Katz v. Household Intern., Inc., 93-2284
| Decision Date | 28 September 1994 |
| Docket Number | No. 93-2284,93-2284 |
| Parties | Fed. Sec. L. Rep. P 98,407, 30 Fed.R.Serv.3d 748 Moise KATZ, Plaintiff-Appellant, v. HOUSEHOLD INTERNATIONAL, INC., Donald C. Clark and Edwin P. Hoffman, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Jules Brody, Stull, Stull & Brody, Joseph H. Weiss, Robert A. Skirnick, Robert Harwood, Weschsler, Skirnick, Harwood, Halebian & Feffer, New York City, Kevin M. Forde, Mary Anne Mason (argued), Forde & Associates, Chicago, IL, for plaintiff-appellant.
Steven P. Handler (argued), William P. Schuman, Christopher M. Murphy, McDermott, Will & Emery, Chicago, IL, for defendants-appellees.
Before KANNE and ROVNER, Circuit Judges, and CURTIN, District Judge. *
Moise Katz filed suit for securities fraud against Household International, its Chairman of the Board and Chief Executive Officer, Donald C. Clark, and its President and Chief Operating Officer, Edwin P. Hoffman, on November 13, 1991. Purporting to represent a class of Household Securities purchasers, 1 Katz invoked sections 10(b) and 20 of the Securities Exchange Act of 1934, 15 U.S.C. Secs. 78j(b) & 78t(a), and Rule 10b-5, 17 C.F.R. 240.10b-5. On December 9, 1991, the defendants filed a motion to dismiss for failure to state a claim. The court did not permit Katz to file a written response to the motion, but did hear oral argument on December 19 and granted the motion from the bench on that day. Katz filed an amended complaint on January 2, 1992, and the defendants again moved for dismissal. Just as before, the court denied Katz an opportunity to respond in writing, and, after allowing oral argument at a January 16 hearing, granted defendants' motion from the bench. In both instances the court provided only a cursory explanation of its reasons for dismissal. (See December 19, 1991 Tr.; January 16, 1992 Tr.) Katz did not appeal, and after the time to do so had elapsed, the defendants moved for sanctions under Fed.R.Civ.P. 11. The court granted that motion on March 15, 1993 in a brief written order, and on April 26, 1993, ordered Katz and his attorney to pay the defendants' costs and expenses, which, according to the court's calculation, amounted to $54,111.99. Katz and his attorney appeal from that award. Because we find that the district court abused its discretion, we vacate its award and remand for reconsideration in light of this opinion.
Katz' complaint alleged that the defendants released "materially false and misleading positive information and misrepresent[ed] the facts about the business, operations, financial condition, and future business prospects of Household" for the purpose of artificially inflating the price of Household stock. (R. 15 p 43; see also id. pp 1-2.) 2 In particular, the complaint points to three statements made during the class period suggesting that Household expected to experience growth in its earnings during the remainder of 1991 and 1992. First, the complaint cites a July 22, 1991 article in Barron's, which was based on an interview with Clark and stated in part:
... Donald C. Clark, chairman and chief executive officer, feels the company has come through the recession in good shape. Following what was basically a flat first half for earnings, Clark sees a slight improvement in the second half and an acceleration in 1992, if the economy doesn't stumble again.
* * * * * *
Delinquencies on consumer receivables are improving, and chargeoffs may have peaked in the second quarter--or will in the third.
* * * * * *
Clark expects continued brightening of the delinquency picture through the rest of the year.
(Id. p 28.) Next, the complaint cites Household's August 8, 1991 Form 10-Q, quoting this comment on the company's consumer business in the United Kingdom and Australia:
The Company continues to expect favorable full year comparisons for these problem businesses.
(Id. p 31.) Finally, the complaint cites a September 4, 1991 presentation to securities analysts, which was covered in the September 6, 1991 Dow Jones Professional Investors Report ("PIR"). The PIR stated in part:
In an half-day presentation to roughly 100 buy and sell side analysts, the Company's talk about its significant earnings growth possibility has many investors convinced the Company's stock price will continue to advance.
* * * * * *
Legg Mason Wood Walker analyst David Penn concurs, adding that the number one thing that probably stood out at the meeting was the Company's earnings growth potential.
Household Finance "basically came in and said earnings would grow meaningfully over the next couple years."
* * * * * *
While the Company didn't give any significant earnings figures at the meeting, it did repeat a previous forecast that net income would be a record this year.
(Id. p 33.)
According to Katz, those three statements were false and misleading in two respects:
The representations were false and misleading because, as defendants knew, Household's actual, non-public results contradicted their public statements and because, in making their representations, they claimed that they assumed a continuing, sometimes even severe, economic recession, whereas, as they disclosed at the end of the Class Period, their representations depended on an "economic rebound."
(Id. p 2.) Thus, although attempting to state only a single claim, the complaint set out two distinct theories as to why Household's predictions were fraudulent: (1) nonpublic financial information in Household's possession made clear that the predictions were unreasonable, and (2) Household stated that it would experience growth in earnings even if the recession were to continue, when it privately knew that its optimistic predictions depended on overall economic recovery.
After twice dismissing the complaint without written explanation, the district court explained its imposition of sanctions in this way:
In order to maintain a securities fraud action such as the case at bar, the complaint must set forth facts from which a plausible inference of fraudulent intent could be drawn. DiLeo v. Ernst & Young, 901 F.2d 624, 627-628 (7th Cir.1990). As explained in DiLeo:
The story in this complaint is familiar to securities litigation. At one time the firm bathes itself in a favorable light. Later the firm discloses that things are less rosy. The plaintiff contends that the difference must be attributable to fraud. 'Must be' is the critical phrase, for the complaint offers no information other than the differences between the two statements of the firm's condition. Because only a fraction of financial deteriorations reflects fraud, plaintiffs may not proffer the different financial statements and rest. Investors must point to some facts suggesting that the difference is attributable to fraud.
In the case at bar, neither the original nor the amended complaints identified any facts which suggested the financial deterioration was attributable to fraud. Plaintiff's original and amended complaints were therefore not reasonably grounded in either fact or law.
Fed.R.Civ.P. 11 provides in relevant part: 3
The signature of an attorney or party constitutes a certificate by the signer that the signer has read the pleading, motion, or other paper; that to the best of the signer's knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.... If a pleading, motion, or other paper is signed in violation of this rule, the court, upon motion or upon its own initiative, shall impose upon the person who signed it, a represented party, or both, an appropriate sanction, which may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the pleading, motion, or other paper, including a reasonable attorney's fee.
We review the district court's Rule 11 determination for an abuse of discretion. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 2460-61, 110 L.Ed.2d 359 (1990). Although deferential, that standard "will not prevent this court from ensuring that district judges reflect seriously, and consider fully, before imposing (or denying) sanctions." Mars Steel Corp. v. Continental Bank N.A., 880 F.2d 928, 936 (7th Cir.1989) (en banc). As the Supreme Court has explained, "[a] district court would necessarily abuse its discretion if it based its ruling on an erroneous view of the law or a clearly erroneous assessment of the evidence." Cooter & Gell, 496 U.S. at 405, 110 S.Ct. at 2461; see also Milwaukee Concrete Studios Ltd. v. Fjeld Mfg. Co., 8 F.3d 441, 448 (7th Cir.1993). In addition, "a district court abuses its discretion when it [grants or] denies sanctions with no explanation, or with an explanation that is so conclusory that the appellate court cannot review the substance of its decision." LaSalle National Bank v. County of DuPage, 10 F.3d 1333, 1338 (7th Cir.1993). At the same time, even a perfunctory order may at times suffice if the award of sanctions was clearly appropriate from the face of the record. Ross v. City of Waukegan, 5 F.3d 1084, 1088-89 (7th Cir.1993).
The district court's order in this case is problematic for several reasons. First, it is cursory and somewhat unclear, leaving us in doubt about the actual basis for the imposition of sanctions. The first sentence of the above-quoted portion of the order seems to indicate that Katz' error was in failing to sufficiently allege that the defendants acted with fraudulent intent. However, the order then quotes a portion of our opinion in DiLeo that is unrelated...
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