's facilities. These homes were apparently visible to the executives of the subsidiary when they were flying into the nearby airport. Plaintiff contends that these facts were confirmed by allegations made in a complaint filed by the Holding Companies against Ted Parker. Plaintiff alleges that John Trapaso, who originally worked for Parker Homes and later worked for Champion, indicated that Parker Homes "always" had too much inventory and that Champion knew this because sales representatives from its wholly-owned subsidiary were "always going from one [Parker Homes] lot to another." Trapaso also stated that the manager from the subsidiary told him in March 1999 that Parker Homes had too much inventory and "was going to go bankrupt." The same manager told Trapaso, in late March 1999, that Champion could no longer deliver houses to Parker Homes because Parker Homes had exhausted its financing. Finally, according to a former employee of Parker Homes, Wayne Murchison, when rumors began to circulate within Parker Homes in March 1999 that the company was in financial straits, two Parker Homes managers, Kathy Parker and Bob Dowless, told the employees that "everything would be okay because Champion would take over the company soon."
On June 28, 1999, the Holding Companies that owned Parker Homes pursuant to GE Partners and Ardhouse's purchase of a controlling interest in Parker Homes filed a Chapter 11 bankruptcy petition. The board of directors of Parker Homes also approved the filing of a Chapter 11 petition for Parker Homes on June 28. By June 30, 1999, Champion was aware that the Holding Companies had filed for bankruptcy. Thereafter, Champion, Ted Parker, GE Partners, and Ardhouse began discussing plans to fund the continuing operations of Parker Homes and avoid a bankruptcy filing. Champion, GE Partners, and Ardhouse executed a letter of intent on July 15, 1999, whereby they agreed to the creation of a senior secured credit facility to meet Parker Homes's funding needs. Pursuant to this letter of intent, on July 16, 1999, Champion made an initial advance to Parker Homes of $350,000 on an unsecured basis.
Prior to the execution of the letter of intent, on July 12, Ted Parker had sent Parker Homes notices of default on lease agreements for Parker Homes's sales lots. Under these agreements, if Parker Homes did not pay Ted Parker the overdue rent on these leases by July 22, it would forfeit the sales lots. According to the plaintiff, the only means Parker Homes had to preserve the leases was to file for bankruptcy, unless Ted Parker agreed to give Parker Homes more time. The sales lots leases were Parker Homes's only unencumbered asset. According to the plaintiff, as of 1:42 a.m. on July 22, an agreement between Champion and Ted Parker with respect to these leases was not yet finalized. An e-mail of 1:42 a.m. showed that the documents for an agreement were close to final, and that Parker Homes's Board would meet in the morning "to approve the Champion and Ted deals and ratify the recent working capital borrowings from [GE Partners] and [Ardhouse]." Later that day GE Partners and Ardhouse filed for Chapter 11 bankruptcy for Parker Homes. Champion and Ted Parker were unaware that GE Partners and Ardhouse were going to take this action, and did not learn of the Parker Homes bankruptcy filing until July 23, 1999.
As of the time of Parker Homes's Chapter 11 bankruptcy filing, Parker Homes owed Champion about $10.4 million in discounts and cash reimbursements under the Bonus Program. Parker Homes also owed Champion an additional $7.2 million for loans extended when Parker Homes opened new sales centers under the Revolving Loan Agreement. Additionally, when Parker Homes filed for bankruptcy, Champion became obligated to repurchase around $69 million of Parker Homes's inventory under Champion's repurchase agreements with the third-party finance companies.
The CAC also alleged that Champion had failed to disclose its intent to purchase the assets of Parker Homes. According to the plaintiff, Champion had begun negotiating with Parker Homes to purchase all of Parker Homes's assets sometime prior to the filing of the Holding Companies' Chapter 11 petitions. In a conference call on August 1, a Champion vice president implied to employees at Parker Homes's sales centers that Champion would be taking over Parker Homes. In a bankruptcy filing on August 9, Parker Homes and the Holding Companies stated that "[c]ommencing prior to the inception of Debtors' [Parker Homes and the Holding Companies] cases, and continuing after their filings, the Debtors negotiated with Champion Enterprises, Inc. for the sale of substantially all of their assets and post-petition financing for working capital and the Debtors' general corporate requirements pending the closing on the sale." On August 13, Champion agreed, subject to bankruptcy court approval, to: (1) repurchase all of the Parker Homes inventory that was subject to a repurchase obligation, with a value of $69 million; (2) repurchase other inventory not subject to a repurchase obligation, with a value of $10 million; (3) provide Parker Homes with $1.15 million in post-petition financing; and (4) purchase the leases for 37 Parker Homes sales centers for $1.25 million.
From July 8 until August 26, 1999, Champion made numerous public disclosures in the form of press releases, conference calls, and filings with the SEC. On July 8, Young wrote a letter to the shareholders indicating that Champion was comfortable with the earnings estimates for the second quarter of 1999. On July 21, Champion issued a press release indicating that the second quarter of 1999 had set records for revenues and earnings. Also on July 21, Champion held a conference call in which Young discussed retail inventory, turn rates, repurchase obligations, and dealer bankruptcies. On July 30, Champion again made a press release and held a conference call, in which Young discussed the circumstances and effects of Parker Homes's Chapter 11 filing, as well as Champion's relationship with Parker Homes. On August 9, Champion filed a Form 10-Q for the second quarter of 1999. In this Form 10-Q Champion disclosed in a footnote that Parker Homes had filed a Chapter 11 petition, and that Champion would take a pre-tax charge of $33.6 million related to its repurchase obligations for Parker Homes's inventory. Finally, on August 26, Champion announced that the bankruptcy court had approved its purchase of 37 of Parker Homes's sales center leases and all of Parker Homes's inventory, totaling about 1,850 homes. Also on August 26, Champion stated that it expected that its earnings for the second half of 1999 would be 40% lower than earnings for the second half of 1998 because of a greater than expected build-up of retail inventory in the market.
On July 21, the day before Parker Homes filed for Chapter 11 relief, Champion's stock price closed at around $18 per share. Champion's stock price dropped to $13.50 per share on July 30, the day Champion announced the $33.6 million pre-tax charge. On August 26, 1999, after announcing that it expected earnings to be lower in the second half of 1999, Champion's stock price fell to $8.94 per share, having closed at approximately $11.94 per share the day before.
Plaintiff Joel Miller filed a securities fraud action against Champion and Young on August 26, 1999. Two other securities fraud class actions were also filed against Champion and Young, and these actions were consolidated on March 30, 2000. On May 15, 2000, plaintiff filed the CAC, charging Champion and Young with violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5 which was promulgated thereunder, 17 C.F.R. § 240.10b-5. Defendant Young was also alleged to have "controlling person" liability under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). The gravamen of the CAC was that Champion "violated the federal securities laws by inadequately disclosing and accruing more than $38 million in losses stemming from Champion's undisclosed business dealings with its then-largest customer, Ted Parker Home Sales, Inc. [], a retailer of manufactured homes that filed a Chapter 11 bankruptcy petition on July 22, 1999."
On June 30, 2000, defendants filed a motion to dismiss the CAC. Plaintiff then filed a motion for leave to file the SASC on December 1, 2000, and renewed this motion on March 27, 2001. The district court issued a Memorandum and Order on April 9, 2001, stating that the CAC must be dismissed, but stayed consideration of whether the dismissal should be with prejudice until after considering plaintiff's motion to amend. Then, on June 13, 2001, the district court issued an opinion denying plaintiff's motion to file the SASC and dismissing the case with prejudice.
This appeal requires us to interpret the PSLRA, and questions of statutory interpretation are reviewed de novo. Hoffman v. Comshare, Inc. (In re Comshare Inc. Secs. Litig.), 183 F.3d 542, 547 (6th Cir.1999). We also review a district court's dismissal of a complaint under Rule 12(b)(6) de novo. Id. The facts set forth in the complaint must be accepted as true, so long as they are well pleaded. Id. However, the panel "is not restricted to ruling on the district court's reasoning, and may affirm a district court's grant of a motion to dismiss on a basis not mentioned in the district court's opinion." Id. at 548. Finally, a district court's denial of leave to amend on the ground of futility is reviewed de novo, Ziegler v. IBP Hog Market, Inc., 249 F.3d 509, 518 (6th Cir.2001), although generally we review a district court's denial of leave to amend for abuse of discretion, except in cases where the district court bases its decision on the legal conclusion that an amended complaint could not withstand a motion to dismiss. Morse v. McWhorter, 290 F.3d 795, 799 (6th Cir. 2002).
B. General Legal Background
In his complaint, the plaintiff alleges violations by Champion and its CEO of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder by the SEC. Section 10(b) of the Exchange Act and Rule 10b-5 prohibit "fraudulent, material misstatements or omissions in connection with the sale or purchase of a security." Morse, 290 F.3d at 798; see 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Section 20(a) of the Exchange Act makes a person liable for violations of the Exchange Act when that person controls the person whose action caused the violation. See 15 U.S.C. § 78t(a). Defendant Young's liability is therefore dependent on whether Champion's statements at issue in this case violated the Exchange Act.
In order to state a claim pursuant to Section 10(b) of the Exchange Act and Rule 10b-5, "a plaintiff must allege, in connection with the purchase or sale of securities, the misstatement or omission of a material fact, made with scienter, upon which the plaintiff justifiably relied and which proximately caused the plaintiff's injury." Comshare, 183 F.3d at 548. In the present case there is no dispute as to the purchase of securities, justifiable reliance, causation, or damages. Therefore, this case centers on two issues: (1) whether the defendants misstated or omitted material facts; and (2) whether these misstatements or omissions were made with scienter.
In order to allege scienter in a private securities action for money damages, the PSLRA requires that "the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2) (emphasis added). There are three distinct scienter requirements for securities fraud actions, each of which depends on the type of statement that is being made, and, in the case of "forward-looking statements,"4 whether that statement was material and accompanied by meaningful cautionary statements. See 15 U.S.C. § 78u-5(c). First, for "forward-looking statements" that are accompanied by meaningful cautionary language, the first prong of the safe harbor provided for in the PSLRA makes the state of mind irrelevant. See 15 U.S.C. § 78u-5(c)(1)(A); see also Harris v. Ivax Corp., 182 F.3d 799, 803 (11th Cir.1999). In other words, if the statement qualifies as "forward-looking" and is accompanied by sufficient cautionary language, a defendant's statement is protected regardless of the actual state of mind. Second, under the second prong of the safe harbor provision of the PSLRA, in the case of "forward-looking statements" that are not accompanied by meaningful cautionary language, actual knowledge of their false or misleading nature is required. See 15 U.S.C. § 78u-5(c)(1)(B); see also Helwig v. Vencor, Inc., 251 F.3d 540, 552 (6th Cir.2001) (en banc). Finally, for statements of present or historical fact, the state of mind required is recklessness. Vencor, 251 F.3d at 552. Recklessness is defined as "highly unreasonable conduct which is an extreme departure from the standards of ordinary care. While the danger need not be known, it must at least be so obvious that any reasonable man would have known of it." Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1025 (6th Cir.1979).
We have previously held that certain factors are usually relevant to scienter in securities fraud actions:
(1) insider trading at a suspicious time or in an unusual amount; (2) divergence between internal reports and external statements on the same subject; (3) closeness in time of an allegedly fraudulent statement or omission and the later disclosure of inconsistent information; (4) evidence of bribery by a top company official; (5) existence of an ancillary lawsuit charging fraud by a company and the company's quick settlement of that suit; (6) disregard of the most current factual information before making statements; (7) disclosure of accounting information in such a way that its negative implications could only be understood by someone with a high degree of sophistication; (8) the personal interest of certain directors in not informing disinterested directors of an impending sale of stock; and (9) the self-interested motivation of defendants in the form of saving their salaries or jobs. Vencor, 251 F.3d at 552. In this appeal, factors one, two, and six are at issue.
As stated previously, a plaintiff must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). In Vencor, we provided a definitive explanation of the meaning of a "strong inference":
Inferences must be reasonable and strong — but not irrefutable. "Strong inferences" nonetheless involve deductive reasoning; their strength depends on how closely a conclusion of misconduct follows from a plaintiff's proposition of fact. Plaintiffs need not foreclose all other characterizations of fact, as the task of weighing contrary accounts is reserved for the fact finder. Rather, the "strong inference" requirement means that plaintiffs are entitled only to the most plausible of competing inferences.
251 F.3d at 553. Thus, if certain factors are not met in the complaint — factual particularity and the most plausible of competing inferences — "the court shall, on the motion of any defendant, dismiss the complaint." 15 U.S.C. § 78u-4(b)(3)(A).
C. Scienter was Pleaded with Sufficiently Particular Facts
One factor on which the district court based its dismissal of the CAC was a failure by the plaintiff to plead scienter with sufficient particularity. Specifically, the district court went through the complaint paragraph by paragraph, analyzing each of the factual allegations and attempting to connect these allegations with the allegations of scienter to determine if they were sufficiently well pleaded so as to satisfy the requirements of the heightened pleading requirements of the PSLRA. Ultimately, the district court concluded that the plaintiff "`failed to craft a Complaint in such a way that a reader can, without undue effort, divine why each alleged statement was false or misleading.'" R.40, Opinion (April 9, 2001) (granting motion to dismiss consolidated amended class action complaint) (quoting Wenger v. Lumisys, Inc., 2 F.Supp.2d 1231, 1243 (N.D.Cal.1998)).
The plaintiff takes issue with the district court's finding that he was unable to draft an adequate complaint. He argues that the district court erred in the method it used to analyze the CAC, characterizing the district court's standard of review as requiring that each paragraph contain all the elements necessary to state a securities fraud claim. This standard, plaintiff argues, is unsupported by either the PSLRA or the Federal Rules of Civil Procedure, and therefore the district court's judgment should be reversed.
Plaintiff is correct in his contention that nothing in the PSLRA or the Federal Rules of Civil Procedure supports a method of analysis that would require all the elements of a securities fraud claim to be stated in each paragraph of a complaint. However, nowhere in its 39-page opinion did the district court purport to be applying such a standard. We assume, therefore, that the plaintiff must be asserting that such a method, as a practical matter, was the one used by the district court, not that the district court explicitly held that such a method was the one to be applied.
There is some merit to this characterization of the district court's opinion. The district court approached the CAC in a highly systematic — and somewhat rigid — manner and overlooked some of plaintiff's attempts to connect its factual allegations and allegations of scienter. Plaintiff alleged some kind of scienter in paragraphs 4, 39-40, 47-48, 64, 66-67,5 69, 70, 73-75, and 82.6 Many of these allegations were general and therefore insufficient to meet the particularity requirements of the PSLRA. See ¶¶ 69, 70, 73-75, 82.7 Moreover, other allegations of scienter were not asserted in relation to a statement or omission of a material fact, but rather with respect to Champion's substantive actions throughout the underlying situation, and