Arnlund v. Smith

• Court: U.S. District Court — Eastern District of Virginia
• Writing for the Court: Spencer
• Citation: Arnlund v. Smith, 210 F.Supp.2d 755 (E.D. Va. 2002)
• Decision Date: 29 May 2002
• Docket Number: No. CIV.A.3:01-CV-105.,CIV.A.3:01-CV-105.
• Parties: Bert E. ARNLUND, John C. Cullather, Robert J. D'Amico, Donald H. Duncan, Gregory L. Freeman, Joseph Graziano and Daniel P. Mahoney, Plaintiffs. v. Lawrence N. SMITH, William C. DeRusha, Robert L. Burrus, Jr., Eugene P. Trani and Alexander Alexander, Defendants.

210 F.Supp.2d 755

Bert E. ARNLUND, John C. Cullather, Robert J. D'Amico, Donald H. Duncan, Gregory L. Freeman, Joseph Graziano and Daniel P. Mahoney, Plaintiffs. v. Lawrence N. SMITH, William C. DeRusha, Robert L. Burrus, Jr., Eugene P. Trani and Alexander Alexander, Defendants.

No. CIV.A.3:01-CV-105.

United States District Court, E.D. Virginia. Richmond Division.

May 29, 2002.

COPYRIGHT MATERIAL OMITTED

Steven Scott Biss, Richmond, VA, for Bert E. Arnlund, John C. Cullather, Robert J. D'Amico, Donald H. Duncan, Gregory L. Freeman, Joseph Graziano, Daniel P. Mahoney.

John C. Ivins, Jr., Hirschler, Fleischer, Weinberg, Cox & Allen, Richmond, VA, Everette G. Allen, Jr., Allen & Allen, Richmond, VA, for Lawrence N. Smith, Eugene P. Trani, Alexander Alexander.

James Joseph Burns, Williams, Mullen, Clark & Dobbins, Richmond, VA, Samuel Walter Hixon, III, Williams, Mullen, Clark & Dobbins, Richmond, VA, for William C. DeRusha.

James W. Morris, III, Morris and Morris, P.C., Richmond, VA, Michael Robert Ward, Morris and Morris, Richmond, VA, David C. Bryan, Wachtell Lipton Rosen & Katz, New York, NY, for Robert L. Burrus, Jr.

MEMORANDUM OPINION

SPENCER, District Judge.

This matter comes before the Court on Defendants' Motion to Dismiss, pursuant to Federal Rule of Civil Procedure 12(b)(6), filed on December 17, 2001. For the reasons discussed below, Defendants' Motion is GRANTED in part and DENIED in part.

I. BACKGROUND

On November 26, 2001, Plaintiffs filed their Complaint against Defendants, alleging federal securities fraud, common law fraud and conspiracy. Plaintiffs' claims arise out of a series of alleged misrepresentations and omissions surrounding the financial condition of Heilig-Meyers Company ("the Company" or "Heilig-Meyers"), particularly the Company's Annual Report issued on May 30, 2000. Plaintiffs are seven shareholders of the Company and Defendants are members of the Company's Board of Directors. The Complaint is quite lengthy and repeats many of the facts essential to the instant motion. What follows is an abbreviated recapitulation of Plaintiffs' allegations.

At some point prior to May 30, 2000, Defendants became aware that the Company faced a liquidity crisis. Goldman Sachs had been asked to review strategic alternatives, and in late Spring 2000 to perform a tacit market check to determine whether anyone had significant interest in acquiring the Company. (Second Am. Compl. at ¶ 52.) On May 17, 2000, a special meeting of the Board of Directors ("the Board") was held to discuss the Company's financial position and the impending liquidity issues. Id. at ¶ 38. During that meeting, the Board was informed by the Company's CEO and President, William DeRusha ("DeRusha"), that if the Company did not enter into an extension of its banks credit facility by May 25, 2000, the Company would be in default under the terms of that facility. Id. at ¶ 39. At that meeting, the Defendants agreed that if satisfactory agreements could not be reached with the lender group by May 25, 2000, the Company should be positioned to file for bankruptcy. Id. at ¶ 41.

Defendants scheduled another special meeting for May 24, 2000. At that meeting, Defendants were informed that Duff & Phelps Credit Rating Co. ("D & P") would downgrade the Company's debt after the extended bank facility was signed. The Defendants were also made aware that not all of the banks party to the credit facility had submitted an agreement to revise the facility. Id. at ¶ 48.

Another special meeting was held on May 29, 2000. At that meeting Defendants unanimously approved the draft annual report. The Board also gave DeRusha a vote of confidence and decided to retain him as Chairman and CEO.

The Annual Report (Form 10K) was filed on May 30, 2000 with the Securities & Exchange Commission ("SEC"). The Annual Report represented that the Company was solvent; that the Company had grown and was continuing to grow; that there were no significant factors affecting the business of the Company; that the Board intended to continue paying regular quarterly dividends when justified by the financial condition of the Company; that stockholders' equity was $534,748,000.00; that stockholders' equity per share was $8.81; and that the Company had no significant concentration of credit risk. Id. at ¶ 82.

The annual meeting of shareholders took place on June 21, 2000. The Board discussed suspension of the payment of the quarterly dividend and authorized DeRusha to suspend the dividend if certain Company officers agreed that a suspension was unlikely to result in both the sale of the Company's stock by a substantial number of shareholders and a negative reaction by the major credit rating agencies. Id. at ¶ 105. Also, at this meeting, DeRusha formally requested that the Board consider the termination of his employment and the election of Donald S. Shaffer ("Shaffer") as his replacement. Id. at ¶ 66.

The Board conducted a special meeting on July 18, 2000. Representatives of Lazard Freres & Co. ("Lazard"), a New York investment banking firm, were in attendance, and presented a detailed analysis and report of the Company's financial condition and prognosis. Id. at ¶ 114. The Board also discussed the fact that the Company's financial future did not look good.

Yet another special meeting was held on July 21, 2000. During this meeting, the Defendants were made aware of the financial implications of DeRusha's termination, primarily the effect his severance obligation would have on the Company. Defendants were notified that the banks would not support a waiver of the covenant violations caused by the accrual of DeRusha's severance obligation. One of the board members asked about the expenses that would be incurred if the Company filed for bankruptcy. Id. at ¶ 121.

On July 24, 2000, the Company publicly announced that DeRusha had been replaced as president and CEO. In Form 8-K and its press release, the Company disclosed that DeRusha was entitled to payments of roughly $8.1 million in connection with his departure from the Company.

On August 16, 2000, the Company declared bankruptcy and announced that it would close down its servicing operations. Id. at ¶ 136-37. The Company filed its quarterly report with the SEC on November 27, 2000. The report revealed that by August 31, 2000:

• The Company's assets had shrunk by over $611,474,000;

• Total revenues for the quarter decreased by 7.8%;

• Operating expenses exceeded revenue by over $48 million;

• Net loss increased by $536,835,000;

• Accounts payable increased by $27,313,000;

• Loss per share was ($9.71); and

• Total shareholder equity went from $534,748,000 in May 2000 to ($75,057), a decrease of $609,805,000.

Id. at ¶ 154.

By April 4, 2001, the Company had put all advertising on hold. Id. at ¶ 162. Finally, on April 11, 2001, the Company announced the liquidation and sale of all its stores. Id. at ¶ 163.

II. APPLICABLE RULES AND PRINCIPLES

The Second Amended Complaint alleges that each of the Defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b)(1994), Rule 10b-5, 17 C.F.R. § 240.10b-5 (1999), and are liable for common law fraud, both actual and constructive, and common law conspiracy. Plaintiffs also allege that Defendants are "controlling persons" of Heilig-Meyers under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), and are therefore individually liable for Heilig-Meyers' alleged violations of Section 10(b) and Rule 10b-5.

A. MOTION TO DISMISS

The function of a motion to dismiss is to test the law governing claims, not the facts which support them. See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Spell v. McDaniel, 591 F.Supp. 1090 (E.D.N.C.1984). When considering such a motion, the Court must presume that all factual allegations in the complaint are true. See Puerto Rico ex. rel. Quiros v. Alfred L. Snapp & Sons, Inc., 632 F.2d 365 (4th Cir.1980). All reasonable inferences must be made in favor of the non-moving party. See Johnson v. Mueller, 415 F.2d 354 (4th Cir.1969); MacKethan v. Peat, Marwick, Mitchell & Co., 439 F.Supp. 1090 (E.D.Va.1977). The Court should not dismiss any count unless it appears beyond a doubt that the plaintiff could not recover under any set of facts which could be proven. See Doby v. Safeway Stores, Inc., 523 F.Supp. 1162 (E.D.Va.1981); Austin v. Reynolds Metals Co., 327 F.Supp. 1145 (E.D.Va.1970).

In evaluating a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), not only will the court consider the facts as set forth in the complaint, but the court will also consider the documents attached to the complaint, In re First Union Corp. Sec. Litig., 128 F.Supp.2d 871, 883, and matters of public record whose authenticity is unquestioned, Gasner v. County of Dinwiddie, 162 F.R.D. 280, 282 (E.D.Va.1995). "In securities fraud actions, courts will also examine the other information that was publicly available to reasonable investors at the time the defendant made statements plaintiffs alleged were fraudulent." Id. (citing Phillips v. LCI Int'l, Inc., 190 F.3d 609, 617 (4th Cir.1999) (court considered news article and company proxy statement); Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1274-1281 (11th Cir.1999) (court considered SEC filings); In re FAC Realty Sec. Litig., 990 F.Supp. 416, 420 (E.D.N.C.1997) (court considered press release, other public statements made by the company, and company's Form 10-K)). In certain limited circumstances, the court may consider non-public documents that have not been attached to the complaint. "[W]hen a plaintiff fails to introduce a pertinent document as part of his complaint, the defendant may attach the document to a motion to dismiss the complaint and the Court may consider the same without converting the motion to one for summary judgment." Gasner, 162 F.R.D. at 282. However, the authenticity of such documents must be...