Caremark, Inc. v. Coram Healthcare Corp.

• Decision Date: 18 April 1997
• Docket Number: No. 96-1166,96-1166
• Citation: 113 F.3d 645
• Parties: Fed. Sec. L. Rep. P 99,451 CAREMARK, INCORPORATED, a California corporation, and Caremark International Incorporated, a Delaware corporation, Plaintiffs-Appellants, v. CORAM HEALTHCARE CORPORATION, a Delaware corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 645

113 F.3d 645

Fed. Sec. L. Rep. P 99,451

CAREMARK, INCORPORATED, a California corporation, and Caremark International Incorporated, a Delaware corporation, Plaintiffs-Appellants, v. CORAM HEALTHCARE CORPORATION, a Delaware corporation Defendant-Appellee.

No. 96-1166.

United States Court of Appeals, Seventh Circuit.

Argued May 20, 1996.

Decided April 18, 1997.

Steven L. Bashwiner, Mary Ellen Hennessy (argued), Sheldon T. Zenner, Sean M. Berkowitz, Lisa Noller, Katten, Muchin & Zavis, Chicago, IL, for Plaintiffs-Appellants.

Peter C. John, Thomas L. Duston, Matthew M. Getter, Hedlund & Hanley, Chicago, IL, Michael A. Kahn, Douglas W. Sullivan, Samuel R. Miller (argued), Katherine Livingston, Julie M. Kennedy, Theresa I. McFarland, Folger & Levin, San Francisco, CA, for Defendant-Appellee.

Before CUDAHY, COFFEY and RIPPLE, Circuit Judges.

RIPPLE, Circuit Judge.

Caremark, Incorporated appeals the district court's grant of judgment on the pleadings in favor of Coram Healthcare. ¹ Because we believe that the complaint adequately states a cause of action for fraud under the securities laws, we reverse the judgment of the district court and remand the case for further proceedings.

I BACKGROUND

A.

Because this case comes to us from a dismissal on the pleadings, we must take the allegations in the complaint as true. Ledford v. Sullivan, 105 F.3d 354, 356 (7th Cir.1997); Wilczynski v. Lumbermens Mut. Cas. Co., 93 F.3d 397, 401 (7th Cir.1996).

During 1994 and 1995, Coram negotiated with Caremark to buy the latter's home infusion business. In April 1995, that sale was completed. In return for its business, Caremark received a cash payment of $209 million and notes with a face value of $100 million. Caremark negotiated and accepted these terms based on Coram's representations that its business strategy was to focus on the home infusion market.

However, while the negotiations between Coram and Caremark were underway, Coram was also negotiating secretly to buy Lincare, a provider of respiratory services. Caremark was unaware of the Coram/Lincare negotiations. Twelve days after the sale of Caremark's business to Coram, Coram announced its planned merger with Lincare. The value of Coram's stock then dropped dramatically, and the secondary market for its notes also dropped as the stock fell in value. In July 1995, Coram and Lincare mutually agreed not to go ahead with their planned merger.

Caremark alleges that, if it had known of the Coram/Lincare negotiations, it would have valued the notes differently on the date of closing. It claims that it has been damaged because the notes it received from Coram were worth less on that day than Coram were worth less on that day than Coram represented them to be worth. Accordingly, Caremark brought this action alleging a violation of Rule 10b-5, promulgated under 15 U.S.C. § 78j(b), and various supplemental state claims.

B.

The district court held that the complaint did not state a violation of Rule 10b-5. In the court's view, Caremark had failed to allege adequately loss causation. The court noted that, although Coram did not disclose its negotiations to buy Lincare's respiratory business prior to closing its merger with Caremark, Coram did disclose that it was seeking other home infusion businesses to acquire. The court further noted that Caremark did not allege that Coram diverted more energies toward the Lincare acquisition than it might have expended toward the acquisition of a home infusion company. Therefore, the court reasoned, Caremark could not allege that Coram had expended its corporate resources in a manner unexpected by the Coram/Caremark agreement. Moreover, continued the court, it would be impossible for Caremark to prove such an allegation because the representations in Coram's Form 10-K show that the parties contemplated that, at the very least, Coram would pursue mergers with other home infusion providers. The district court therefore concluded that Caremark's alleged loss due to the undisclosed Lincare transaction was no greater than the loss it might have suffered because of a hypothetical merger transaction whose possibility had been disclosed adequately.

II DISCUSSION

A.

As we have noted earlier, this case comes to us at a very early stage of the litigation. The district court dismissed the complaint on the ground that the allegations did not state a cause of action. See Fed.R.Civ.P. 12(b)(6). When reviewing a complaint in this procedural posture, the district court must take the allegations of the complaint as true and give the plaintiff the benefit of all inferences. Ledford, 105 F.3d at 356; Wilczynski, 93 F.3d at 401. "[A] complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Because the district court may not dismiss the complaint unless the complaint is legally insufficient, our review of that decision is de novo. Ledford, 105 F.3d at 356; Wilczynski, 93 F.3d at 401. As the Supreme Court of the United States stated in Scheuer v. Rhodes:

When a federal court reviews the sufficiency of a complaint, ... its task is necessarily a limited one. The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.

416 U.S. 232, 236 (1974).

B.

The federal claim before us alleges a violation of Rule 10b-5. In such an action, the plaintiff must establish that: (1) the defendant made a false statement or omission (2) of material fact (3) with scienter (4) in connection with the purchase or sale of securities (5) upon which the plaintiff justifiably relied (6) and that the false statement proximately caused the plaintiff's damages. In re HealthCare Compare Corp. Sec. Litig., 75 F.3d 276, 280 (7th Cir.1996); Stransky v. Cummins Engine Co., 51 F.3d 1329, 1331 (7th Cir.1995). ² In this case, we are concerned principally with the causation requirement.

A plaintiff in a securities fraud action under Rule 10b-5 must plead adequately not only "transaction causation" but also "loss causation." LHLC Corp. v. Cluett, Peabody & Co., 842 F.2d 928, 931 (7th Cir.), cert. denied, 488 U.S. 926 (1988). ³

As this court has noted previously, these terms are "ungainly to start with because they conscript nouns for service as adjectives [and] have been confusing in practice.... Used without care, these terms hinder rather than facilitate understanding." Id. To plead transaction causation, the plaintiff must allege that it would not have invested in the instrument if the defendant had stated truthfully the material facts at the time of sale. To plead loss causation, the plaintiff must allege that it was the very facts about which the defendant lied which caused its injuries. Id.

In Bastian v. Petren Resources Corp., 892 F.2d 680 (7th Cir.), cert. denied, 496 U.S. 906 (1990), this court addressed the distinction between these two types of causation. It held that it was not sufficient for an investor to allege only that it would not have invested but for the fraud. Id. at 683. Such an assertion alleges transaction causation, but it does not allege loss causation. Rather, it is also necessary to allege that, "but for the circumstances that the fraud concealed, the investment ... would not have lost its value." Id. ⁴

This requirement of "loss causation," which we have described as nothing more than the "standard common law fraud rule," id., ought not be construed as a metaphysical term, but rather as a practical requirement. See Rankow v. First Chicago Corp., 870 F.2d 356, 367 (7th Cir.1989). It ought not place unrealistic burdens on the plaintiff at the initial pleading stage. It does not require, for instance, that the plaintiff plead that all of its loss can be attributed to the false statement of the defendant. Such a burden would be far more stringent than the common law tort requirement upon which the requirement is based and would impose a burden on the plaintiff specifically forbidden by our case law. See Ackerman v. Schwartz, 947 F.2d 841, 849 (7th Cir.1991) (noting that the task of apportionment of damages is for the trier of fact). Nor does the requirement of pleading loss causation require that the plaintiff allege that it could not have suffered the same damage under other circumstances. Rather, the requirement is straightforward: The plaintiff must allege that it was in fact injured by the misstatement or omission of which it complains.

C.

The complaint filed in this case is hardly a model of good draftsmanship. Its scatter-gun approach made it most difficult for the district court to discern the gravamen of Caremark's allegations and to deal with them fairly and expeditiously. ⁵ We have shared the burden of our colleague in the district court during these appellate proceedings. Nevertheless, we believe that a fair reading of the complaint establishes that Caremark has alleged a cause of action under Rule 10b-5.

More precisely, we believe that Caremark adequately has pleaded loss causation. It has alleged that Coram did not disclose that it was negotiating a merger with a home respiratory care provider. Caremark has also alleged a plausible theory connecting this omission to its loss: that the failure to disclose this fact caused Caremark's injury through its undervaluation of the risk it was undertaking in accepting the notes as payment for its business. In short, Caremark has alleged that Coram made a fraudulent misstatement and that this misstatement was responsible for its damage. ⁶

We do not believe that Caremark's claim is rendered infirm because its alleged injuries equally could have been caused by factors which Coram did disclose. Caremark pleaded that its injury was caused by its reliance on the very fact which Coram misrepresented, and that allegation is sufficient at this early...