Bryant v. Apple South, Inc.
| Decision Date | 29 July 1998 |
| Docket Number | No. 3:97-CV-83 (DF).,3:97-CV-83 (DF). |
| Citation | 25 F.Supp.2d 1372 |
| Parties | John BRYANT, et al., Plaintiffs, v. APPLE SOUTH, INC., et al., Defendants. |
| Court | U.S. District Court — Middle District of Georgia |
Theodore J. Sawicki, Oscar N. Persons, John A. Jordak, Jr., Alston & Bird, Atlanta, GA, Edward Davison Burch, Athens, GA, for Avado Brands, Inc.
Martin D. Chitwood, Atlanta, GA, Jules Brody, New York City, Alfred G. Yates, Jr., Pittsburgh, PA, Steven E. Cauley, Little Rock, AR, for Robert C. East, Thomas R. Rutherford, S.S. Rutherford, Artel Foam Corp. Pension Trust,Stanley Cohen and Joseph Nadboy.
Before the Court is a motion to dismiss the above-styled action. Defendants contend that they are entitled to dismissal because the Complaint runs afoul of Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, federal securities laws, and the applicable statute of limitations. After a hearing on the motion and a review of the record, which includes an eighty five page Amended Complaint, and over ten briefs on the motion, the Court enters the following Order.
In considering a motion to dismiss under Rule 12(b)(6) for failure to state a claim, the Court accepts all well-pleaded factual allegations in the complaint as true and draws all reasonable inferences from these facts in favor of the Plaintiffs. Read in this light, the facts are as follows.
Apple South is a Corporation that operates restaurants throughout the United States. Its stock is publicly traded on ANASDAQ as "APSO." During the class period, defined by the Complaint to be May 26, 1995 through September 24, 1996, Apple South engaged in an aggressive growth strategy that involved the acquisition of additional restaurants. A high stock price facilitated Apple South's ability to raise capital for these acquisitions. Plaintiffs allege that Apple South's top officers and directors inflated the price of Apple South stock between May 26, 1995 and September 24, 1996 (the "class period") by making false and misleading statements about the success of its acquisition of restaurants from the Marcus Corporation and DF & R Restaurants, Inc., its overall expansion strategy, and its business prospects. During the class period, Apple South sold over 10 million shares of Apple South stock and $125 million in debt securities to the investing public, and defendants David Frazier, Marc Redus, and John McLeod, Jr. sold over $19.6 million of their Apple South stock.
On May 26, 1995, the beginning of the class period, Apple South stock was publicly traded for $15.25 per share. By May of 1996, the price had risen to $28.25 per share, an all-time high. At the conclusion of the class period, September 24, 1996, Defendants publicly announced the following: (1) Apple South's acquisition of 18 Applebee's restaurants and the related franchise territories from the Marcus Corporation had hurt Apple South's business; (2) the 1996 EPS would not meet earlier forecasts of 30%-35% growth, and would probably not exceed 1995 EPS; and (3) Apple South was curtailing its 1996 and 1997 expansion plans. After the announcement, Apple South stock plummeted 40% to $12¼.
Prior to considering the motion to dismiss, the Court must address Plaintiffs' motion to strike. Defendants attached 19 documents to their "Memorandum of Law in Support of Motion to Dismiss Amended Complaint." These documents, filed as exhibits, are referenced throughout the memorandum. Plaintiff seeks to strike nine of these documents, Exhibits K through S, as outside the pleadings in this case. A description of the disputed documents follows:
Disputed Documents in Plaintiff's Motion to Strike
In support of their argument that Exhibits K-S should be stricken from the record at this phase of the litigation, Plaintiffs rely on Eleventh Circuit authority which holds that a district court may not consider matters outside the pleadings on a motion to dismiss based on Rule 12(b)(6) without converting it to a motion for summary judgment. See Property Management & Inv., Inc. v. Lewis, 752 F.2d 599, 604 (11th Cir.1985).2
The Defendants argue that three exceptions to the general rule cited above allow the court to consider Exhibits K-S. First, Defendants argue that Plaintiffs' Amended Complaint specifically refers to Exhibit S, when it states:
On 1/16/96, the Atlanta Constitution published an interview of defendants DuPree and Booth in which Booth adopted analysts' estimates of 1996 EPS of $0.95. Defendants also stated that its Applebee's same store growth would increase slightly in the next year.
Amended Complaint ¶ 69. Because the article is quoted in the complaint, fairness requires that the entire document be considered here. See Pension Benefit Guar. Corp. v. White Consol. Ind., 998 F.2d 1192 (3rd Cir.1993) (). Therefore, the motion to strike is DENIED as to Exhibit S.
In contrast with Exhibit S, Exhibits K, L, M, N, O, Q, and R are not quoted or mentioned in Plaintiffs' Complaint. Defendants argue that they are relevant, however, and rely on the following holding of the Second Circuit:
When a district court decides a motion to dismiss a complaint alleging securities fraud, it may review and consider public disclosure documents required by law to be and which actually have been filed with the SEC, particularly where plaintiff has been put on notice by defendant's proffer of these public documents.
Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42,47 (2d Cir.1991). The rule quoted above has not been adopted by the Eleventh Circuit, and the Eleventh Circuit's opinions on the subject do not leave room for a district court to create an exception to the general rule. The law of the Eleventh Circuit is that consideration of matters outside the pleadings on a Rule 12(b)(6) motion requires conversion to summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Ware v. Associated Milk Producers, Inc., 614 F.2d 413, 415 (5th Cir. 1980).3 Because the documents were not quoted or specifically mentioned in the Amended Complaint, the Court will not deviate from the general rule of the Eleventh Circuit by adopting the Second Circuit's rule from Cortec Industries. Therefore Plaintiffs' motion to strike is GRANTED with respect to exhibits K, L, M, N, O, Q, and R.
Finally, Defendants argue that the Court should rely on Cortec Industries to allow consideration of Exhibit P. The non-SEC documents that were allowed to be considered in ruling upon the motion to dismiss in Cortec Industries were a stock purchase agreement, an offering memorandum, and a warrant. The Second Circuit held that these documents were either in the plaintiff's possession or the plaintiff had knowledge of them, and they were relied upon in bringing suit. Id. at 48. In holding that the documents could be considered in ruling on the motion to dismiss, the court found that the plaintiff had notice of the documents and they were integral to the complaint. Id. In the case sub judice, Defendants have not shown that Exhibit P was integral to the Complaint; therefore, it will not be considered.
Rule 8 of the Federal Rules of Civil Procedure set out the general rules of pleading. Specifically, Rule 8(a)(2) requires that a complaint contain, "a short and plain statement of the claim showing that the pleader is entitled to relief." Ordinarily, a plaintiff is not required to set out in great detail the facts upon which a claim is based. Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 103, 2 L.Ed.2d 80 (1957). However, the standards for pleading a claim for securities fraud are much more stringent. These standards are outlined in the next section of the Order. One important rule that continues to apply in this type of case is the Supreme Court's mandate that Plaintiffs must be given the benefit of any doubt.
When a federal Court reviews the sufficiency of a complaint ... [t]he issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims. Indeed it may appear on the face of the pleadings that a recovery is very remote and unlikely but that is not the test.... [I]n passing on a motion to dismiss, whether on the ground of lack of jurisdiction over the subject matter or for failure to state a cause of action, the allegations of the complaint should be construed favorably to the pleader.
Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, ...
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