Bryant v. Avado Brands Inc.

• Citation: 1999 WL 688050,187 F.3d 1271
• Decision Date: 03 September 1999
• Docket Number: No. 98-9253,98-9253
• Parties: (11th Cir. 1999) John BRYANT, On behalf of himself and all others similarly situated; Robert C. East, et al., Plaintiffs-Appellees, v. AVADO BRANDS, INC.; Thomas E. Dupree, et al., Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

Page 1271

187 F.3d 1271 (11th Cir. 1999)

John BRYANT, On behalf of himself and all others similarly situated Robert C. East, et al., Plaintiffs-Appellees, v. AVADO BRANDS, INC.; Thomas E. Dupree, et al., Defendants-Appellants.

No. 98-9253.

United States Court of Appeals Eleventh Circuit.

Sept. 3, 1999.

[Copyrighted Material Omitted] Appeal from the United States District Court for the Middle District of Georgia. (No. 3:97-CV-83-DF), Duross Fitzpatrick, Judge.

Before ANDERSON, Chief Judge, HILL, Senior Circuit Judge, and COOK^*, Senior District Judge.

ANDERSON, Chief Judge:

INTRODUCTION

This is a securities class action lawsuit brought by shareholders of Apple South, Inc. (now known as "Avado Brands, Inc.") against the corporation and several of its officers. Bryant et al. ("Plaintiffs") allege that Dupree et al. ("Defendants") made false and misleading statements and material omissions in order to inflate the value of the company's stock in violation of the Securities and Exchange Act of 1934. The district court denied Defendants' Motion to Dismiss, but because of the novel questions presented under the Private Securities Litigation Reform Act of 1995, 15 U.S.C. 78u-4 et seq. (West Supp.1999) ("Reform Act"), certified its order for interlocutory review pursuant to 28 U.S.C. 1292(b). This Court accepted the petition in order to set out the applicable law. We vacate the order entered by the district court and remand the case for further proceedings consistent with this opinion.

STATEMENT OF FACTS

Accepting all well-pleaded facts in the complaint as true,¹ we assume the following facts. Apple South, Inc., publicly traded on the National Association of Securities Dealers Automated Quotations ("NASDAQ") market under the symbol "APSO," was a corporation that owned and operated several chain restaurants, including "Applebee's Neighborhood Grill and Bar," "Don Pablo's," "Harrigan's," and "Tomato Rumba's."² Defendant Thomas E. Dupree, Jr. served as its Chief Executive Officer; Defendant Erich J. Booth served as its Chief Financial Officer; and Defendants Redus, Frazier, and McLeod also served as high-ranking officers during the class period,³ defined by the complaint as May 26, 1995 through September 24, 1996. During this period, Apple South pursued an aggressive expansion plan, acquiring additional restaurants and expanding its geographic reach. In May 1995, Apple South acquired 18 "Applebee's" restaurants located in the Midwest from the Marcus Corporation. According to Plaintiffs, integrating these new restaurants into Apple South's business model proved a difficult and ultimately unprofitable task. Allegedly, the assimilation was a failure, and hurt the company's core business--its restaurants located in the Southeast--as well. In addition to the difficulties associated with the acquisition of the "Applebee's" restaurants from the Marcus Corporation, Apple South's earlier acquisition of the "Tomato Rumba's" restaurant chain allegedly was similarly proving much less profitable than expected.

According to Plaintiffs, Apple South's top management knew that these two acquisitions were creating internal problems that would eventually negatively affect the company's Earnings Per Share ("EPS"), but failed to disclose these problems in order maintain Apple South's high stock price and analysts' attendant positive outlook on it. Plaintiffs allege that such concealment was necessary to finance the acquisitions and to reduce bank debt.

According to Plaintiffs, the management problems that accompanied Apple South's expansion into the Midwest resulted in a high rate of turnover, forcing Apple South to transfer experienced managers from its core restaurants in the Southeast to shore up its Midwest operations. The relocated managers were unable to improve profit margins. Moreover, the core restaurants, now deprived of experienced employees, suffered a decline as well. Apple South allegedly reacted to these adverse developments by firing employees and cutting retail costs in order to meet short-term EPS estimates, causing the overall level of service to decline and the return customer base to diminish, thereby tainting the company's long-term prospects. Plaintiffs contend that despite these problems, of which top management was allegedly aware because of a sophisticated internal information system of daily sales reports, Apple South continued to pursue its growth model aggressively, while concealing the negative material information described above that would have likely jeopardized the continued viability of that growth model.

Moreover, Plaintiffs allege that Apple South not only concealed the problems associated with its expansion strategy but affirmatively misrepresented the direction in which the strategy was taking the company, telling analysts that the new restaurants would positively impact profit margins, raising them as much as 13% to 17%, and that EPS would grow by 30% over the next five years. According to Plaintiffs, Defendants continued to misrepresent the status of the acquired restaurants' operations, maintaining a rosy outlook on growth, enabling Apple South to perpetuate the upward movement of its stock price so as to facilitate the company's expansion without diluting the value of the insider Defendants' holdings. Plaintiffs claim that during the class period, Apple South sold more than 10 million shares, plus $125 million in debt securities, and also allege that Defendants Frazier, Redus, and McLeod sold more than $19.6 million of their personal holdings in Apple South.

Plaintiffs further assert that Defendants' misrepresentations and omissions precipitated the climb of Apple South's stock from $15.25 per share, where it traded on May 26, 1995, the start of the class period, to $28.25 per share, its all-time high, by May of 1996. On September 24, 1996, the close of the class period, as summarized by the district court, see Bryant v. Apple South, Inc., 25 F.Supp.2d 1372, 1375 (M.D.Ga.1998), Defendants announced that: (1) Apple South's acquisition of 18 restaurants and related franchise territories from the Marcus Corporation had negatively impacted Apple South's business; (2) 1996 EPS would not reflect the 30-35% growth forecasted and would likely not exceed 1995 EPS; and (3) Apple South was scaling back its 1996 and 1997 expansion plans. Shortly after the announcement, the price of Apple South stock fell by 40% to $12.25.

Taking these facts as true, the district court concluded that the Plaintiffs had alleged a good claim on both counts enumerated in the complaint pursuant to the Securities Exchange Act of 1934:(1) count one under Section 10(b), 15 U.S.C. 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. 240.10b-5; and (2) count two under Section 20(a), 15 U.S.C. 78t(a). See Bryant, 25 F.Supp.2d at 1383. In so holding, the district court granted Plaintiff's Motion to Strike certain documents that Defendants had attached as exhibits to their Motion to Dismiss, and ruled that the standard for pleading scienter under the Reform Act was that formulated by the Second Circuit--that a "strong inference" of scienter could be raised by: (1) "alleging facts that show the defendants had a motive and opportunity to commit fraud"; or (2) "alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Id. at 1379-81 (citing Shields v. Citytrust Bancorp. Inc., 25 F.3d 1124, 1128 (2d Cir.1994)). Noting that the Reform Act had "not yet been addressed by an appellate court," and further remarking that "there is a distinct difference of opinion among the district courts that have considered the statute's proper interpretation," the district court recommended that our Court permit an interlocutory appeal pursuant to 28 U.S.C. 1292(b). See Bryant, 25 F.Supp.2d at 1383. We accordingly allowed the appeal.

DISCUSSION

We address two discrete legal issues in the instant appeal. The first involves the proper scope of materials that a district court may consider in ruling on a motion to dismiss in a securities fraud case. The second involves what standard Plaintiffs must meet in this Circuit in order to plead scienter adequately under 15 U.S.C. 78u-4(b)(2).⁴

A. Scope of Motion to Dismiss in Securities Fraud

The district court, granting in part Plaintiffs' Motion to Strike, ruled that certain exhibits⁵ proffered by the Defendants as attachments to their Motion to Dismiss could not be considered, because the documents embodied matters outside the pleadings. Bryant, 25 F.Supp.2d at 1376-77. The attachments to the Motion to Dismiss were documents filed with the Securities Exchange Commission ("SEC"),⁶ proffered by Defendants in support of two defenses: the "safe-harbor" protection afforded by 15 U.S.C. 78u-5 and its judicially created equivalent, the "bespeaks caution" doctrine.⁷ The court concluded that it could not consider either defense at the motion to dismiss stage because both defenses relied upon cautionary statements included in the SEC documents, which the district court had already ruled were outside the pleadings and could not be considered without converting the motion into a motion for summary judgment.

In so concluding, the district court rejected Defendants' argument that the exhibits could be judicially noticed at the 12(b)(6) stage, an argument based on the Second Circuit's opinions in Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir.1991), and Cortec Indus. Inc. v. Sum Holding, L.P., 949 F.2d 42, 47 (2d Cir.1991). Cortec held that publicly filed SEC documents could be judicially noticed under Fed.R.Evid. 201 at the motion to dismiss stage. Citing Kramer, the Cortec court noted that:

When a district court decides a motion to dismiss a complaint alleging securities fraud, it may review and consider public 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...