Bovee v. Coopers & Lybrand

• Decision Date: 26 April 2001
• Docket Number: Nos. 00-3018,s. 00-3018
• Citation: 272 F.3d 356
• Parties: (6th Cir. 2001) Barry F. Bovee; Wendy L. Bovee; Brian B. Bovee; Ronald Gerhart; Wayne Langham; Emerson E. Eckrote, Jr.; Kathi J. Eckrote; Michael A. Ryan; William J. Yurkovic; W. Thomas Kirchhoff, Jr.; Stephen Robert Parnham; Jay W. Cleveland, Jr.; Marry S. Cleveland; R. Kevin Carnahan; James B. Craig; Lucille Glasgow; James R. Colestock; Diane L. Colestock; Shortline Mortgage Corporation; Evangelos J. Banacos; Toula Banacos, Plaintiffs-Appellants, v. Coopers & Lybrand C.P.A.; Coopers & Lybrand, L.L.P.; Christopher L. White; Dennis P. Wilburn; Richard A. Widders, Jr.; R. Jay Roberts, Defendants-Appellees. /3471 Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 356

272 F.3d 356 (6th Cir. 2001)

Barry F. Bovee; Wendy L. Bovee; Brian B. Bovee; Ronald Gerhart; Wayne Langham; Emerson E. Eckrote, Jr.; Kathi J. Eckrote; Michael A. Ryan; William J. Yurkovic; W. Thomas Kirchhoff, Jr.; Stephen Robert Parnham; Jay W. Cleveland, Jr.; Marry S. Cleveland; R. Kevin Carnahan; James B. Craig; Lucille Glasgow; James R. Colestock; Diane L. Colestock; Shortline Mortgage Corporation; Evangelos J. Banacos; Toula Banacos, Plaintiffs-Appellants, v. Coopers & Lybrand C.P.A.; Coopers & Lybrand, L.L.P.; Christopher L. White; Dennis P. Wilburn; Richard A. Widders, Jr.; R. Jay Roberts, Defendants-Appellees.

Nos. 00-3018/3471

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: April 26, 2001

Decided and Filed: November 21, 2001

Appeal from the United States District Court for the Southern District of Ohio at Columbus. No. 97-00449. Edmund A. Sargus, Jr., District Judge. [Copyrighted Material Omitted] Michael G. Brautigam (argued and briefed), GENE MESH & ASSOCIATES, Cincinnati, Ohio, for Appellants.

David W. Hardymon, David S. Cupps (argued and briefed), Robert N. Webner (briefed), Michelle M. Gubola, Vorys, Sater, Seymore & Pease, Columbus, Ohio, for Appellees.

On BRIEF: Michael G. Brautigam, GENE MESH & ASSOCIATES, Cincinnati, Ohio, for Appellants. David S. Cupps, Robert N. Webner, VORYS, SATER, SEYMOUR & PEASE, Columbus, Ohio, for Appellees.

Before: BOGGS and CLAY, Circuit Judges; ROBERTS, District Judge. ^*

OPINION

ROBERTS, District Judge.

Plaintiffs appeal from September 30, 1999 and December 21, 1999 Orders of the district court dismissing this action. These Orders were based on findings that Plaintiffs failed to state a claim upon which relief could be granted pursuant to Fed. R. Civ. P. 12(b)(6) and failed to plead fraud with particularity pursuant to Fed. R. Civ. P. 9(b). These are the subjects of Plaintiffs' appeal under Case No: 00-3018. Plaintiffs also appeal from a March21, 2000 Order of the district court denying their Motion for a Hirsch Remand ¹ , which is the subject of the second appeal under Case No: 00-3471. Because the district court did not consider Plaintiff's Amended Complaint before deciding the motions at issue, we VACATE and REMAND for further consideration.

I. SUBSTANTIVE BACKGROUND

Plaintiffs ² are members of the general public who purchased common stock in Mid-Western Waste Systems, Inc. ("MAW"), a publicly traded corporation, under the 1934 Securities Exchange Act. MAW later disclosed serious financial irregularities and filed for bankruptcy protection, causing the investors' stock to lose value. Plaintiffs sued certain MAW officers certain MAW accountants, Coopers & Lybrand and Coopers & Lybrand L.L.P. (collectively, "Coopers"). Coopers performed accounting services for MAW, which included the audit of financial statements which were part of MAW's filings with the Securities and Exchange Commission ("SEC").

Plaintiffs claim that they were sold the MAW stock at inflated prices; that false financial information about MAW was disseminated to them; ³ and, that they suffered a great monetary loss when MAW, without warning, filed for bankruptcy protection.

II. PROCEDURAL BACKGROUND

Plaintiffs brought claims against Coopers for securities fraud violations pursuant to 15 U.S.C. §78j(b) and for their role in assisting the sale at an inflated price of MAW stock, all in violation of the Private Securities Litigation Reform Act., 15 U.S.C §78u-4 ("PSLRA").

Plaintiffs also assert claims of professional negligence and negligent misrepresentation under Ohio law against Coopers. Coopers filed its Motion to Dismiss, asserting that Plaintiffs' Complaint failed to state a claim upon which relief could be granted pursuant to Fed. R. Civ. P. 12(b)(6) or alternatively, failed to allege fraud with the particularity required by PSLRA and Fed. R. Civ. P. 9(b).

The district court granted Coopers' motion, in part, on September 30, 1999, and provided an opportunity for Plaintiffs to amend their Complaint. Plaintiffs did not file an amended complaint, but filed their Notice of Intent to Stand on Amended Class Action Complaint, not realizing that the Amended Complaint had not been considered. ⁴ This led to: (1) the entry of the December 21, 1999 Order dismissing Plaintiffs' entire claim with prejudice; and, (2) the preparation of Plaintiffs' appeal under Case No: 00-3018. Plaintiffs' claim that the district court erred by basing its decision to dismiss their claim upon the original Complaint filed in April 1997 rather than on the Amended Complaint filed and accepted by the District Court of New Jersey in October 1997.

While pursuing their appeal on Case No.: 00-3018, Plaintiffs noticed that certain documents were not part of the record below. This prompted them to file three motions ⁵ , one of which was a Motion for a Hirsch Remand. Had the district court granted Plaintiffs' Hirsch Remand motion, and this Court had agreed to remand, it would have allowed the district court to reconsider its previous judgment of dismissal based on a full evaluation of the case record. First National Bank of Salem, Ohio v. Hirsch, 535 F. 2d 343 (6th Cir. 1976). However, subsequent to a hearing on the matter, the district court denied Plaintiffs' Motion for Hirsch Remand, but granted their motion to supplement the record. The denial of Plaintiffs' Hirsch Remand motion is the subject of Plaintiffs' second appeal under Case No: 00-3471.

III. DISCUSSION

A. STANDARDS OF REVIEW 1.Motion for Dismissal Pursuant to Fed. R. Civ. P. 12(b)(6)

The propriety of a dismissal pursuant to Fed. R. Civ. P. 12(b)(6) is a question of law that is subject to de novo review. In re Sofamor Danek Group, Inc., 123 F. 3d 394, 400 (6th Cir. 1997). The court must construe the complaint in the light most favorable to the plaintiff, accept all the factual allegations as true, and determine whether the plaintiff can prove a set of facts in support of its claims that would entitle it to relief. Mayer v. Mylod, 988 F. 2d 635, 637-38 (6th Cir. 1993). A court may not grant a Rule 12(b)(6) motion based on disbelief of a complaint's factual allegations. Lawler v. Marshall, 898 F. 2d 1196,1199 (6th Cir. 1990). Finally, this Court may consider the full text of the SEC filings, prospectus, analysts' reports and statements "integral to the complaint," even if not attached, without converting the motion into one for summary judgment under Fed. R. Civ. P. 56. See I. Meyer Pincus & Assoc. v. Oppenheimer & Co., 936 F. 2d 759, 762 (2nd Cir. 1991).

The standard of review "require[s] more than the bare assertion of legal conclusions." See Columbia Natural Resources, Inc. v. Tatum, 58 F. 3d 1101, 1109 (6th Cir. 1995). And, this Court "need not accept as true legal conclusions or unwarranted factual inferences." Morgan v. Church's Fried Chicken, 829 F. 2d 10, 12 (6th Cir. 1987).

Plaintiffs' claims for professional negligence and negligent misrepresentation are tested for their ability to state a claim under state law. In diversity cases, this Court applies state law in accordance with the controlling decisions of the Ohio Supreme Court. Erie R. R. Co. v. Tompkins, 304 U.S. 64 (1938); Bailey Farms, Inc. v. NOR-AM Chem. Co., 27 F. 3d 188, 191 (6th Cir. 1994). If the state supreme court has not yet addressed the issue presented, this Court must predict how it would rule, by looking to "all available data," including state appellate decisions. Kingsley Associates, Inc. v. Moll Plastic Crafters, Inc., 65 F. 3d 498, 507 (6th Cir. 2000).

2. Motion for Hirsch Remand

A denial of a Hirsch Remand is essentially a denial of a motion under Fed. R. Civ. P. 60(b) ⁶ . See Begala v. PNC Bank,214 F. 3d 776, 784 (6th Cir. 2000). This Court reviews the denial of Fed. R. Civ. P. 60(b) motions for an abuse of discretion. See Good v. Ohio Edison, Co., 149 F. 3d 413, 423 (6th Cir. 1998). A district court abuses its discretion when it relies on clearly erroneous findings of fact, uses an incorrect legal standard, or applies the law incorrectly." United Food & Commercial Workers Union, Local 1099, v. Southwest Ohio Regional Transit Authority, 163 F. 3d 341, 347 (6th Cir. 1998). Legal conclusions are subject to de novo review. See Suster v. Marshall, 149 F. 3d 523, 528 (6th Cir. 1998).

B. PRIVATE SECURITIES LITIGATION REFORM ACT & FED. R. CIV. P. 9(b): Have Plaintiffs Stated a Claim?

Under Fed. R. Civ. P. 9(b), "[i]n all averments of fraud ... the circumstances constituting fraud ... shall be stated with particularity." Plaintiffs may not simply rely on the proposition that Defendants must have known or should have known of, and participated in, the fraud. Generalized and conclusory allegations that the Defendants' conduct was fraudulent do not satisfy Rule 9(b). Decker v. Massey-Ferguson, Ltd., 681 F. 2d 111, 114 (2nd Cir. 1982). As courts have noted, Rule 9(b) has three (3) broad purposes:

"In the context of securities litigation it has generally been held that Rule 9(b) serves three purposes: (1) it ensures that allegations are specific enough to inform a defendant of the act of which the plaintiff complains, and to enable him to prepare an effective response and defense; (2) it eliminates those complaints filed as a pretext for the discovery of unknown wrongs -- a 9(b) claimant must know what his claim is when he files; and (3) it seeks to protect defendant from unfounded charges of wrongdoing which injure their reputations and goodwill."

Vennittilli v. Primerica, Inc., 943 F. Supp. 793, 798 (E.D. Mich. 1996) (quoting Bennoay v. Decker, 517 F. Supp. 490, 492 (E.D. Mich. 1981)). Therefore, plaintiffs are required to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. §78u-4(b)(2). Under this Court's interpretation of the "required state of mind" under PSLRA: "[P]laintiffs may plead scienter in §10b or Rule 10b-5 cases by alleging facts giving rise to a strong...