Whirlpool Financial Corp. v. GN Holdings, Inc.

• Decision Date: 31 October 1995
• Docket Number: No. 95-1292,95-1292
• Citation: 67 F.3d 605
• Parties: Fed. Sec. L. Rep. P 98,918 WHIRLPOOL FINANCIAL CORPORATION, Plaintiff-Appellant, v. GN HOLDINGS, INC., f/k/a CCHP Delaware, Inc., W.R. Grace & Company-Connecticut, Kevin Clark, Michelle Clark, Robert Bok, and Diane Bok, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 605

67 F.3d 605

Fed. Sec. L. Rep. P 98,918

WHIRLPOOL FINANCIAL CORPORATION, Plaintiff-Appellant, v. GN HOLDINGS, INC., f/k/a CCHP Delaware, Inc., W.R. Grace &amp Company-Connecticut, Kevin Clark, Michelle Clark Robert Bok, and Diane Bok, Defendants-Appellees.

No. 95-1292.

United States Court of Appeals Seventh Circuit.

Argued June 6, 1995.

Decided Sept. 28, 1995.

Rehearing and Suggestions for Rehearing

In Banc Denied

Oct. 31, 1995.

Jonathan G. Bunge, John F. Young, Roy M. Van Cleave (argued), Keck, Mahin & Cate, Chicago, IL, for plaintiff-appellant Whirlpool Financial Corporation, a Delaware corporation.

Mark E. Ferguson (argued), Mark L. Levine, Bartlit, Beck, Herman, Palenchar & Scott, Chicago, IL, for defendants-appellees GN Holdings, Incorporated, a Delaware corporation fka CCHP Delaware, Incorporated, W.R. Grace & Company-Connecticut, a Connecticut corporation.

Matthew F. Kennelly, Cotsirilos, Stephenson, Tighe & Streicker, Chicago, IL, for defendants-appellees Kevin Clark, Michelle Clark, Robert Bok, Diane Bok.

Before ESCHBACH, KANNE, and ROVNER, Circuit Judges.

KANNE, Circuit Judge.

Whirlpool Financial Corporation filed this securities action on July 11, 1994, against GN Holdings, Inc., W.R. Grace & Co.-Connecticut, Kevin and Michelle Clark, and Robert and Diane Bok seeking rescission of Whirlpool's $10 million loan to GN. In its complaint, Whirlpool alleged: (Count 1) violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; (Count 2) violation of Section 13 of the Illinois Securities Law of 1953; and (Count 3) violation of Section 12(2) of the Securities Act of 1933. In response to a motion filed by the defendants pursuant to Fed.R.Civ.P. 12(b)(6), the district court dismissed Whirlpool's federal claims with prejudice because they were filed beyond their respective statutes of limitation. The court also dismissed the state claim without prejudice. The end result was that the action was dismissed in its entirety. For our review of the district court's Rule 12(b)(6) dismissal of this action, we summarize and take as true the facts alleged by Whirlpool in its complaint and supporting documents.

In July 1991, Whirlpool Financial Corporation made a $10 million loan to GN Holdings, Inc., to partially finance GN's purchase of Cross Country Healthcare Personnel, Inc. ("CCHP"). CCHP provided hospitals across the United States with temporary health care personnel such as nurses, physical therapists, and occupational therapists. GN, which W.R. Grace had created as the vehicle through which it would purchase CCHP, executed a promissory note in favor of Whirlpool for the loan. Under the terms of the note, Whirlpool was to receive 15.5% annual interest (payable in quarterly installments) with a balloon payment of the principal in 1998. GN also borrowed $44.8 million from Heller Financial, Inc., and W.R. Grace invested $25.2 million through the purchase of stock.

To solicit financing for the purchase, the defendants, with the help of Shearson Lehman Brothers, circulated a Private Placement Memorandum, which provided narrative information, ¹ historical financial data and projections for future performance. These projections were later, before Whirlpool purchased the note, "revised and made significantly less optimistic." The Private Placement Memorandum and the subsequent amendment set out projections for, among other things, net sales, operating profit, pretax profit and net income during the remainder of 1991 and fiscal years 1992 and 1993. To allow Whirlpool to monitor GN's performance, the loan agreement required GN to send to Whirlpool monthly, quarterly, and yearly financial statements accompanied by management reports. GN complied with these requirements and Whirlpool received the financial statements as scheduled.

As often happens with new ventures, the projections painted a much rosier picture than what actually unfolded. In fact, in the years 1991 through 1993, net sales were 32 to 48% lower than projected, operating profit was 50 to 73% lower than projected, pretax profit was 95 to 257% lower than projected, and net income was 104 to 283% lower than projected. On September 12, 1991, shortly after receiving the first financial statement, Whirlpool account executive Steven Furman first traveled to Boca Raton, Florida (GN's headquarters) to question GN executives about the discrepancies between the financial projections and actual performance. Furman made similar trips on February 5, 1992; July 24, 1992; October 16, 1992; and June 23, 1993. At these meetings, GN executives explained that the general economic recession was softening the demand for traveling nurse services but that better times were just around the corner. Happy days did not arrive, and GN defaulted on the interest payment due Whirlpool on April 1, 1994. Whirlpool filed this suit in July of 1994.

We review de novo the district court's Rule 12(b)(6) dismissal of this action and take, as we have, Whirlpool's factual allegations as true, giving Whirlpool the benefit of all reasonable inferences drawn therefrom. Murphy v. Walker, 51 F.3d 714, 717 (7th Cir.1995). However, as we have observed in the context of securities litigation, if a plaintiff pleads facts that show its suit barred by a statute of limitations, it may plead itself out of court under a Rule 12(b)(6) analysis. Tregenza v. Great Am. Communications Co., 12 F.3d 717, 718-19 (7th Cir.1993), cert. denied, --- U.S. ----, 114 S.Ct. 1837, 128 L.Ed.2d 465 (1994).

Before reviewing the dismissal of its action for failing to meet the statutes of limitation for Rule 10b-5 and Section 12(2), we make note of the major thrust of Whirlpool's complaint. Whirlpool's brief summarizes what it views as the highly significant factual underpinnings as follows:

The Revised Projections were unreasonable when made because they were based on GN's historical performance while defendants knew, but did not disclose, that the industry was subject to material adverse trends including proposed and enacted state and federal legislative and regulatory actions which would limit GN's revenue, increased competition to recruit nurses, trends toward reduced usage of temporary nurses, trends toward increased compensation and benefits for traveling nurses, shifts from inpatient to ambulatory care and trends toward hospital closings and a decrease in licensed beds.

(Whirlpool brief at 8) (emphasis added). The highlighted portion of the foregoing quote could be read to mean that Whirlpool asserts that the defendants had a duty to disclose this information--apart from a duty to make reasonable projections.

If the failure to disclose the above information formed the sole basis for Whirlpool's Rule 10b-5 claim, the matter would be at an end. The information Whirlpool states that the defendants failed to disclose is widely available public information and, therefore, by definition is available to any and all who take the time to discover it.

For example, Whirlpool says that the defendants failed to disclose the existence of state and federal legislation and regulations which exemplified a negative trend that affected the viability of GN's projections. Specifically, Whirlpool in its complaint cites legislation adopted prior to 1991 in California, Connecticut, Florida, Massachusetts, New Jersey, and New York regulating the fees charged by traveling nurse agencies, as well as attempts to take similar action in Kentucky, Louisiana, Michigan, and Rhode Island. Moreover, the information regarding adverse industry trends, which Whirlpool alleges defendants failed to disclose, is public information and was available at the time Whirlpool purchased the note. See, e.g., Emily Friedman, Nursing: Breaking the Bonds?, 264 JAMA 3117 (1990) ("In spite of nursing's historic ability to beat the odds and its recent record of accomplishment and growing power, the profession's future is uncertain. It is, like most of health care, facing restricted funding, work force shortages, rationing, and political upheavals.")

The nondisclosure of enacted or pending legislation and industry-wide trends is not a basis for a securities fraud claim. See Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 515 (7th Cir.1989) ("Securities laws require issuers to disclose firm-specific information; investors and analysts combine that information with knowledge about the competition, regulatory conditions, and the economy as a whole to produce a value for stock."); Acme Propane, Inc. v. Tenexco, Inc., 844 F.2d 1317, 1323-24 (7th Cir.1988) ("The securities laws require the disclosure of information that is otherwise not in the public domain. Sellers of securities need not 'disclose' the statutes at large of the states in which they operate....") (citation omitted).

However, we discern that it is not the failure of the defendants to disclose adverse legislation and industry trends that forms the basis of Whirlpool's Rule 10b-5 claim. Rather the thrust of its argument is that the defendants' revised projections were made without a reasonable basis. In other words, there was no reasonable basis for the defendants' revised projections in light of the adverse legislative, regulatory, and industry trends known to them. Such a Rule 10b-5 cl...