In re Champion Enterprises, Inc. Securities Lit., No. 99-74231.

• Court: United States District Courts. 6th Circuit. United States District Court (Eastern District of Michigan)
• Writing for the Court: Feikens
• Citation: 145 F.Supp.2d 871
• Parties: In re CHAMPION ENTERPRISES, INC., SECURITIES LITIGATION Joel Miller, Gary Kissiah, Simche Margulies, individually and on behalf of all others similarly situated, Plaintiffs, v. Champion Enterprises, Inc., a Michigan corporation; and Walter Young, Defendants.
• Docket Number: No. 99-74231.,No. 99-75162.,No. 99-76206.
• Decision Date: 13 June 2001

145 F.Supp.2d 871 In re CHAMPION ENTERPRISES, INC., SECURITIES LITIGATION
Joel Miller, Gary Kissiah, Simche Margulies, individually and on behalf of all others similarly situated, Plaintiffs,
v.
Champion Enterprises, Inc., a Michigan corporation; and Walter Young, Defendants. No. 99-74231. No. 99-75162. No. 99-76206. United States District Court, E.D. Michigan, Southern Division. June 13, 2001.

E. Powell Miller, Mantesa, Miller and Mantesa, Troy, MI, Richard Acocelli, Weiss & Yourman, New York City, Stephen Wasinger, Wasinger, Kickham and Kohls, Royal Oak, MI, Aaron Brody, Julie Brody, Paul T. Curley, Stull, Stull & Brody, New York City, Lionel Z. Glancy, Peter A. Binkow, Law Offices of Lionel Z. Glancy, Los Angeles, CA, Leo W. Desmond, Palm Beach, CA, Brian P. Murray, Rabin & Peckel, New York City, for Plaintiffs.

Andrew J. McGuinness, Dykema Gossett, Ann Arbor, Timothy Nelson, Donna McDevitt, Skadden, Arps, Slate, Meagher & Flom, Chicago, IL, for Defendants.

OPINION

FEIKENS, District Judge.

I. INTRODUCTION

Plaintiffs sued Champion Enterprises and its Chief Executive Officer for securities fraud under sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated by the Securities

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Exchange Commission (SEC). Having previously held that plaintiffs' first amended complaint was insufficient under the pleading requirements of the Private Securities Litigation Reform Act ("Reform Act" or "the Act"), (see Opinion, Apr. 9, 2001) I now consider plaintiffs' motion for leave to amend. For the reasons that follow, I deny their motion for leave to amend and dismiss the case with prejudice.

II. BACKGROUND

Plaintiffs' proposed pleading, the "Second amended supplemental complaint" is actually their fourth complaint in this action. Plaintiffs filed their initial complaints between August 26 and September 1, 1999.¹ The parties then stipulated to the filing of a consolidated amended complaint. Plaintiffs filed a first amendment on May 15, 2000. Defendants moved to dismiss the amended complaint on June 30, 2000. Plaintiffs filed their first motion for leave to amend (and their third proposed complaint) on December 1, 2000. On March 27, 2001 plaintiffs filed yet another proposed complaint.² I heard arguments on the motion for leave to amend on May 16, 2001.

III. ANALYSIS

A. Leave to amend should be denied because the Reform Act restricts Rule 15 of the Federal Rules of Civil Procedure.

The essential question raised by plaintiffs' motion is not whether amendment should be allowed under Rule 15 of the Federal Rules of Civil Procedure, but rather, whether the Reform Act restricts Rule 15 in Securities Fraud cases.³ I believe it must. This narrow but essential question is a matter of first impression not only in this circuit but throughout the federal court system.

If the Reform Act is read to mean that when a complaint is filed under the Reform Act, a judge must scrutinize the complaint and advise the pleader where the complaint is deficient, and then give the pleader an opportunity to amend the complaint, and when that is done, the judge must again, perhaps like a law school professor, advise the pleader that he or she has not passed the test, and if not, give the pleader another opportunity to meet the heightened pleading requirements, and even after that, still another opportunity, if the pleader requests it, then the Reform Act is meaningless. If this is the interpretation of the Act, then Rule 15 always trumps the plain requirements of the Act, and what Congress did when it passed this act over a presidential veto, means nothing.

During oral argument plaintiffs relied on two cases to support the proposition that leave to amend should be liberally granted in securities fraud cases, Berger v. Ludwick, 2000 WL 1262646 (N.D.Cal.2000), and Chu v. Sabratek, 100 F.Supp.2d 815 (N.D.Ill.2000). Neither of these cases addresses this question. These are merely

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cases in which a court rules on whether or not to dismiss a third amended complaint. It would require a mind reader to fathom what, if anything, the judges in these cases contemplated in regard to this issue. Plaintiffs' contention that these cases must support the assertion that the Reform Act has no effect on Rule 15 is far more than a stretch; it is a pure flight of fancy.

In this case, it appears that plaintiffs are contending that since discovery procedures are not available to them, that a court must be lenient in allowing amendments to pleadings. Contending that Rule 15 permits this, they purposely seek to circumvent the Reform Act's strict requirements preventing discovery. But this is precisely the device that Congress intended to be used, i.e., to prevent suits in which a foundation for the suit can not be pleaded.

The stay of discovery and the heightened pleading standards are separate and distinct, yet complementary mechanisms. The stay of discovery operates to prevent plaintiffs with baseless claims from squeezing a nuisance settlement from an innocent defendant. The pleading requirement is more than simply a line the plaintiffs must cross to get to discovery; it is the heart of the Reform Act. This stringent requirement operates to discourage baseless suits altogether. It evinces Congress's acknowledgment of the burden an allegation of securities fraud places on the innocent defendant even without discovery. The Reform Act requires a uniform pleading standard; this standard is meaningless if judges on a case-by-case basis grant leave to amend numerous times.

The Reform Act clearly states, "In any private action arising under this chapter, the court shall, on the motion of any defendant, dismiss the complaint if the [pleading] requirements...are not met." 15 U.S.C. § 78u-4(b)(3)(A). See also, 15 U.S.C. § 78u-4(b)(1) & (2) (setting out the pleading requirements). Plaintiffs fundamentally failed to meet these requirements. Now they want still another chance.⁴

The plain language of the Reform Act does not contemplate amending complaints; it does set a high standard of pleading which if not met results in a mandatory dismissal. The necessary goal of this plain, and strong language, is that it should be dismissed with prejudice. To conclude otherwise would be to abrogate the very purpose of the legislation.

As plaintiffs' counsel admitted, the purpose of the Reform Act is to prevent harassing strike suits filed the moment a company's stock price falls.⁵ The Reform Act could not achieve this purpose if plaintiffs were allowed to amend and amend until they got it right. This is not only supported by the plain language of the Reform Act cited above, it is supported by the voluminous legislative history. "The objective: to provide a filter at the earliest stage (the pleading stage) to screen out lawsuits that have no factual basis. To

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provide a clearer statement of plaintiffs' claims and scope of the case. To encourage attorneys to use greater care in drafting their complaints. To make it easier for innocent defendants to get cases against them dismissed early in the process." Selected Bill Provisions of the Conference Report to H.R. 1058/S.240, 141 Cong. Rec. S19152 (daily ed. Dec. 22, 1995). "Under the Conference Agreement the complaint must set forth the facts supporting each of the alleged misstatements or omissions and must include facts that give rise to a `strong inference' of scienter or intent. If the complaint does not meet these requirements, the lawsuit will be terminated." Id. (emphasis added).

The legislative history contains assertions of both the supporters and the opponents of the Act that are quite revealing. The supporters hoped that the strict pleading requirements would bar frivolous and harassing lawsuits. "This should help weed out, at an early stage, lawsuits filed against innocent defendants." Statement of Senator Hatch, 141 Cong. Rec. S17966 (daily ed. Dec. 5, 1995). "This bill will hopefully curb this modern-day champerty, stop the vexatiousness and restore integrity to our securities laws by filtering out abusive, frivolous class action lawsuits that harm investors and only benefit the class action attorneys." Statement of Senator Domenici, 141 Cong. Rec. S17967 (daily ed. Dec. 5, 1995). "[T]ougher pleading standards ensure that the plaintiff's lawyer actually has a case before bringing a frivolous suit....