RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206 2 Miller, et al. v. Champion No. 01-1955
ELECTRONIC CITATION: 2003 FED App. 0359P (6th Cir.) Enterprises, et al.
File Name: 03a0359p.06
_________________
UNITED STATES COURT OF APPEALS COUNSEL
FOR THE SIXTH CIRCUIT ARGUED: Robin Howald, GLANCY & BINKOW, Los
_________________ Angeles, California, for Appellants. Donna L. McDevitt,
SKADDEN, ARPS, SLATE, MEAGHER & FLOM,
JOEL MILLER; GARY KISSIAH ; X Chicago, Illinois, for Appellees. ON BRIEF: Robin
SIMCHE MARGULIES, - Howald, Lionel Z. Glancy, GLANCY & BINKOW, Los
individually and on behalf of - Angeles, California, E. Powell Miller, MANTESE MILLER
- No. 01-1955 & SHEA, Troy, Michigan, for Appellants. Donna L.
all others similarly situated, - McDevitt, Timothy A. Nelsen, SKADDEN, ARPS, SLATE,
Plaintiffs-Appellants, > MEAGHER & FLOM, Chicago, Illinois, Andrew J.
,
- McGuinness, DYKEMA GOSSETT, Ann Arbor, Michigan,
v. - Carl H. Von Ende, MILLER, CANFIELD, PADDOCK &
- STONE, Detroit, Michigan, for Appellees.
CHAMPION ENTERPRISES, - _________________
INC., a Michigan corporation; -
- OPINION
WALTER YOUNG ,
- _________________
Defendants-Appellees. -
N ROGERS, Circuit Judge. Plaintiff Joel Miller, a
Appeal from the United States District Court shareholder of Champion Enterprises, Inc. (“Champion”),
for the Eastern District of Michigan at Detroit. appeals from the dismissal of his complaint, referred to as the
No. 99-74231—John Feikens, District Judge. “CAC,”1 pursuant to Rule 12(b)(6), Federal Rules of Civil
Procedure, and the Private Securities Litigation Reform Act
Argued: June 20, 2003 (the “PSLRA”), 15 U.S.C. 78u-4 et seq. Plaintiff sued
Champion and its Chief Executive Officer for securities fraud
Decided and Filed: October 8, 2003 under Sections 10(b) and 20(a) of the Securities and
Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5
Before: DAUGHTREY and ROGERS, Circuit Judges; promulgated thereunder by the Securities Exchange
QUIST, District Judge.* Commission (the “SEC”), alleging that the defendants made
1
*
The dismissed complaint was styled “Consolidated and Amended
The Honorable Gordon J. Quist, United States District Judge for the Class Action Complaint,” and has generally been referred to as the
W estern District of Michigan, sitting by designation. “CA C.”
1
No. 01-1955 Miller, et al. v. Champion 3 4 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
various false or misleading statements related to the independent retailers. Parker Homes, headquartered in North
bankruptcy of its largest customer. The district court Carolina, was Champion’s largest independent retailer,
dismissed the CAC because (1) it failed to meet the accounting for 3.5 percent of the 70,000 homes sold by
heightened pleading requirements for scienter of the PSLRA, Champion in 1998.
(2) a number of the alleged misleading statements qualified as
“forward-looking statements” protected by the PSLRA’s safe Prior to 1998, Champion, through two of its subsidiaries,
harbor provision, and (3) the CAC failed to give rise to a entered into agreements with Parker Homes whereby Parker
strong inference that Champion or its CEO knowingly or Homes would receive substantial volume discounts for
recklessly misstated or omitted any material facts. inventory purchases (the “Bonus Program”). Parker Homes
would also receive an additional $1,000 or $2,000 for each
Plaintiff also appeals from the district court’s denial of single-section or multi-section home purchased under the
leave to file a proposed amended complaint, referred to as the Bonus Program. Parker Homes did not purchase the homes
“SASC.”2 The district court denied plaintiff’s leave to file in its inventory directly. Instead, the homes were purchased
the SASC on two grounds: (1) the PSLRA restricts Rule 15 through third-party finance companies, which charged Parker
of the Federal Rules of Civil Procedure, thereby barring Homes interest on the amount financed. When Parker Homes
repeated amendments to a complaint governed by the sold a home, it paid the finance company from the proceeds
PSLRA, and (2) the proposed amendments were futile. For of the sale. However, if a home remained unsold for 12 to 15
the following reasons, we AFFIRM the judgment of the months and if the retailer—Parker Homes—went bankrupt or
district court. defaulted, Champion was obligated by the finance company
to repurchase the home. Champion recognized revenue once
I. BACKGROUND financing was obtained, and Parker Homes received the
advances under the Bonus Program at the same time. Parker
Plaintiff brought this securities fraud action against Homes was required to repay these advances if Champion
Champion and Walter Young, President, Chairman of the repurchased the home. However, according to the plaintiff,
Board of Directors, and Chief Executive Officer of this contingency was unlikely because Champion would only
Champion, for making allegedly false or fraudulent repurchase the home if Parker Homes went bankrupt or
statements concerning Champion’s relationship with Ted otherwise defaulted, in which case Parker Homes would be
Parker Home Sales, Inc. (“Parker Homes”), and especially unable to repay the advances.
with regard to Parker Homes’s filing for bankruptcy on
July 22, 1999. Champion, headquartered in Michigan, is the Ted Parker was the original owner of Parker Homes. In
largest producer of manufactured housing in the nation, and December of 1998 he sold a controlling interest of 60 percent
one of the largest retailers, although it sells the manufactured in Parker Homes to two professional investors, GE
homes through both its own 280 retail stores and 3,500 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
2 Companies”) were created through which Ardhouse and GE
The proposed amended complaint was styled “Second Amended and
Supplemental Conso lidated Class Action Comp laint,” and has generally
Partners invested approximately $42 million in Parker
been referred to as the “SASC.” Homes. Champion asserts in its brief that Ted Parker’s
No. 01-1955 Miller, et al. v. Champion 5 6 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
purpose in undertaking this transaction was to provide turnover had decreased from an adjusted turnover rate of 1.7
funding to Parker Homes for the opening of 26 new retail on December 31, 1996, to 1.4 on June 30, 1998.3
centers.
According to the plaintiff, Champion was aware or should
Prior to this transaction between Parker Homes, GE have been aware of the overstock of inventory by Parker
Partners, and Ardhouse, Champion and Parker Homes had Homes in the first quarter of 1999. He refers to several
entered into agreements (the “revolving loan agreement”) instances when the defendants stated that they had been
whereby Champion would lend Parker Homes $250,000 for monitoring inventory levels, both as a general matter and
each new sales center that Parker Homes opened, and specifically as to Parker Homes. The plaintiff also notes
Champion would credit $50,000 toward repayment of these several statements by industry experts that speak of the excess
loans for each year a sales center purchased $5 million in inventory in the manufactured home market.
inventory. These loans by Champion were unsecured and
could not exceed $8 million. These agreements were renewed Plaintiff also argues that several other facts, not included in
on May 5, 1999, and also on that date, Champion agreed to the CAC, but outlined in detail in the SASC, show that
advance to Parker Homes an additional $2.25 million Champion knew that Parker Homes was both overstocked and
pursuant to these agreements. in some financial danger during the first quarter of 1999. A
former Parker Homes sales manager in North Carolina, John
According to the plaintiff, beginning in the first quarter of Trapaso, said that one of Champion’s local manufacturing
1999, Parker Homes’s inventory became significantly plants “stayed in business because Ted [Parker] kept the
overstocked. He cites as evidence of the overstocked excess inventory going.” Plaintiff also states that a former
inventory a statement in GE Partners and Ardhouse’s Champion employee, unnamed, estimated that Champion sold
complaint in their lawsuit against Ted Parker and others for $3 million to $4 million worth of unfinanced homes without
fraud with respect to the sale of the 60% controlling interest. purchase orders to Parker Homes sometime around May
The statement alleges that Parker Homes’s “inventory build- 1999. This same employee went on to say that “[a]t the end,
up was so large that the Company was unable to fit all the Parker did not order a ton of houses. We forced them down
homes it purchased on its sales sites and, as a result, had to his throat to keep the plants running.” According to this
convert extra lots into storage centers.” The plaintiff also employee, “everyone at the plant” was talking about this
points to a due diligence report that was undertaken by situation, including upper management.
PricewaterhouseCoopers, L.L.P., on behalf of GE Partners
and Ardhouse prior to their purchase of the controlling Plaintiff further asserts that Parker Homes’s sales and
interest in Parker Homes. This report showed that (1) Parker storage facilities became so overstocked that Champion had
Homes’s inventory that was older than 15 months had to store more than 200 homes at one of its wholly-owned
increased from 4.9% to 10% from December 31, 1997, to subsidiary’s facilities. These homes were apparently visible
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 3
GE Partners and Ardhouse still decided to go forward with the
financing agreement despite having prior knowledge of these figures from
the due diligen ce rep ort.
No. 01-1955 Miller, et al. v. Champion 7 8 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
to the executives of the subsidiary when they were flying into Prior to the execution of the letter of intent, on July 12, Ted
the nearby airport. Plaintiff contends that these facts were Parker had sent Parker Homes notices of default on lease
confirmed by allegations made in a complaint filed by the agreements for Parker Homes’s sales lots. Under these
Holding Companies against Ted Parker. Plaintiff alleges that agreements, if Parker Homes did not pay Ted Parker the
John Trapaso, who originally worked for Parker Homes and overdue rent on these leases by July 22, it would forfeit the
later worked for Champion, indicated that Parker Homes sales lots. According to the plaintiff, the only means Parker
“always” had too much inventory and that Champion knew Homes had to preserve the leases was to file for bankruptcy,
this because sales representatives from its wholly-owned unless Ted Parker agreed to give Parker Homes more time.
subsidiary were “always going from one [Parker Homes] lot The sales lots leases were Parker Homes’s only
to another.” Trapaso also stated that the manager from the unencumbered asset. According to the plaintiff, as of 1:42
subsidiary told him in March 1999 that Parker Homes had too a.m. on July 22, an agreement between Champion and Ted
much inventory and “was going to go bankrupt.” The same Parker with respect to these leases was not yet finalized. An
manager told Trapaso, in late March 1999, that Champion e-mail of 1:42 a.m. showed that the documents for an
could no longer deliver houses to Parker Homes because agreement were close to final, and that Parker Homes’s Board
Parker Homes had exhausted its financing. Finally, according would meet in the morning “to approve the Champion and
to a former employee of Parker Homes, Wayne Murchison, Ted deals and ratify the recent working capital borrowings
when rumors began to circulate within Parker Homes in from [GE Partners] and [Ardhouse].” Later that day GE
March 1999 that the company was in financial straits, two Partners and Ardhouse filed for Chapter 11 bankruptcy for
Parker Homes managers, Kathy Parker and Bob Dowless, told Parker Homes. Champion and Ted Parker were unaware that
the employees that “everything would be okay because GE Partners and Ardhouse were going to take this action, and
Champion would take over the company soon.” did not learn of the Parker Homes bankruptcy filing until
July 23, 1999.
On June 28, 1999, the Holding Companies that owned
Parker Homes pursuant to GE Partners and Ardhouse’s As of the time of Parker Homes’s Chapter 11 bankruptcy
purchase of a controlling interest in Parker Homes filed a filing, Parker Homes owed Champion about $10.4 million in
Chapter 11 bankruptcy petition. The board of directors of discounts and cash reimbursements under the Bonus Program.
Parker Homes also approved the filing of a Chapter 11 Parker Homes also owed Champion an additional $7.2
petition for Parker Homes on June 28. By June 30, 1999, million for loans extended when Parker Homes opened new
Champion was aware that the Holding Companies had filed sales centers under the Revolving Loan Agreement.
for bankruptcy. Thereafter, Champion, Ted Parker, GE Additionally, when Parker Homes filed for bankruptcy,
Partners, and Ardhouse began discussing plans to fund the Champion became obligated to repurchase around $69
continuing operations of Parker Homes and avoid a million of Parker Homes’s inventory under Champion’s
bankruptcy filing. Champion, GE Partners, and Ardhouse repurchase agreements with the third-party finance
executed a letter of intent on July 15, 1999, whereby they companies.
agreed to the creation of a senior secured credit facility to
meet Parker Homes’s funding needs. Pursuant to this letter of The CAC also alleged that Champion had failed to disclose
intent, on July 16, 1999, Champion made an initial advance its intent to purchase the assets of Parker Homes. According
to Parker Homes of $350,000 on an unsecured basis. to the plaintiff, Champion had begun negotiating with Parker
No. 01-1955 Miller, et al. v. Champion 9 10 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
Homes to purchase all of Parker Homes’s assets sometime Parker Homes had filed a Chapter 11 petition, and that
prior to the filing of the Holding Companies’ Chapter 11 Champion would take a pre-tax charge of $33.6 million
petitions. In a conference call on August 1, a Champion vice related to its repurchase obligations for Parker Homes’s
president implied to employees at Parker Homes’s sales inventory. Finally, on August 26, Champion announced that
centers that Champion would be taking over Parker Homes. the bankruptcy court had approved its purchase of 37 of
In a bankruptcy filing on August 9, Parker Homes and the Parker Homes’s sales center leases and all of Parker Homes’s
Holding Companies stated that “[c]ommencing prior to the inventory, totaling about 1,850 homes. Also on August 26,
inception of Debtors’ [Parker Homes and the Holding Champion stated that it expected that its earnings for the
Companies] cases, and continuing after their filings, the second half of 1999 would be 40% lower than earnings for the
Debtors negotiated with Champion Enterprises, Inc. for the second half of 1998 because of a greater than expected build-
sale of substantially all of their assets and post-petition up of retail inventory in the market.
financing for working capital and the Debtors’ general
corporate requirements pending the closing on the sale.” On On July 21, the day before Parker Homes filed for Chapter
August 13, Champion agreed, subject to bankruptcy court 11 relief, Champion’s stock price closed at around $18 per
approval, to: (1) repurchase all of the Parker Homes inventory share. Champion’s stock price dropped to $13.50 per share
that was subject to a repurchase obligation, with a value of on July 30, the day Champion announced the $33.6 million
$69 million; (2) repurchase other inventory not subject to a pre-tax charge. On August 26, 1999, after announcing that it
repurchase obligation, with a value of $10 million; expected earnings to be lower in the second half of 1999,
(3) provide Parker Homes with $1.15 million in post-petition Champion’s stock price fell to $8.94 per share, having closed
financing; and (4) purchase the leases for 37 Parker Homes at approximately $11.94 per share the day before.
sales centers for $1.25 million.
Plaintiff Joel Miller filed a securities fraud action against
From July 8 until August 26, 1999, Champion made Champion and Young on August 26, 1999. Two other
numerous public disclosures in the form of press releases, securities fraud class actions were also filed against
conference calls, and filings with the SEC. On July 8, Young Champion and Young, and these actions were consolidated on
wrote a letter to the shareholders indicating that Champion March 30, 2000. On May 15, 2000, plaintiff filed the CAC,
was comfortable with the earnings estimates for the second charging Champion and Young with violations of Section
quarter of 1999. On July 21, Champion issued a press release 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.
indicating that the second quarter of 1999 had set records for § 78j(b), and SEC Rule 10b-5 which was promulgated
revenues and earnings. Also on July 21, Champion held a thereunder, 17 C.F.R. § 240.10b-5. Defendant Young was
conference call in which Young discussed retail inventory, also alleged to have “controlling person” liability under
turn rates, repurchase obligations, and dealer bankruptcies. Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). The
On July 30, Champion again made a press release and held a gravamen of the CAC was that Champion “violated the
conference call, in which Young discussed the circumstances federal securities laws by inadequately disclosing and
and effects of Parker Homes’s Chapter 11 filing, as well as accruing more than $38 million in losses stemming from
Champion’s relationship with Parker Homes. On August 9, Champion’s undisclosed business dealings with its then-
Champion filed a Form 10-Q for the second quarter of 1999. largest customer, Ted Parker Home Sales, Inc. [], a retailer of
In this Form 10-Q Champion disclosed in a footnote that
No. 01-1955 Miller, et al. v. Champion 11 12 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
manufactured homes that filed a Chapter 11 bankruptcy B. General Legal Background
petition on July 22, 1999.”
In his complaint, the plaintiff alleges violations by
On June 30, 2000, defendants filed a motion to dismiss the Champion and its CEO of Sections 10(b) and 20(a) of the
CAC. Plaintiff then filed a motion for leave to file the SASC Exchange Act and Rule 10b-5 promulgated thereunder by the
on December 1, 2000, and renewed this motion on March 27, SEC. Section 10(b) of the Exchange Act and Rule 10b-5
2001. The district court issued a Memorandum and Order on prohibit “fraudulent, material misstatements or omissions in
April 9, 2001, stating that the CAC must be dismissed, but connection with the sale or purchase of a security.” Morse,
stayed consideration of whether the dismissal should be with 290 F.3d at 798; see 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-
prejudice until after considering plaintiff’s motion to amend. 5. Section 20(a) of the Exchange Act makes a person liable
Then, on June 13, 2001, the district court issued an opinion for violations of the Exchange Act when that person controls
denying plaintiff’s motion to file the SASC and dismissing the person whose action caused the violation. See 15 U.S.C.
the case with prejudice. § 78t(a). Defendant Young’s liability is therefore dependent
on whether Champion’s statements at issue in this case
II. ANALYSIS violated the Exchange Act.
A. Standard of Review In order to state a claim pursuant to Section 10(b) of the
Exchange Act and Rule 10b-5, “a plaintiff must allege, in
This appeal requires us to interpret the PSLRA, and connection with the purchase or sale of securities, the
questions of statutory interpretation are reviewed de novo. misstatement or omission of a material fact, made with
Hoffman v. Comshare, Inc. (In re Comshare Inc. Sec. Litig.), scienter, upon which the plaintiff justifiably relied and which
183 F.3d 542, 547 (6th Cir. 1999). We also review a district proximately caused the plaintiff’s injury.” Comshare, 183
court’s dismissal of a complaint under Rule 12(b)(6) de novo. F.3d at 548. In the present case there is no dispute as to the
Id. The facts set forth in the complaint must be accepted as purchase of securities, justifiable reliance, causation, or
true, so long as they are well pleaded. Id. However, the panel damages. Therefore, this case centers on two issues:
“is not restricted to ruling on the district court's reasoning, (1) whether the defendants misstated or omitted material
and may affirm a district court's grant of a motion to dismiss facts; and (2) whether these misstatements or omissions were
on a basis not mentioned in the district court's opinion.” Id. made with scienter.
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 In order to allege scienter in a private securities action for
Market, Inc., 249 F.3d 509, 518 (6th Cir. 2001), although money damages, the PSLRA requires that “the complaint
generally we review a district court's denial of leave to amend shall, with respect to each act or omission alleged to violate
for abuse of discretion, except in cases where the district court this chapter, state with particularity facts giving rise to a
bases its decision on the legal conclusion that an amended strong inference that the defendant acted with the required
complaint could not withstand a motion to dismiss. Morse v. state of mind.” 15 U.S.C. § 78u-4(b)(2) (emphasis added).
McWhorter, 290 F.3d 795, 799 (6th Cir. 2002). 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
No. 01-1955 Miller, et al. v. Champion 13 14 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
statements,”4 whether that statement was material and 5(c)(1)(B); see also Helwig v. Vencor, Inc., 251 F.3d 540, 552
accompanied by meaningful cautionary statements. See 15 (6th Cir. 2001) (en banc). Finally, for statements of present
U.S.C. 78u-5(c). First, for “forward-looking statements” that or historical fact, the state of mind required is recklessness.
are accompanied by meaningful cautionary language, the first Vencor, 251 F.3d at 552. Recklessness is defined as “highly
prong of the safe harbor provided for in the PSLRA makes the unreasonable conduct which is an extreme departure from the
state of mind irrelevant. See 15 U.S.C. § 78u-5(c)(1)(A); see standards of ordinary care. While the danger need not be
also Harris v. Ivax Corp., 182 F.3d 799, 803 (11th Cir. 1999). known, it must at least be so obvious that any reasonable man
In other words, if the statement qualifies as “forward-looking” would have known of it.” Mansbach v. Prescott, Ball &
and is accompanied by sufficient cautionary language, a Turben, 598 F.2d 1017, 1025 (6th Cir. 1979).
defendant’s statement is protected regardless of the actual
state of mind. Second, under the second prong of the safe We have previously held that certain factors are usually
harbor provision of the PSLRA, in the case of “forward- relevant to scienter in securities fraud actions:
looking statements” that are not accompanied by meaningful
cautionary language, actual knowledge of their false or (1) insider trading at a suspicious time or in an unusual
misleading nature is required. See 15 U.S.C. § 78u- 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
Und er the PSLRA , a “forward-looking statement” is defined as: (4) evidence of bribery by a top company official;
(5) existence of an ancillary lawsuit charging fraud by a
(A) a statement containing a projection of revenues, income company and the company’s quick settlement of that
(including income loss), earnings (including earnings loss) per
share, capital expenditures, dividends, capital structure, or other
suit; (6) disregard of the most current factual information
financial items; before making statements; (7) disclosure of accounting
(B) a statement of the plans and objectives of management for information in such a way that its negative implications
future operations, including plans or objectives relating to the could only be understood by someone with a high degree
products or serv ices of the issuer; of sophistication; (8) the personal interest of certain
(C) a statement of future economic performance, including any
such statement contained in a discussion and analysis of
directors in not informing disinterested directors of an
financial condition by the management or in the results of impending sale of stock; and (9) the self-interested
operations included pursuant to the rules and regulations of the motivation of defendants in the form of saving their
Commission; salaries or jobs.
(D) any statement of the assumptions underlying or relating to
any statem ent described in sub paragraph (A), (B), o r (C); Vencor, 251 F.3d at 552. In this appeal, factors one, two, and
(E) any report issued by an outside reviewer retained by an
issuer, to the extent that the report assesses a forward-looking six are at issue.
statement made by the issuer; or
(F) a statement containing a projection or estimate of such other As stated previously, a plaintiff must “state with
items as may be specified by rule or regulation of the particularity facts giving rise to a strong inference that the
Comm ission. defendant acted with the required state of mind.” 15 U.S.C.
15 U.S.C. § 78 u-5(i)(1).
No. 01-1955 Miller, et al. v. Champion 15 16 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
§ 78u-4(b)(2). In Vencor, we provided a definitive The plaintiff takes issue with the district court’s finding that
explanation of the meaning of a “strong inference”: he was unable to draft an adequate complaint. He argues that
the district court erred in the method it used to analyze the
Inferences must be reasonable and strong—but not CAC, characterizing the district court’s standard of review as
irrefutable. “Strong inferences” nonetheless involve requiring that each paragraph contain all the elements
deductive reasoning; their strength depends on how necessary to state a securities fraud claim. This standard,
closely a conclusion of misconduct follows from a plaintiff argues, is unsupported by either the PSLRA or the
plaintiff’s proposition of fact. Plaintiffs need not Federal Rules of Civil Procedure, and therefore the district
foreclose all other characterizations of fact, as the task of court’s judgment should be reversed.
weighing contrary accounts is reserved for the fact
finder. Rather, the “strong inference” requirement means Plaintiff is correct in his contention that nothing in the
that plaintiffs are entitled only to the most plausible of PSLRA or the Federal Rules of Civil Procedure supports a
competing inferences. method of analysis that would require all the elements of a
securities fraud claim to be stated in each paragraph of a
251 F.3d at 553. Thus, if certain factors are not met in the complaint. However, nowhere in its 39-page opinion did the
complaint—factual particularity and the most plausible of district court purport to be applying such a standard. We
competing inferences—“the court shall, on the motion of any assume, therefore, that the plaintiff must be asserting that
defendant, dismiss the complaint.” 15 U.S.C. § 78u- such a method, as a practical matter, was the one used by the
4(b)(3)(A). district court, not that the district court explicitly held that
such a method was the one to be applied.
C. Scienter was Pleaded with Sufficiently Particular Facts
There is some merit to this characterization of the district
One factor on which the district court based its dismissal of court’s opinion. The district court approached the CAC in a
the CAC was a failure by the plaintiff to plead scienter with highly systematic—and somewhat rigid—manner and
sufficient particularity. Specifically, the district court went overlooked some of plaintiff’s attempts to connect its factual
through the complaint paragraph by paragraph, analyzing allegations and allegations of scienter. Plaintiff alleged some
each of the factual allegations and attempting to connect these kind of scienter in paragraphs 4, 39-40, 47-48, 64, 66-67,5 69,
allegations with the allegations of scienter to determine if 70, 73-75, and 82.6 Many of these allegations were general
they were sufficiently well pleaded so as to satisfy the and therefore insufficient to meet the particularity
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
5
statement was false or misleading.’” R.40, Opinion (April 9, Plaintiff makes no argument that the allegations of scienter, or even
2001) (granting motion to dismiss consolidated amended the underlying facts, alleged in paragraphs 64, 66, and 67 , are sufficient
class action complaint) (quoting Wenger v. Lumisys, Inc., 2 F. to support a securities fraud claim, and we will not address them here.
Supp. 2d 1231, 1243 (N.D. Cal. 1998)). 6
The content of these paragraphs will be set forth in the subsequent
footnotes.
No. 01-1955 Miller, et al. v. Champion 17 18 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
requirements of the PSLRA. See ¶¶ 69, 70, 73-75, 82.7 loosely, tied to the alleged false or misleading statements or
Moreover, other allegations of scienter were not asserted in to omissions of material facts listed in the complaint. See
relation to a statement or omission of a material fact, but ¶¶ 4, 39-40, 47.9
rather with respect to Champion’s substantive actions
throughout the underlying situation, and thus do not allege
scienter sufficient as a basis for a securities fraud action. See
¶ 48.8 However, some of the allegations of scienter are, albeit conduct” by Parker Ho mes, b ut the plaintiff does not allege any facts to
support the inference that the defendants kne w of or recklessly
disregarded this conduct. Plaintiff alleges: “Plaintiffs are informed and
7
believe that Champion knew of or recklessly disregarded other improper
¶ 69 alleges: “D efendants’ false representations and material conduct in which Parker Homes engag ed in an effort to show false profits.
omissions were made with scienter [emphasis in original] in that . . . Champion knew or recklessly disregarded the likelihood that Parker
defendants knew or recklessly disregarded [emphasis added] that the Ho mes’s severe cash shortage co uld result in violations of its trust
pub lic documents and statements issued or disseminated by Champion agreements . . . . Champion knew or recklessly disregarded that Parker
were materially false or m isleading.” Homes was ad ding additional costs to the invoice price of homes for non-
¶ 70 alleges: “defendants are liable fo r those false forward-looking existent furniture . . .” (emphasis added).
statements because at the time each of those forward-loo king statements
was made, the particular speaker knew that the particular forward-looking 9
¶ 4 alleges: “Plaintiff’s contend that defendants ma terially
statement was false or misleading, and/or the forward-looking statement overstated Champio n’s earnings, revenues, and p rospects by . . .
was authorized and/or approved by an executive officer of Champion who (b) [k]now ingly or recklessly failing to accrue [an $1 8 million dollar loss
knew that those statements were false when made” (emphasis added). on money lent to Parker Homes] in light of the fact that Champion was
¶ 73 alleges: “they knowingly and/or recklessly mad e and /or failed to fully aware [that the p arent comp anies o f Parker Home s filed for
correct public representations which were or had become materially false bankruptcy, as shown by a statement that implies that Champion knew of
and misleading regarding Champion’s financial results and operations . . . the parent companies’ financial difficulties] . . . (d)[k] now ingly or
the defendants caus[ed] Champion to publish public statements which recklessly failing to disclose that the anticipated loss upon resale of
they knew, or were reckless in not knowing, were materially false and repurchased inventory was only one component of the $33.6 million
misleading” (emphasis added). charge aga inst earnings taken in the third quarter of 1999 [as shown by a
¶ 74 alleges: “D efendant Yo ung . . . control[led] the content of the statement by Young that implies that 85 percent of the charge would be
aforesaid stateme nts . . . and/or . . . fail[ed] to corre ct those stateme nts in the result of resale losses, while Champ ion’s 1999 Form 10-K shows that
a timely manner once he knew or was reckless in not knowing that those more than 50 percent o f the charge was attributable to loans, advances,
statements were no longer true or accurate” (emphasis added). and discounts to Parker Homes] . . . (f) [k] now ingly or recklessly
¶ 75 alleges: “Defendant Young had actual knowledge of the facts concealing that Parker H ome s was no t going to obtain deb tor-in-
making the material statements false and misleading, or acted with possession financing [as shown by two statements by officers of
reckless disregard for the truth in that he failed to ascertain and to Champion stating that they were unaware of whether Parker Homes
disclose such facts, even though sam e were availab le to him” (emphasis would obtain financing, while a later statement implied that Champion
added). was nego tiating to buy Parker Homes during the time period the earlier
¶ 82 alleges: “Defendant Young’s position made him p rivy to and statements were made]” (emphasis added).
provided him with actual knowledge of the material facts concealed from ¶ 39 alleges: “In light of the following facts known to defenda nts,
lead plaintiffs and the Class” (emphasis added). [defendants earlier statements that they were monitoring inventory levels,
8
did not vo luntarily rep urchase inven tory, and that only o ne or two of their
¶ 48 alleges: “As a result, Champion kno wing ly or recklessly dealers had gone bankrupt] were materially false, misleading and
increased its risk of being req uired to purchase overvalued , unsold incomplete, [(1) because] Champion was awa re [that Parker Homes had
invento ry.” The other allegations of scienter in ¶ 48 are simply assertions extreme amo unts of excess inventory] b ecause it was unable to ship [new
that the defendants knew of or re cklessly d isregarded other “improper invento ry] to Parker Homes until additional financing was in place [as
No. 01-1955 Miller, et al. v. Champion 19 20 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
The SASC did not remedy any of the shortcomings of the CAC does. In fact, the SASC simply reiterates the scienter
CAC with respect to pleading scienter with sufficient allegations of the CAC.
particularity. The SASC adds more facts, but it does not link
these facts with the allegations of scienter any more than the Although we understand the district court’s frustration with
the complaint, as the CAC does not link the factual
allegations with defendant’s purported scienter in a
particularly cogent manner, we nevertheless find that the
shown by a statement in Ted Parker’s complaint in another lawsuit, as complaint is not so inadequate in this respect that it merits
well as other submissions in that lawsuit], [(2) because Parker Homes dismissal. The plaintiff did not simply make “conclusory
parent companies had alread y declared bankrup tcy before these allegations of recklessness, intention, or misconduct.” Burns
statements were made, a fact which Champion must have be en aware of,
and (3) because Champion had lent Parker H omes $2.25 million and
v. Prudential Sec., 116 F. Supp. 2d 917, 925 (N.D. Ohio
$350,000 as working ca pital in order to save it from bankruptcy, and were 2000). However, as indicated below, we further conclude that
in negotiations to purchase all of Parker Ho mes’s assets, as shown by the district court was correct in holding that the CAC did not
statements in Ted Parker’s complaint in another lawsuit and other contain allegations sufficient to state a claim under the
documents]” (emphasis added). heightened pleading requirements of the PSLRA.
¶ 40 alleges: “Champion knew both that Holding Com panies and
Parker Homes had filed Ch apter 11 p etitions an d that C hampion would
soon purchase substantially all of the assets of Parker Homes [as shown D. The CAC Did Not Contain Allegations Sufficient to
in the above paragraphs, but Champion still failed to accrue an $18 State a Claim
million loss in their second quarter financial statements as required by
GAA P]” (emphasis added). In order for a complaint to be adequate, it must contain
¶ 47 alleges: “In light of the following facts known to Champion, allegations sufficient to state a claim. Under the PSLRA and
[Champion’s representations (1) that its second quarter was ‘ano ther all- our prior caselaw, these allegations must give rise to a strong
time record quarter,’ (2) that it had a ‘strong balance sheet’ and ‘superior
returns on shareholder equity,’ (3) that it had record sales perfo rmance in inference—the most probable of competing inferences—that
the first half of 1999, (4) that Parker Homes bankruptcy was the defendants made false or misleading statements with the
‘unanticipated ,’ (5) that it hoped that Parker Home s could ‘con tinue to required state of mind. See 15 U.S.C. § 78u-4(b)(2); Vencor,
ope rate through Chapter 11 and eventua lly come out o f it,’ (6) that it kept 251 F.3d at 553. Plaintiff alleged six separate
‘close tabs on the contingent liability’ it has with each of its retailers and communications that he contends were false or misleading:
had been ‘watching Parker Homes inventory turn,’ (7) that it didn’t know
if Parker H ome s would ob tain debtor in possession financing, and (8) that (1) Young’s letter to Champion shareholders on July 8, 1999;
the charge it would take because of Parker Homes’s bankruptcy was (2) Champion’s press release on July 21, 1999;
primarily ‘for the discounting that is anticipated in the reselling of the (3) Champion’s conference call on July 21, 1999;
homes and for the removal and reloc ation costs associated with the (4) Champion’s press release on July 30, 1999;
repurchase of the homes’] were materially false, misleading and (5) Champion’s conference call on July 30, 1999; and
incom plete [as shown by (1) the notes of counsel in another lawsuit that
Champion aware that Parker Homes was in severe financial difficulty and (6) Champion’s second quarter Form 10-Q which was filed
might need to file for Chapter 11, (2) submissions in the bankruptcy with the SEC on August 9, 1999. Some of these
proceeding that Champion wo uld rep urchase all of P arker Ho mes’s communications fall within the safe harbor for “forward-
invento ry, including that which they were not obligated to repurchase, and looking statements” provided by the PSLRA, while the others
provide post-b ankruptcy-petition financing to Parker H ome s, and do not give rise to a strong inference that Champion or Young
(3) agreements between Champion and Parker Homes which gave Parker
Hom es strong incentives to have excess inventory]” (emphasis added).
acted with sufficient scienter to survive a Rule 12(b)(6)
No. 01-1955 Miller, et al. v. Champion 21 22 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
motion dismiss under the heightened pleading requirements bankruptcy which would adversely impact Champion.
of the PSLRA. Plaintiff further alleges that the statements are not subject to
the PSLRA’s safe harbor provision, because they are not
1. The July 8, 1999, Letter to Shareholders forward-looking and lack meaningful cautionary language.
Specifically, plaintiff argues that the word “continuation”
The July 8, 1999, Letter to Shareholders was forward- refers to the present state of affairs, and that cautionary
looking and fell within the safe harbor provision because it language referring to business downturns and possible
was accompanied by meaningful cautionary language. The inventory excesses is insufficient disclosure since Champion
letter, written by Young to Champion’s shareholders, stated did not disclose the nature of its loans to Parker Homes. He
in pertinent part: also contends that the district court misapplied the holding in
Ivax in finding that the statements were forward-looking.
As we start the second half of the year, we know that
you are as concerned as we are regarding the In Ivax, the plaintiff sued Ivax Corporation for securities
performance of Champion Enterprises stock compared fraud and alleged that Ivax had made false or misleading
with the overall market. Housing stocks in general have statements concerning its financial outlook. 182 F.3d at 802.
under performed the markets in 1999, and we are no Ivax moved to dismiss the claims based on the safe harbor
exception. Given the continuation of outstanding provision and heightened pleading requirements of the
earnings growth and the successful implementation of PSLRA. Id. The district court dismissed the action, and on
our retail strategy, we challenge ourselves as to what we appeal the Eleventh Circuit affirmed the judgment of the
can do to enhance our stock value in a market dominated district court. Id. at 802, 808. In reaching this conclusion, the
by Internet and the Dow Jones Nifty 50 stocks . . . . Eleventh Circuit held that in certain situations, mixed
statements of present fact and future prediction must be
Some of our competitors have reported problems with treated as wholly forward-looking. Id. at 805-07.
meeting earnings estimates. Champion recently
announced that we were comfortable with consensus We find plaintiff’s arguments with regard to the July 8,
earnings estimates of $0.59 per share for the second 1999, Letter to Shareholders to be unpersuasive. The
quarter, which would be a 13 percent increase compared statements by Walter Young in his letter to Champion
to last year. shareholders appear to be classically forward-looking. The
statements speak of earnings “estimates,” of “challenging”
J.A. at 1045-46. The district court found that these statements themselves to “enhance” their stock value. These are all
were forward-looking and accompanied by sufficient statements that imply projections or objectives, falling
cautionary language, and therefore protected under the safe squarely within the definition of “forward-looking
harbor provisions of the PSLRA. statements” found in 15 U.S.C. § 78u-5(i)(1).10 The phrase
Plaintiff alleges that the statements with regard to
Champion’s earnings estimates were materially misleading
10
given that Champion and Walter Young knew of Parker In addition, we note that Champion did actually have earnings of
Homes’s poor financial condition and the probability of its $0.59 per share in the second quarter as announced on July 21, 1999,
therefore undermining the notion that these statements were either false
No. 01-1955 Miller, et al. v. Champion 23 24 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
“given the continuation of outstanding earnings growth and underperformed the markets in 1999,” and that “in certain
the successful implementation of our retail strategy,” although regions we see too many retail locations, suggesting an over
certainly implying some present circumstances, also is the supply of retail inventory of homes in that region.” Plaintiff
basis for the later “forward-looking statements,” thus argues that Champion should also have disclosed the nature
qualifying as an “assumption underlying” a “forward-looking of their loans to Parker Homes. This goes too far. Champion
statement” found in 15 U.S.C. § 78u-5(i)(1)(D).11 See Ivax, disclosed the exact risk that occurred in this situation: excess
182 F.3d at 804-805 (the phrase “[r]eorders are expected to retailer inventory that could lead to negative economic effects
improve as customer inventories are depleted” was found to on Champion. Champion is not required to detail every facet
be a “forward-looking statement” under the “assumptions or extent of that risk to have adequately disclosed the nature
underlying” definition in 15 U.S.C. § 78u-5(i)(1)(D)). of the risk.
Furthermore, the July 8 letter does not contain a mixed
statement of present fact and future prediction similar to that Accordingly, since we conclude that the statements in
discussed in Ivax, and therefore we do not need to address Walter Young’s July 8 Letter to Shareholders were both
plaintiff’s argument in this regard. Given these facts, we forward-looking within the meaning of the PSLRA, and that
conclude that the statements are forward-looking for the they were accompanied by meaningful cautionary language,
purposes of the PSLRA. the statements are subject to the safe harbor provisions of the
PSLRA and are therefore not actionable. No investigation of
However, in order to be protected by the safe harbor defendant’s state of mind is required. See 15 U.S.C. § 78u-
provisions of the PSLRA, these statements must also have 5(c)(1)(A); see also Ivax, 182 F.3d at 803.
been accompanied by meaningful cautionary langauge. We
conclude, as did the district court, that the statements were 2. The July 21, 1999, Press Release
accompanied by meaningful cautionary language. The July 8
letter cited Champion’s risk disclosures in its 1998 Form 10- The July 21, 1999, press release was not a forward-looking
K, which included a risk related to inventory levels of statement and was therefore not protected under the safe
manufactured housing retailers. Additionally, the letter itself harbor provisions of the PSLRA. We nevertheless hold that
contained warnings that “housing stocks in general have the plaintiff failed to state a claim regarding the July 21,
1999, press release. The press release in question announced
that Champion’s second quarter “earnings per share [] grew
13 percent to $0.59 from $0.52 last year.” In the CAC,
or misleading. Plaintiff argues that these earnings were nevertheless plaintiff quoted nearly all of the July 21 press release, much
misleading because Champ ion actually should have taken a loss during
the second quarter d ue to P arker Ho mes’s probab le bankruptcy. This w ill
of which consists of statements that would qualify as forward-
be discussed in greater length later in this opinion. looking under the PSLRA. The district court, applying a test
found in Ivax for mixed statements of present fact and future
11 prediction, found the whole press release to be forward-
Plaintiff’s reliance on In re B oeing Sec. Lit., 40 F. Supp. 2d 1160,
1169 (W .D. W ash. 19 98) is unavailing. The portion of that opinion looking. It also found that the July 21 press release was
quoted by the plaintiff relates back to statements by the defendant in that accompanied by meaningful cautionary language, and
case that are almost exclusively statements of present or historical fact and therefore concluded that the statements fit into the statutory
certainly do not provide the basis for any future projections, unlike the
statements at issue here.
safe harbor of the PSLRA and were not actionable.
No. 01-1955 Miller, et al. v. Champion 25 26 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
Plaintiff contends that he took issue solely with the here is that the list as a whole misleads anyone reading
earnings figure included in the July 21 press release, and it for an explanation of Ivax’s projections, because the
therefore argues that this is not a “forward-looking statement” list omits the expectation of a goodwill writedown. If the
protected by the PSLRA’s safe harbor provision. allegation is that the whole list is misleading, then it
Specifically, he argues that the district court misapplied Ivax makes no sense to slice the list into separate sentences.
in concluding that the entire press release should be treated as Rather, the list becomes a “statement” in the statutory
a “forward-looking statement.” Plaintiff avers that the sense, and a basis of liability, as a unit. It must therefore
earnings figure given in the July 21 press release (and be either forward-looking or not forward-looking in its
repeated in the August 9, 1999, Form 10-Q filed with the entirety.
SEC) was recklessly misstated, because, under generally
accepted accounting principles (“GAAP”), Champion was 182 F.3d at 806. The court in Ivax concluded that a list must
required to accrue a loss of approximately $18 million12 in be treated as a whole when the allegation was that the list
the second quarter of 1999 due to the probability of Parker itself misled investors by omitting certain relevant factors.
Homes’s bankruptcy, about which the defendants knew or The statement at issue here is not a list, nor is the argument
should have known. that the earnings figure is misleading based on an omission
from a list. The earnings figure is easily separable from the
We agree with the plaintiff that the earnings figure “forward-looking statements” contained in the press release,
statement in the July 21 press release is a statement of present and is not given merely as an “assumption underlying” future
or historical fact, and therefore not subject to the safe harbor projections. It therefore is not protected under the safe harbor
provision of the PSLRA. We also agree with the plaintiff that provisions of the PSLRA, and the district court erred in so
the mixed scenario described in Ivax does not apply to this holding.
situation, and therefore that the district court erred in so
holding. The mixed statement discussed in Ivax was a list of The question still remains whether the earnings figure was
factors that would influence Ivax’s third quarter results. The fraudulently misstated, which is dependent on whether the
court there held that: defendants recklessly failed to accrue an $18 million loss
because of the possibility of Parker Homes’s bankruptcy. For
The mixed nature of this statement raises the question the reasons given below in discussing Champion’s identical
whether the safe harbor benefits the entire statement or earning figure given in the August 9, 1999, Form 10-Q,there
only parts of it. Of course, if any of the individual was no such reckless failure, and the plaintiff therefore failed
sentences describing known facts (such as the customer’s to state a claim regarding the July 21, 1999, press release.
bankruptcy) were allegedly false, we could easily
conclude that that smaller, non-forward-looking 3. The July 21, 1999, Conference Call
statement falls outside the safe harbor. But the allegation
The July 21, 1999, conference call contained a number of
statements, some of which were forward-looking and some
12 that were not, but because we find that none of the statements
This figure is made up of $10.4 million in discounts under the were made with sufficient scienter to amount to recklessness,
Bonus Program and $ 7.2 million in outstanding loans to Parker Homes we hold that the plaintiff failed to state a claim regarding
unde r the Revolving Lo an Agreem ent.
No. 01-1955 Miller, et al. v. Champion 27 28 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
these statements. Champion held a conference call following with some. There’s plus or minus on that. So, the turn
the July 21, 1999, press release. Plaintiff asserts that several appears—and it changes because of the seasonal time of
statements—or groups of statements on the same year. The industry turn has dropped below 2.5 time
topic—made during this conference call were misleading to turns, from everything that we can see. So, it has gone
investors and were made with either recklessness or actual down. That’s why we think there may be a month of
knowledge of their falsity. The first statement he cites is inventory, which would be about 20,000 homes in the
identical to one found in the July 21 press release: industry, that should be excess and should be flushed
through. Now, our inventory turns from our own
While our retail traffic remains healthy and we continue organization . . . are somewhere a little under three times
to keep our inventory levels under tight control, the turn. . . . Our independents are about at the industry
biggest short-term challenge we face is to improve the number, the best we can see, overall, that[’s] the 3,500
industry’s retail inventory excesses. Even though we independent retailers we sell to.
anticipate that our retail sales should be strong for the
remainder of the year, we expect that industry wholesale Id. at 400. Plaintiff argues that, given that Champion knew of
shipments could be down until this temporary adjustment Parker Homes’s excess inventory, these statements were false
is completed. because Champion was not actually keeping inventory under
“tight control.” He cites as evidence of the falsity of Young’s
J.A. at 54. Plaintiff also cites some statements by Walter statement three facts: “(1) [Champion’s] forcing [Parker
Young during the conference call, in which Young stated that Homes] to take more inventory than it needed; (2) 100 other
Champion was “watching” and “managing” the inventory of retailers supplied by Champion went bankrupt in 1999; and
its independent retailers. The final statements on this topic (3) Young’s admissions that there was too much industry
that plaintiff alleges were misleading are as follows: expansion because manufacturers got “carried away” when
“greed overcame logic.”13 Pl. Br. at 41. Additionally,
The overall industry outlook, the overall retail demand plaintiff contends that the statements are not forward-looking.
seems to be holding up very well. The positive impact of
this overall demand impact is somewhat dissipated due The district court found that the statements were forward-
to the growth in the number of retail outlets in the looking, in part because of its overly broad interpretation of
industry, which has outpaced the overall industry growth, mixed statements of present or historical fact and future
over the last year or so. Therefore, total industry projection under Ivax. The district court also held that the
inventory has probably increased maybe a month or so, statements lacked meaningful cautionary language, and
somewhere around 20,000 homes, industry wide. therefore were not protected under the first prong of the
PSLRA’s safe harbor provision, where scienter is not even
J.A. at 397. The above statement was given by Walter Young considered. Nevertheless, because the statements were
at the opening of the conference call, and in response to a
follow-up question on the topic, Young answered as follows:
13
Again, there aren’t any industry numbers as to turns that The phrase “greed overcame logic” was only alleged in the SASC,
are really valid. So, it’s—the Census Bureau comes out as is the evidence that Champion “forced” Parker Homes to take more
inventory than needed.
No. 01-1955 Miller, et al. v. Champion 29 30 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
forward-looking, under the second prong the PSLRA’s safe was speaking with such reckless disregard for the truth that
harbor provision they would only be actionable if they were his statements amount to “highly unreasonable conduct which
made with actual knowledge as to their falsity. The district is an extreme departure from the standards of ordinary care.”
court did not reach this question, however, because it found Mansbach, 598 F.2d at 1025. Young admitted in the
that the plaintiff had not sufficiently alleged scienter with statements themselves that there was excess inventory in the
regard to any of the allegedly false statements in the CAC. market. The fact that he underestimated the true extent of the
As discussed earlier, the district court erred in so finding. excess—which it is doubtful that he knew or should have
been aware of—does not mean that he was reckless when he
We are not persuaded by the plaintiff’s arguments with stated that there was an inventory excess or when he said that
respect to these statements. The statements are forward- they were “managing” and “watching” the inventory.
looking in some respects, but they also contain numerous
statements of present or historical fact, not all of which are The next statement that the plaintiff says was misleading
simply assumptions underlying future projections. But even from the July 21, 1999, conference call was Young’s response
under a recklessness standard, Walter Young and Champion to a question of whether Champion was voluntarily
were not misleading. Certainly Champion and Walter Young repurchasing inventory from weaker retail dealers. As
professed to be monitoring inventory levels, both for their plaintiff alleged in paragraph 38 of the CAC, “CEO Young
own retail stores and for their independent retailers.14 responded that he could not be ‘adamant enough’ that
However, Young also explicitly stated that there was excess Champion made no voluntary repurchases and that
inventory in the market, partially due to the growth of repurchases were limited to Champion’s repurchase
retailers in the industry outpacing that of the overall industry obligations to third party floor finance lenders when a retailer
growth. In other words, Champion and Young acknowledged when bankrupt.” When asked if any of the dealers had gone
that there was excess inventory in the market, and that there bankrupt, Young responded: “I think one or two out of 3,500
was an excess of retailers in the market as well. across the country. There have been some. But . . . under the
repurchase obligation . . . out of 70,000 homes that we build
The evidence that the plaintiff cites to support his a year, I think we took back 100-110 homes last year . . . .”
contentions is unavailing. He asserts that Champion was Id.
“forcing [Parker Homes] to take more inventory than it
needed.” Pl. Br. at 41. We first note that the only real The plaintiff, defendants, and the district court all agree that
evidence of this is found in SASC, which, for reasons that these are statements of present or historical fact, and therefore
will be discussed later in this opinion, the district court not entitled to protection under the safe harbor provision of
properly denied plaintiff’s motion to file. But even if we the PSLRA. The district court did not discuss these
were to consider this evidence, it does not show that Young statements further, however, finding that they were not
sufficiently linked to allegations of scienter. Plaintiff
contends that these statements were reckless and misleading
14 given that in August, Champion chose to repurchase an
The first quoted section (from the press release) seems to state that additional $10 million of Parker Homes inventory beyond the
Champion was keeping its own inventory under tight control, as opposed
to that of independent retailers who would be the probable recipients of
$69 million which it was obligated to purchase, that the day
“industry wholesale shipme nts.” after the conference call Parker Homes filed for bankruptcy,
No. 01-1955 Miller, et al. v. Champion 31 32 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
and that approximately 100 other retailers supplied by back up the next day), or not disclosing the Parker Homes
Champion also declared bankruptcy sometime in 1999. situation, which, if it blew up in their faces (as it did), could
lead to significant negative consequences, as well as open
The evidence does not support a strong inference that them up to suits. Given the circumstances, it is difficult to
Young’s statements with regard to repurchases were say that the defendants’ statements were “an extreme
recklessly made. Simply because Champion later made a departure from the standards of ordinary care.” Mansbach,
business judgment that it should voluntarily repurchase 598 F.2d at 1025. Faced with a tough decision, defendants
inventory does not make it reckless to state that Champion made a choice that ultimately proved to be erroneous, but
does not make such repurchases as a general matter. Even if there is no “strong inference” of recklessness.
the negotiations to purchase Parker Homes inventory were
ongoing at this point, the plaintiff has not asserted facts that Plaintiff’s claim regarding 100 other retailers that allegedly
show Champion knew or should have known that the end went bankrupt in 1999 does not make these statements
result of such negotiations was that Champion would reckless. There is no indication that any of these other dealers
voluntarily repurchase inventory it was not obligated to. It is had gone bankrupt as of July 21, 1999; if anything, the facts
plausible to argue as the plaintiff does, but these facts do not asserted seem to imply the opposite. What this allegation
give rise to a strong inference of recklessness by Young or does seem to show is that 100 other businesses in the
Champion. manufactured housing industry also had not yet realized the
extent to which retail inventory had outpaced industry and
The statements with regard to bankruptcies raise a more market growth. Champion and Parker Homes, along with 100
difficult question. There is no contention by the plaintiff that other dealers, seem to have been caught off guard by an
the actual statement made by Young was materially unexpected decline in the manufactured homes market. This
inaccurate when made. Rather, plaintiff asserts that does not support a strong inference of recklessness by the
defendants recklessly minimized the risk of potential defendants in making these statements.
bankruptcies by referring to statistics from 1998. We agree
with the plaintiff that it was somewhat disingenuous of the Plaintiff, citing Vencor, also alleges that defendants, since
defendants to refer to the previous year’s statistics given the they chose to issue a press release and hold a conference call
possibility that Parker Homes would go bankrupt the next on July 21, were obligated to tell the truth about Parker
day, resulting in a far larger negative impact on Champion Homes’s possible bankruptcy and give full disclosure. In
than that referred to from the 1998 figures. Nevertheless, Vencor, this court stated that “with regard to future events,
many of the plaintiff’s allegations also show that Champion uncertain figures, and other so-called soft information, a
was under the impression that it had reached a deal that would company may choose silence or speech elaborated by the
keep Parker Homes out of bankruptcy. Champion and Young factual basis as then known—but it may not choose
were placed in the difficult position of either disclosing that half-truths.” 251 F.3d at 561. The plaintiff’s assertion goes
Parker Homes might go bankrupt the next day, which would beyond the Vencor requirement. Just because defendants
lead to a significant drop in Champion’s stock price that day issued a press release and held a conference call to discuss
and potentially harm their ability to finalize the deal to keep their second quarter earnings does not mean that they chose
Parker Homes out of bankruptcy (and if they did keep Parker to speak on any situation that could possibly affect their
Homes out of bankruptcy, have Champion’s stock price shoot financial condition. Such a rule would require almost
No. 01-1955 Miller, et al. v. Champion 33 34 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
unlimited disclosure on any conceivable topic related to an can continue to operate through Chapter 11 and
issuer’s financial condition whenever an issuer released any eventually come out of it.
kind of financial data. Additionally, the other topics
discussed during the conference call were not things that J.A. at 62-63, 429-30. Following these statements Young
defendants chose to discuss. They were asked questions by went on to describe Champion’s plans to use its own retail
investors about repurchase obligations and bankruptcies, organization to move into the void left by Parker Homes’s
which it appears they endeavored to answer truthfully as to bankruptcy, as well as to sell the inventory that it would be
the current state of affairs. Furthermore, they studiously obligated to repurchase. Among the numerous questions
avoided speaking about future events. Vencor does not during the teleconference, one questioner asked whether
require more disclosure in such a situation. Champion could explain the kind of financial information that
Champion received regularly from large independent retailers,
In short, we find that these asserted facts do not imply including Parker Homes, to which Champion responded:
reckless conduct on the part of Champion or Walter Young.
They may not have been as careful as they could have been, [Chief Financial Officer Stegmayer:] [T]hat information
but the asserted facts do not give rise to a strong inference varies depending on the relationship and retailer. . . .
that the defendants, in making these statements, displayed Financial information does not necessarily have to be
highly unreasonable conduct which is an extreme departure provided by them, and then there’s always the question
from the standards of ordinary care. See 15 U.S.C. § 78u- of reliability on private financial statements. What we
4(b)(2); Mansbach, 598 F.2d at 1025. do, instead, is we try to track inventory to inventory
turns, and monitor our liability with our retailer in that
4. The July 30, 1999, Press Release and Conference Call form, and we keep close tabs on the contingent liability
we have with each of our retailers . . . .
The July 30, 1999, press release and conference call
contained a number of statements, all of which were [Young:] . . . We had all impression the financials were
statements of present or historical fact, but since we find that going well. You know, we don’t have an operational
none of the statements were made with sufficient scienter to understanding here, but this organization continued to
amount to recklessness, we hold that the plaintiff failed to grow and expand, and with its new ownership here we
state a claim regarding these statements. Champion issued a had all impressions that it was valid regardless of the
press release on July 30, 1999, in which it stated that the financial statements . . . .
Parker Homes bankruptcy was “not anticipated.” Young
reiterated this point in a conference call later that day: J.A. at 432-33.
We are the virtual exclusive supplier to Ted Parker Walter Young and another Champion employee also
Homes. This Chapter 11 filing, which we totally—was responded to a question dealing with the circumstances
unanticipated by us . . . . [W]e are certainly supporting leading up to Parker Homes’s bankruptcy:
Ted Parker Home Sales in its Chapter 11 situation that it
has taken on, we will support it as a supplier and as a [Young:] We have been working with Ted Parker over
creditor where we are, and we certainly hope that they the years and part of his expansion working with him,
No. 01-1955 Miller, et al. v. Champion 35 36 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
and positive [sic]. But we never—I mean, we have not might be preparing, we’re not inside on that track. I mean,
really been getting operating statements or the financial we’re sitting here as outside creditors as any other creditor
aspects, so let me—we have been watching their would be, so we really don’t know.”
inventory turn which is, with their unique operation,15
always [unintelligible]. We have, over the, you know, In response to a later question asking whether Champion
over the last few—with the change of management it had any plans to buy Parker Homes out of bankruptcy, Young
[sic] . . . . answered that
[Chief Operating Officer Surles:] . . . [W]e had obviously we’ve considered all options as far as the way to do it
been watching their inventories, and they have been a that led us to this announcement today. And, you know,
high expansion company, but as recent as a couple of we’ve bought many good retailers . . . but when it went
months, the management had come to us and informed us to Chapter 11 it changes the nature of things, okay? . . .
that they were going into an inventory reduction mode Now I have to say in going forward, you know, if Ted
and it might affect some of our plants, and so we Parker Sales goes to another—we’ll always consider all
suddenly reduced production at our Maxton, North options at all time[s] . . . okay?
Carolina, plant to compensate for that, and even though
we’re not—weren’t excited about the profits and loss J.A. at 436. Finally, when asked whether Champion’s plan
there, we were excited about their attitude in reducing with respect to Parker Homes might change if Parker Homes
inventories, and so we felt comfortable. filed a Chapter 7 petition, Young responded:
J.A. at 440. When asked if this occurred in approximately Well, that’s some of the issue. It is in Chapter 11, and
May or April, Young responded: “Mmm–hmm. And so that’s we do not know, so we’re flying blind too. That’s why
why it so surprised us of the decision to go Chapter 11.” Id. the nature of this thing and rather than—you know, we’ll
Young was then asked about Champion’s discussions with be flexible whatever happens. . . . And as you say, there
Parker Homes since the Chapter 11 filing, to which Young is a difference as to having Chapter 11 or the various
responded: “With the decision to go Chapter 11 we’ve had chapters, but we’re flexible to react to whatever
ongoing discussions and to add the color background to them accordingly.
I don’t think would be productive, probably not legal . . . .”
Id. J.A. at 446.
Another Champion employee, when asked about Parker The district court found that the statement in the July 30,
Homes’s future and Chapter 11, answered: “[W]e can’t speak 1999, press release that Parker Homes’s bankruptcy was “not
for them and [debtor-in-possession] financing, whatever, they anticipated” was a statement of present or historical fact, and
therefore that the scienter required was recklessness. The
district also found, applying Ivax, that the general import of
the July 30, 1999, conference call was forward-looking,
15
To another question, Young explained that “it was a unique retail although there was not meaningful cautionary language, and
mod el. [Parker H ome s] believed in high inventories and selling . . . .” therefore all the statements in that conference call required the
J.A. at 441.
No. 01-1955 Miller, et al. v. Champion 37 38 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
scienter of actual knowledge. The district court did not look As to the statements with regard to Parker Homes’s
further into the issue, however, as it found that scienter was financial situation, they also are statements of present or
not sufficiently alleged in the CAC. As stated previously, the historical fact, and therefore recklessness is the state of mind
district court erred both in its application of Ivax and in required. These statements could also be somewhat
concluding that scienter was not sufficiently alleged in the misleading, but they are not so obviously misleading as to be
CAC. reckless. The asserted facts are apparently consistent with the
defendants’ belief that Parker Homes was financially sound,
Plaintiff alleges that these statements were at least at least up until a few months before the bankruptcy.
recklessly false or misleading in several ways. First, plaintiff Ostensibly, the defendants thought that although Parker
contends that the statements characterized Parker Homes’s Homes had a unique business plan that called for higher
bankruptcy filing as unanticipated and indicated that inventory, it was still in decent shape financially, especially
Champion was unaware of Parker Homes’s financial considering that it had just recently been purchased by new
situation, when in fact Champion had been making strenuous owners that invested heavily in the company. A potential
efforts to save Parker Homes from bankruptcy. He also investor in Champion could have, however, interpreted these
claims that these statements were at least recklessly statements to mean that the defendants believed that Parker
misleading in that they imply that Champion was uninformed Homes’s financial situation was good all the way up to the
about Parker Homes’s reorganization plans, when Champion bankruptcy declaration, when the defendants knew that Parker
was in fact engaged in discussions with Parker Homes and the Homes was, at a minimum, suffering some financial
bankruptcy court to buy out Parker Homes. Lastly, plaintiff difficulties such that it needed some emergency funding, even
asserts that these statements rejected suggestions that if only temporarily. Although this is a plausible
Champion purchase a large number of Parker Homes’s sales understanding of those statements, it is no more compelling
lots, when in fact it had plans to do so and in fact did later than the previous interpretation advanced above. Therefore,
purchase them. plaintiff’s allegations with regard to those statements do not
raise the strong inference of recklessness required by the
Once again, we find these arguments, although plausible, to PSLRA.
be insufficient to support a strong inference of recklessness by
the defendants. Young’s statements about Parker Homes’s Plaintiff also does not adequately assert that the defendants
bankruptcy were statements of present or historical fact, and were knowingly or recklessly misleading in their statements
therefore recklessness with respect to their misleading nature concerning their present contacts and future plans with Parker
is required. These comments were perhaps misleading, but Homes in bankruptcy. Some of these statements are of
the evidence does not support a strong inference of present or historical fact, while other are forward-looking, and
recklessness by the defendants with regard to their misleading therefore different standards apply. Plaintiff’s argument is
nature. The bankruptcy certainly was not entirely unconvincing regardless of the standard applied, as the
unanticipated, yet there is also a fairly strong indication that evidence does not show that the statements were made even
Champion thought it had struck a deal to prevent the Chapter recklessly. Young explicitly stated in the conference call that
11 filing. This will be discussed more in the next section. Champion was engaging in ongoing discussions with Parker
Homes now that it was in Chapter 11. Admittedly, Young
and another Champion employee also stated that Champion
No. 01-1955 Miller, et al. v. Champion 39 40 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
was “not inside on that track” and “flying blind,” but these with potential retailers of what those prices might be and
statements must be taken in light of the other comments it can only be worse. But that’s, by far, the majority of
confirming that they were engaging in discussions with this charge . . . . The other piece of it, the plant closing,
Parker Homes since the Chapter 11 filing. Additionally, is some of the costs of the opening of our retail, some of
although Champion employees had stated that Champion the actual physical moving is—you know, the physical
currently had other plans for how it was going to relate to moving of relocating these homes and, again, since
Parker Homes and how it was going to handle the they’re environmental, but that’s probably less than 15
repurchased inventory, the employees also stated very percent of this total charge.
explicitly that they were “flexible” and would consider “all
options” with respect to Parker Homes. However, the J.A. at 431. Plaintiff argues that this statement was recklessly
employees didn’t want to say too much because they were misleading because it represents that the majority of the
unsure of how the Chapter 11 filing would affect all these charge was related to future discounts necessary to resell the
issues. These statements by the defendants are not homes, when defendants actually knew that a large percentage
significantly misleading, much less made with a reckless of the charge was to write-off secret loans and undisclosed
disregard for the truth. discounts.
Under the heightened pleading requirements of the PSLRA, We begin our analysis with whether this statement qualifies
only allegations that give rise to strong inference of scienter for protection under the safe harbor provision of the PSLRA.
will survive a motion to dismiss. 15 U.S.C. § 78u-4(b)(2). This statement is not forward-looking, as it is describing the
The allegations advanced by the plaintiff in this case do not components of a present charge that Champion has decided to
give a sufficiently strong inference of recklessness with take due to Parker Homes’s bankruptcy. Even if some of the
regard to the July 30, 1999, statements discussed above to components are somewhat uncertain and dependent on future
survive such a motion. events, it nevertheless describes Champion’s present
calculation. Therefore, the scienter required with regard to
Plaintiff also asserts that defendants were recklessly this statement is recklessness.
misleading in the July 30 conference call when they made
statements about the nature of the $33.6 million charge Plaintiff’s argument with respect to the statement about the
Champion planned to take during the third quarter of 1999. $33.6 million charge is unavailing. Although Vencor requires
Specifically, plaintiff takes issue with the following that when an issuer reveals information it has no duty to
statement: disclose, it cannot give half-truths, in this case Walter Young
explicitly and repeatedly stated that he was not revealing all
On the component question, the pre-tax is 33.6 million. the details of the charge. In other words, Young’s statement
And in there—here, I’m not going to break it apart for was not recklessly misleading, because he told the investors
you and I’ll tell you why. Primarily it’s because of the that he was not “going to break it apart” and he didn’t “want
discounting when we’re required to take the homes back, to say any percentage,” but instead only gave them a rough
what we may have to sell them for, and I don’t want to sketch. Although the statement might have been somewhat
say any percentage. We had to make that assumption misleading, it was not so obviously so as to be reckless.
obviously, what that is, because I don’t want to negotiate Accordingly, we find that these facts do not give rise to the
No. 01-1955 Miller, et al. v. Champion 41 42 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
strong inference of recklessness that the PSLRA requires. See given the probability of Parker Homes’s bankruptcy and
15 U.S.C. § 78u-4(b)(2). defendants’ knowledge thereof prior to July 3, 1999,
Champion was required to accrue at least $18 million in
5. The August 9, 1999, Form 10-Q probable losses due to Parker Homes’s bankruptcy on its
second quarter Form 10-Q released on August 9, 1999.
The August 9, 1999, Form 10-Q did not recklessly violate
generally accepted accounting principles (“GAAP”), and In order for us to judge the merits of the plaintiff’s claim,
therefore we hold that the plaintiff failed to state a claim we need to be able to answer two questions with regard to
regarding this filing. The plaintiff contends that Champion’s “probability.” First, we need to know what the word
second quarter Form 10-Q recklessly violated GAAP because “probable” means in FAS No. 5. In other words, we need to
Champion was required by those accounting principles to know how probable the contingency needs to be for a
accrue at least $18 million as a loss on the outstanding loans company to be required to accrue a loss in the financial
and volume discounts owed by Parker Homes to Champion. statements. There is no guidance in the record on how to
He further avers that the footnote disclosure that Champion answer this question. Second, we need to know how probable
did make was insufficient under GAAP. The district court Parker Homes’s bankruptcy actually was, a contingency that
dismissed this claim because it insufficiently alleged scienter, is hard to assess after the fact.16
because the court found that Champion was not required to
accrue the loss in the second quarter, and because the footnote It is difficult now, in retrospect, to assert that these
disclosure satisfied GAAP. probabilities were such that it was reckless for the defendants
to decide not to disclose more information or to accrue the
Plaintiff bases his argument on Financial Accounting $18 million loss in the second quarter of 1999. It is certainly
Standard (“FAS”) No. 5, which requires a company to accrue a plausible inference that it was reckless. But the opposite is
an estimated loss if two conditions are met: also a plausible inference—that defendants thought they had
avoided the bankruptcy, were not sure if they would be able
a. Information available prior to the issuance of the to purchase Parker Homes’s assets in the bankruptcy
financial statements indicates that it is probable that
an asset had been impaired or a liability had been
incurred at the date of the financial statements. It is 16
In fact, muc h of the p laintiff’s argum ent in this case depends upon
implicit in this condition that it must be probable probab ility: the pro bab ility of the bankrup tcy, as well as the probability,
that one or more future events will occur confirming after the bankruptcy, that Champion would be able to buy all of Parker
the fact of the loss. Ho mes’s assets during the bankruptcy proceedings. The plaintiff is aided
by hindsight, which reveals that the probability of both these events was
b. The amount of the loss can be reasonably estimated. high, but this was not nearly as certain in advance. In substance,
therefore, the plaintiff wishes for the court to accept that Champ ion’s
attemp ts to prevent Parker Homes from having to enter into Chapter 11
J.A. at 60. The “date of the financial statements” is the last were almost certainly doomed to fail, while likewise asserting that
day of the accounting period for which the financial Champion’s negotiation with Parker Homes to purchase its assets in the
statements are presented, which in this case was the end of the bankruptcy court proceedings were a fait accom pli. Thus, according to the
second quarter: July 3, 1999. Plaintiff’s argument is that, plaintiff, defendants were reckless because they did not properly weigh
the probability that these things would occur.
No. 01-1955 Miller, et al. v. Champion 43 44 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
proceedings, and in general were not aware of the economic Additionally, when it did become clear that the loans and
downturn that was about to hit the manufactured housing discount money were impaired—after Parker Homes was put
market. After the Holding Companies declared bankruptcy into bankruptcy—Champion did take the proper steps under
on June 28, 1999, Champion engaged in discussions with GE GAAP. Since the bankruptcy occurred after the closing of the
Partners and Ardhouse to continue to provide funding to second quarter on July 3, 1999, and the defendants ostensibly
Parker Homes. These discussions resulted in a Letter of had good reasons to think—at least until after July 3—that
Intent on July 15, 1999, in which GE Partners and Champion they would be able to prevent Parker Homes’s bankruptcy,
agreed to provide the funding. Pursuant to this Letter of they were arguably not required to accrue the loss during the
Intent, Champion made an unsecured loan of $350,000 to second quarter. Instead, Champion followed the instructions
Parker Homes on July 16, 1999. Furthermore, as Ted Parker in GAAP and FAS No. 5 which provide that, if information
alleged in his complaint against GE Partners and Ardhouse, becomes available indicating that it is probable that an asset
became impaired after the date of the financial
At the time such bankruptcy proceedings were filed, T. statements—July 3, 1999—but before the statements were
Parker had conducted telephone negotiations with senior filed on August 9, 1999, the financial statements should
management at GE [Partners] to help structure a disclose the nature and estimated amount of the loss, but the
continued operating plan for [Parker Homes]. T. Parker loss should not be accrued in those financial statements. This
had agree to transfer . . . a significant portion of his stock is what Champion did in its August 9, 1999, Form 10-Q,
in [Parker Homes] to the Defendants and Champion for footnote 11.
their input of additional capital into [Parker Homes],
which would have allowed the continued operation of Both outcomes in this situation—bankruptcy or avoidance
[Parker Homes]. T. Parker and Champion believed that of bankruptcy—appear to be somewhat probable, and FAS
such an agreement was in place and then learned the next No. 5 does not specify the level of probability required to
day that the Defendants had unnecessarily and with accrue a loss. Given two fairly plausible explanations of the
improper motivation placed [Parker Homes] into facts, we find it difficult to say that plaintiff’s facts give rise
bankruptcy. to a strong inference of scienter, that plaintiff’s explanation
is the “most plausible of competing inferences.” Vencor, 251
J.A. at 106. It is at least plausible based on these facts that F.3d at 553. We also find it difficult to say that, given the
the defendants had good reason to believe that the loans to level of knowledge that defendants had of Parker Homes’s
Parker Homes were not impaired because they had come to an financial situation, Champion’s actions in not accruing the
agreement whereby Parker Homes would be able to avoid $18 million loss in the second quarter of 1999 were an
Chapter 11. It also appears implausible that defendants would “extreme departure from the standards of ordinary care.”
have continued to advance unsecured loans of $2.25 million17 Mansbach, 598 F.2d at 1025.
and $350,000 to Parker Homes if they had known that Parker
Homes was going to file a Chapter 11 petition. Plaintiff’s reliance on the similarities between the passage
of the Balanced Budget Act in Vencor and Parker Homes’s
bankruptcy in this case is misplaced. In Vencor, the passage
17
The detailed allegations surroun ding this loan are found only in the
of the Balanced Budget Act was a contingency outside the
SASC. defendants’ control that was virtually certain to have a
No. 01-1955 Miller, et al. v. Champion 45 46 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
negative impact on the defendants. See 251 F.3d at 556-58. First, the district court held that the amendments provided in
Therefore, we held that there was a strong inference that the SASC were futile. Second, the district court held that
defendants were reckless when they released favorable allowing the repeated filing of amended complaints would
earnings projections after they knew that the Balanced Budget frustrate the purpose of the PSLRA.
Act was going to have a negative impact on those earnings,
and did not give adequate disclaimers about the possible As a general matter, leave to amend “should be freely given
effects of the Act. Id. at 566. In this case, the contingency when justice so requires.” Fed. R. Civ. P. 15(a). And “[i]n
that could have a negative impact on defendants was not the securities litigation context, leave to amend is particularly
outside defendants’ control, and it appears at least plausible appropriate where the complaint does not allege fraud with
that defendants reasonably believed that they had prevented particularity.” Morse, 290 F.3d at 800. Denial of leave to
that contingency from taking place. Vencor is also amend may nonetheless be appropriate “where there is ‘undue
distinguishable from the present case in that there is no delay, bad faith or dilatory motive on the part of the movant,
indication in the present case that the defendants profited repeated failure to cure deficiencies by amendments
from their allegedly misleading statements. Unlike the previously allowed, undue prejudice to the opposing party by
defendants in Vencor, there is no allegation in the present case virtue of allowance of the amendment, futility of the
that the defendants undertook any insider trading—or any amendment, etc.’” Id. (quoting Foman v. Davis, 371 U.S.
other means to profit—that might have led them to attempt to 178, 182 (1962)).
conceal Parker Homes’s bankruptcy during this period. Cf.
Vencor, 251 F.3d at 558. The district court held that amendment of the CAC with the
SASC would be futile because the SASC did not better link
In short, we do not believe that the plaintiff has pleaded the allegations of scienter with any specific misstatements or
sufficient facts to give rise to the strong inference of scienter omissions. We have already stated that the district court erred
that is required under the PSLRA. See 15 U.S.C. § 78u- in so holding. As we stated in Morse, “[i]n the securities
4(b)(2). The evidence does not show that defendants acted litigation context, leave to amend is particularly appropriate
with an extreme disregard for the standard of ordinary care in where the complaint does not allege fraud with particularity.”
making these statements. See Mansbach, 598 F.2d at 1025. 290 F.3d at 800. However, we nonetheless agree with the
district court that the facts alleged in the SASC do not give
E. The District Court Did Not Err in Denying Plaintiff’s rise to the strong inference of scienter required under the
Motion for Leave to File the SASC18 PSLRA, and therefore are futile. See Morse, 290 F.3d at 800.
The additional facts alleged in the SASC strengthen the
The district court moreover did not err in denying the inference that the defendants had some indication that Parker
plaintiff’s motion for leave to file the SASC. The district Homes had surplus inventory and was going through some
court denied plaintiff leave to file the SASC on two grounds. financial difficulties in the spring of 1999. The SASC also
alleges that the defendants knew that Parker Homes’s
bankruptcy was likely because Ted Parker had sent out
18 notices of default on Parker Homes’s sales lot lease
This motion has been variously described as a motion to amend
and as motion for leave to file an amended compla int. They are in
agreements, which were Parker Homes’s only unencumbered
substance the same motion. asset. However, as the plaintiff also alleged, the defendants
No. 01-1955 Miller, et al. v. Champion 47 48 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
expressly disclosed that they believed there was excess F. Supp. 2d 622 (E.D. Tex. 2001) (fourth amended
inventory in the market as well as their knowledge that Parker complaint); Chu v. Sabratek Corp., 100 F. Supp. 2d 827, 844
Homes had excess inventory, which the defendants believed & n.14 (N.D. Ill. 2000) (sixth amended complaint); In re
to be due to Parker Homes’s unique business plan. As the Southern Pac. Funding Corp. Sec. Lit., 83 F. Supp. 2d 1172,
facts alleged by the plaintiff also imply, there is at least a 1174 (D. Or. 1999) (fourth amended complaint). He also
plausible inference that the defendants believed they had cites a Third Circuit case that allowed amendment despite the
averted the Parker Homes bankruptcy. The additional PSLRA, even after the final judgment:
allegations in the SASC thus do not give rise to the strong
inference of recklessness required under the PSLRA, and are Although we are reluctant to allow amendment of a
therefore futile. pleading at this stage of the proceedings, the plaintiffs
were precluded from engaging in discovery in the
The district court also correctly held that allowing repeated District Court. Without discovery, plaintiffs had no way
filing of amended complaints would frustrate the purpose of to obtain the meeting minutes other than by
the PSLRA. To come to this conclusion, the district court happenstance. We will not add to the strict discovery
first had to decide whether the PSLRA restricts Rule 15(a) of restrictions in the Private Securities Litigation Reform
the Federal Rules of Civil Procedure. Rule 15(a) provides Act (“PSLRA”) by narrowly construing Rule 15 in this
that “[a] party may amend the party’s pleading only by leave case, even at this late stage in the litigation. Given the
of court or by written consent of the adverse party; and leave high burdens the PSLRA placed on plaintiffs, justice and
should be freely given when justice so requires.” The fairness require that the plaintiffs before us be allowed an
PSLRA, on the other hand, states that “[i]n any private action opportunity to amend their complaint to include
arising under this chapter, the court shall, on the motion of allegations relating to the newly discovered Board
any defendant, dismiss the complaint if the [pleading] meeting minutes.
requirements . . . are not met.” 15 U.S.C. § 78u-4(b)(3)(A).
The district court found that the purpose of the PSLRA’s Werner v. Werner, 267 F.3d 288, 297 (3d Cir. 2001). Werner
heightened pleading requirements and stay of discovery were is the most persuasive authority for requiring the district court
to prevent “harassing strike suits filed the moment a to allow an amended pleading.
company’s stock price falls,” and concluded that the PSLRA
“could not achieve this purpose if plaintiffs were allowed to While the Werner opinion had not been issued at the time
amend and amend until they got it right.” Since the plaintiff of the district court’s denial of the motion to permit an
failed to meet the pleading requirements, the district court amended complaint, the district court nonetheless responded
concluded that in order to enforce the purpose of the PSLRA, to a similar argument by plaintiff:
it must dismiss the CAC with prejudice.
In this case, it appears that plaintiffs are contending that
Plaintiff cites several district court opinions that allowed for since discovery procedures are not available to them, that
repeated amendments to complaints despite motions to a court must be lenient in allowing amendments to
dismiss by the defendants. See In re Livent, Inc. Noteholders pleadings. Contending that Rule 15 permits this, they
Sec. Lit., 174 F. Supp. 2d 144, 148 (S.D.N.Y. 2001) (third purposely seek to circumvent the [PSLRA’s] strict
amended complaint); McNamara v. Bre-X Minerals, Ltd., 197 requirements preventing discovery. But this is precisely
No. 01-1955 Miller, et al. v. Champion 49 50 Miller, et al. v. Champion No. 01-1955
Enterprises, et al. Enterprises, et al.
the device that Congress intended to be used, i.e., to plaintiffs were liberally permitted leave to amend again;
prevent suits in which a foundation for the suit can not be this is particularly true where, as here, there is a stark
pleaded. absence of any suggestion by the plaintiffs that they have
developed any facts since the action was commenced
The stay of discovery and the heightened pleading which would, if true, cure the defects in the pleadings
standards are separate and distinct, yet complimentary under the heightened requirements of the PSLRA.
mechanisms. The stay of discovery operates to prevent
plaintiffs with baseless claims from squeezing a nuisance In re Nahc, Inc. Sec. Litig., 306 F.3d 1314, 1332-333 (3d Cir.
settlement from an innocent defendant. The pleading 2002) (quoting In re Nahc, Inc. Sec. Litig., No. 00-4020, 2001
requirement is more than simply a line the plaintiffs must U.S. Dist. LEXIS 16754, at *81-82 (E.D. Pa. Oct. 17, 2001)).
cross to set to discovery; it is the heart of the [PSLRA]. While it is true that the Third Circuit was reviewing its
This stringent requirement operates to discourage district court’s decision only for abuse of discretion,19 it is
baseless suits altogether. It evinces Congress’s clear that it was giving its approval to the district court’s legal
acknowledgment of the burden an allegation of securities interpretation of the PSLRA, an interpretation that is subject
fraud places on the innocent defendant even without to de novo review.
discovery. The [PSLRA] requires a uniform pleading
standard; this standard is meaningless if judges on a case- Plaintiff also contended during oral argument that our
by-case basis grant leave to amend numerous times. recent holding in Morse, 290 F.3d 795, requires a reversal of
the district court’s decision denying plaintiff further leave to
Since Werner was decided, the Third Circuit has specifically amend his complaint. In Morse we held that, despite the
endorsed this reasoning, quoting with approval District Judge plaintiffs’ “gamesmanship” in failing to amend their
Reed’s reliance upon the district court’s opinion in this case: complaint, the plaintiffs’ actions did not amount to bad faith
and the delay alone did not justify denial of leave to amend.
The PSLRA’s stay of discovery procedures was intended 290 F.3d at 800. Additionally, in that case it did not appear
by Congress to protect innocent defendants from having that the defendants would be prejudiced by allowing further
to pay nuisance settlements in securities fraud actions in amendment. Id. at 800-01. Notably however, in Morse there
which a foundation for the suit cannot be pleaded; rather was no discussion of the heightened pleading requirements of
than lead to the conclusion that plaintiffs should receive the PSLRA, or even of the PSLRA generally. In light of
more leniency in amending their pleadings, the stay of those requirements, we think it is correct to interpret the
discovery procedures adopted in conjunction with the PSLRA as restricting the ability of plaintiffs to amend their
heightened pleading standards under the PSLRA is a complaint, and thus as limiting the scope of Rule 15(a) of the
reflection of the objective of Congress “to provide a filter Federal Rules of Civil Procedure. Morse is also
at the earliest stage (the pleading stage) to screen out distinguishable from the present case in that there was no
lawsuits that have no factual basis.” [Champion Enters.,
145 F.Supp.2d] at 874 (quoting Selected Bill Provisions
of the Conference Report to H.R. 1058/§ 240, 141 Cong. 19
Rec. § 19152 (daily ed. Dec. 22, 1995)). This objective This appears to be due to some discrepancy on the standard of
review applied to the denial of a motion to amend between the Third and
would be thwarted if, considering the history of this case, the Sixth Circuits.
No. 01-1955 Miller, et al. v. Champion 51
Enterprises, et al.
finding in that case that amendment would be futile, while in
this case allowing the plaintiff to file the SASC would not
overcome the inadequacies of the CAC. We therefore find
that our holding in Morse does not dispose of the issue at
hand.
We agree with the district court that the purpose of the
PSLRA would be frustrated if district courts were required to
allow repeated amendments to complaints filed under the
PSLRA. We also agree, although on other grounds, that the
proposed amendments in the SASC would be futile. The
district court was within its discretion in refusing the plaintiff
leave to file the SASC, and in light of our holding that filing
of the SASC would be futile—although on alternative
grounds than those found by the district court—we AFFIRM
the judgment of the district court dismissing this case.
CONCLUSION
For the foregoing reasons, we AFFIRM the judgment of the
district court dismissing this case.