Miller v. Champion Enterprises, Inc.
| Decision Date | 08 October 2003 |
| Docket Number | No. 01-1955.,01-1955. |
| Citation | 346 F.3d 660 |
| Parties | Joel MILLER; Gary Kissiah; Simche Margulies, individually and on behalf of all others similarly situated, Plaintiffs-Appellants, v. CHAMPION ENTERPRISES, INC., a Michigan corporation; Walter Young, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
ARGUED: Lionel Z. Glancy (briefed), Robin Howald, (argued and briefed), GLANCY & BINKOW, Los Angeles, California, E. Powell Miller (briefed), Mantese Miller & Shea, Troy, MI, for Plaintiffs-Appellants. Donna L. McDevitt, SKADDEN, ARPS, SLATE, MEAGHER & FLOM, Chicago, Illinois, for Appellees.
ON BRIEF: Andrew J. McGuinness (briefed), Dykema Gossett, Ann Arbor, Michigan, Carl H. Von Ende (briefed), Miller, Canfield, Paddock & Stone, Detroit, Michigan, Timothy A. Nelsen (briefed), Donna L. McDevitt (argued and briefed), Skadden, Arps, Slate, Meagher & Flom, Chicago, Illinois, for Defendants-Appellees.
Before: DAUGHTREY and ROGERS, Circuit Judges; QUIST, District Judge.*
Plaintiff Joel Miller, a shareholder of Champion Enterprises, Inc. ("Champion"), appeals from the dismissal of his complaint, referred to as the "CAC,"1 pursuant to Rule 12(b)(6), Federal Rules of Civil Procedure, and the Private Securities Litigation Reform Act (the "PSLRA"), 15 U.S.C. § 78u-4 et seq. Plaintiff sued Champion and its Chief Executive Officer for securities fraud under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission (the "SEC"), alleging that the defendants made various false or misleading statements related to the bankruptcy of its largest customer. The district court dismissed the CAC because (1) it failed to meet the heightened pleading requirements for scienter of the PSLRA, (2) a number of the alleged misleading statements qualified as "forward-looking statements" protected by the PSLRA's safe harbor provision, and (3) the CAC failed to give rise to a strong inference that Champion or its CEO knowingly or recklessly misstated or omitted any material facts.
Plaintiff also appeals from the district court's denial of leave to file a proposed amended complaint, referred to as the "SASC."2 The district court denied plaintiff's leave to file the SASC on two grounds: (1) the PSLRA restricts Rule 15 of the Federal Rules of Civil Procedure, thereby barring repeated amendments to a complaint governed by the PSLRA, and (2) the proposed amendments were futile. For the following reasons, we AFFIRM the judgment of the district court.
Plaintiff brought this securities fraud action against Champion and Walter Young, President, Chairman of the Board of Directors, and Chief Executive Officer of Champion, for making allegedly false or fraudulent statements concerning Champion's relationship with Ted Parker Home Sales, Inc. ("Parker Homes"), and especially with regard to Parker Homes's filing for bankruptcy on July 22, 1999. Champion, headquartered in Michigan, is the largest producer of manufactured housing in the nation, and one of the largest retailers, although it sells the manufactured homes through both its own 280 retail stores and 3,500 independent retailers. Parker Homes, headquartered in North Carolina, was Champion's largest independent retailer, accounting for 3.5 percent of the 70,000 homes sold by Champion in 1998.
Prior to 1998, Champion, through two of its subsidiaries, entered into agreements with Parker Homes whereby Parker Homes would receive substantial volume discounts for inventory purchases (the "Bonus Program"). Parker Homes would also receive an additional $1,000 or $2,000 for each single-section or multi-section home purchased under the Bonus Program. Parker Homes did not purchase the homes in its inventory directly. Instead, the homes were purchased through third-party finance companies, which charged Parker Homes interest on the amount financed. When Parker Homes sold a home, it paid the finance company from the proceeds of the sale. However, if a home remained unsold for 12 to 15 months and if the retailer — Parker Homes — went bankrupt or defaulted, Champion was obligated by the finance company to repurchase the home. Champion recognized revenue once financing was obtained, and Parker Homes received the advances under the Bonus Program at the same time. Parker Homes was required to repay these advances if Champion repurchased the home. However, according to the plaintiff, this contingency was unlikely because Champion would only repurchase the home if Parker Homes went bankrupt or otherwise defaulted, in which case Parker Homes would be unable to repay the advances.
Ted Parker was the original owner of Parker Homes. In December of 1998 he sold a controlling interest of 60 percent in Parker Homes to two professional investors, GE Investment Private Placement Partners II, L.P. ("GE Partners"), and Ardhouse, L.L.C. ("Ardhouse"). In the course of the transaction two holding companies (the "Holding Companies") were created through which Ardhouse and GE Partners invested approximately $42 million in Parker Homes. Champion asserts in its brief that Ted Parker's purpose in undertaking this transaction was to provide funding to Parker Homes for the opening of 26 new retail centers.
Prior to this transaction between Parker Homes, GE Partners, and Ardhouse, Champion and Parker Homes had entered into agreements (the "revolving loan agreement") whereby Champion would lend Parker Homes $250,000 for each new sales center that Parker Homes opened, and Champion would credit $50,000 toward repayment of these loans for each year a sales center purchased $5 million in inventory. These loans by Champion were unsecured and could not exceed $8 million. These agreements were renewed on May 5, 1999, and also on that date, Champion agreed to advance to Parker Homes an additional $2.25 million pursuant to these agreements.
According to the plaintiff, beginning in the first quarter of 1999, Parker Homes's inventory became significantly overstocked. He cites as evidence of the overstocked inventory a statement in GE Partners and Ardhouse's complaint in their lawsuit against Ted Parker and others for fraud with respect to the sale of the 60% controlling interest. The statement alleges that Parker Homes's "inventory build-up was so large that the Company was unable to fit all the homes it purchased on its sales sites and, as a result, had to convert extra lots into storage centers." The plaintiff also points to a due diligence report that was undertaken by PricewaterhouseCoopers, L.L.P., on behalf of GE Partners and Ardhouse prior to their purchase of the controlling interest in Parker Homes. This report showed that (1) Parker Homes's inventory that was older than 15 months had increased from 4.9% to 10% from December 31, 1997, to September 18, 1998; (2) the average value of the inventory at each of Parker Homes's sales centers had increased over the 18 months that ended June 30, 1998; and (3) inventory turnover had decreased from an adjusted turnover rate of 1.7 on December 31, 1996, to 1.4 on June 30, 1998.3
According to the plaintiff, Champion was aware or should have been aware of the overstock of inventory by Parker Homes in the first quarter of 1999. He refers to several instances when the defendants stated that they had been monitoring inventory levels, both as a general matter and specifically as to Parker Homes. The plaintiff also notes several statements by industry experts that speak of the excess inventory in the manufactured home market.
Plaintiff also argues that several other facts, not included in the CAC, but outlined in detail in the SASC, show that Champion knew that Parker Homes was both overstocked and in some financial danger during the first quarter of 1999. A former Parker Homes sales manager in North Carolina, John Trapaso, said that one of Champion's local manufacturing plants "stayed in business because Ted [Parker] kept the excess inventory going." Plaintiff also states that a former Champion employee, unnamed, estimated that Champion sold $3 million to $4 million worth of unfinanced homes without purchase orders to Parker Homes sometime around May 1999. This same employee went on to say that According to this employee, "everyone at the plant" was talking about this situation, including upper management.
Plaintiff further asserts that Parker Homes's sales and storage facilities became so overstocked that Champion had to store more than 200 homes at one of its wholly-owned subsidiary's facilities. These homes were apparently visible to the executives of the subsidiary when they were flying into the nearby airport. Plaintiff contends that these facts were confirmed by allegations made in a complaint filed by the Holding Companies against Ted Parker. Plaintiff alleges that John Trapaso, who originally worked for Parker Homes and later worked for Champion, indicated that Parker Homes "always" had too much inventory and that Champion knew this because sales representatives from its wholly-owned subsidiary were "always going from one [Parker Homes] lot to another." Trapaso also stated that the manager from the subsidiary told him in March 1999 that Parker Homes had too much inventory and "was going to go bankrupt." The same manager told Trapaso, in late March 1999, that Champion could no longer deliver houses to Parker Homes because Parker Homes had exhausted its financing. Finally, according to a former employee of Parker Homes, Wayne Murchison, when rumors began to...
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