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USM Holdings, Inc. v. Simon

United States District Court, E.D. Michigan, Southern Division

September 12, 2017

USM HOLDINGS, INC., Plaintiff/Counter-defendant,
v.
BRIAN A. SIMON, Defendant/Counterclaimant, and MARK J. ROLL, ERIC A. SIMON, DIANE M. DECRAENE, PAUL J. SIMON, JOSEPH A. SIMON, JR., GEORGE A. SIMON, II, SUSAN SIMON, JOANNE MORRISON, PENNY SUPPES, KEVIN SIMON, MARIANNE SHOCK, CHRISTOPHER M. SIMON, WILLIAM F. BLAKE, JUSTIN A. SIMON, ASHLEY SIMON, CAROLYN A. EGLE, DEBRA A. DEFOUR, CATHERINE S. SMITH, CHRISTINE A. GRAHAM, RENEE A. SIMON, RAYMOND R. DECRAENE, JR., NATALIE M. SIMON, ALLISON A. SIMON, and T. KELLY SIMON, Defendants, and BRIAN A. SIMON, Third-Party Plaintiff,
v.
WYNNCHURCH CAPITAL PARTNERS III, L.P., and U.S. MANUFACTURING CORP., Third-Party Defendants

          ORDER GRANTING DEFENDANTS' MOTION TO DISMISS THE AMENDED COMPLAINT (DOC. 45) AND DISMISSING THE CASE

          GEORGE CARAM STEEH UNITED STATES DISTRICT JUDGE.

         This securities fraud action arises out of plaintiff USM Holdings Inc.'s purchase of U.S. Manufacturing Company (USM) in 2014. Buyer sued former officers, directors, and shareholders of USM for alleged federal and state securities violations, common-law fraud and misrepresentation, and breach of contract. Plaintiff's original complaint was filed on December 4, 2015. (Doc. 1). Defendants' filed a motion to dismiss, (Doc. 16), which was granted in part and denied in part, (Doc. 32). The Court dismissed Counts I-XI but allowed Counts XII-XVI to proceed. The Court further granted plaintiff an opportunity to amend its complaint.

         Plaintiff filed an Amended Complaint on September 19, 2016. (Doc. 35). Most of the allegations in the Amended Complaint concern defendants Brian Simon and Mark Roll, the former CEO and CFO, respectively. The Amended Complaint divides the remaining defendants into several groups: the pre-sale Voting Shareholders, the pre-sale Non-Voting Shareholders, the pre-sale directors of USM (the Simon Directors), and the Sellers (comprised of the pre-sale Voting and Non-Voting Shareholders). Brian Simon, but not Roll, is a member of the Voting Shareholders, the Simon Directors, and the Sellers. Defendants moved to dismiss the Amended Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). (Doc. 45). The Court held oral argument on June 12, 2017. For the reasons stated below, defendants' motion is GRANTED. The Court shall dismiss Counts I-XI with prejudice and dismiss Counts XII-IVI without prejudice.

         I. Background

         USM is an automotive manufacturer specializing in “drive line components and assemblies, including highly specialized axle housings.” (Doc. 35 at PageID 1699). In late 2013, Sellers began marketing USM for sale. (Doc. 35 at PageID 1703). Sellers provided plaintiff with information about USM's finances, capital, and customer relationships. (Doc. 35 at PageID 1703). In May 2014, plaintiff agreed to purchase USM for $270 million. (Doc. 35 at PageID 1706).

         The sale agreement was memorialized in an Agreement and Plan of Merger (Merger Agreement), signed by plaintiff, the Voting Shareholders (including Simon), and two representatives for the Non-Voting Shareholders on May 23, 2014. (Doc. 35 at PageID 1706). The Merger Agreement was amended on June 27, 2014. (Doc. 35 at PageID 1711). The Merger Agreement contains a number of representations and warranties concerning USM. When the sale closed on June 27, 2014, Simon and Roll executed a Closing Certificate, which certifies that “[t]he representations and warranties . . . contained in the [Merger] Agreement are true and correct in all material respects on and as of the Closing Date.” (Doc. 35 at PageID 1716). Simon and Roll remained in their positions as CEO and CFO, respectively, for several months following the closing. They were eventually terminated. This termination is the subject of several of Brian Simon's counterclaims.

         Plaintiff claims that after the closing, it discovered that it had been the victim of a “brazen fraud.” (Doc. 35 at PageID 1679). Specifically, plaintiff alleges that the Merger Agreement contained various misrepresentations and misleading omissions, and that Simon and Roll made additional misrepresentations and omissions during the due-diligence phase of the sale. The specifics will be set forth in detail in the discussion below, but, in brief, the alleged misrepresentations and omissions involve three general subjects: (1) the state of USM's manufacturing capital expenditures, (2) USM's relationship with its second largest customer, Dana Holding Corporation (Dana), and (3) USM's relationship with its largest customer, American Axle & Manufacturing (AAM). Plaintiff claims that as a result of the alleged misrepresentations and omissions, it overpaid for USM by tens of millions of dollars. (Doc. 35 at PageID 1679).

         II. Legal Standard

         A. Fed.R.Civ.P. 12(b)(6)

         A court confronted with a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) must construe the complaint in favor of the plaintiff, accept the allegations of the complaint as true, and determine whether the plaintiff's factual allegations present plausible claims. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 554-56 (2007). “[N]aked assertions devoid of further factual enhancement” and “unadorned, the-defendant-unlawfully-harmed-me accusation[s]” are insufficient to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The complaint need not contain “detailed” factual allegations, but its “factual allegations must be enough to raise a right to relief above the speculative level on the assumption that all of the allegations in the complaint are true.” Ass'n of Cleveland Fire Fighters v. City of Cleveland, 502 F.3d 545, 548 (6th Cir. 2007).

         B. Fed.R.Civ.P. 9(b)

         For a claim involving fraud, it is not sufficient for a plaintiff to plead general facts that render the claim plausible. Rather, “a party must state with particularity the circumstances constituting fraud.” Fed.R.Civ.P. 9(b). This means that a plaintiff must “allege the time, place, and content of the alleged misrepresentations [or omissions] on which he or she relied; the fraudulent scheme; the fraudulent intent of the defendants; and the injury resulting from the fraud.” Sanderson v. HCA-The Healthcare Co., 447 F.3d 873, 877 (6th Cir. 2006) (quoting Yuhasz v. Brush Wellman, Inc., 341 F.3d 559, 563 (6th Cir. 2003)) (internal quotation marks omitted); see also Republic Bank & Trust Co. v. Bear Stearns & Co. Inc., 683 F.3d 239, 255-56 (6th Cir. 2012).

         C. PSLRA

         In addition to Rule 9(b), the Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4, imposes heightened pleading requirements on a plaintiff alleging a violation of the Securities Exchange Act. Under the PSLRA, a plaintiff alleging federal securities fraud must “specify [1] each statement alleged to have been misleading, [2] the reason or reasons why the statement is misleading, and [3] if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u- 4(b)(1). Furthermore, “the complaint shall . . . state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Id. § 78u- 4(b)(2) (emphasis added). Under the “strong inference” standard, “a court must compare th[e] inference [of scienter] with other competing possibilities, allowing the complaint to go forward ‘only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.'” In re Omnicare, Inc. Sec. Litig. (Omnicare I), 769 F.3d 455, 473 (6th Cir. 2014) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322-24 (2007)) (citations omitted) (emphases added).

         III. Analysis

         A. Consideration of Documents Not Attached to the Complaint

         Prior to addressing the substantive arguments in defendant's Motion to Dismiss the Amended Complaint, the Court must decide whether the Conway Report may be considered. The Conway Report is a document prepared by Conway MacKenzie, Inc. consulting firm. Plaintiff commissioned Conway MacKenzie to prepare this report as it considered whether to purchase USM. The Conway Report was not attached to plaintiff's complaint. Defendants attached the document to their Motion to Dismiss the Amended Complaint. (Doc. 45-2). Plaintiff opposes the Court's consideration of the Conway Report.

         “[A]s a general rule, matters outside the pleadings may not be considered in ruling on a 12(b)(6) motion to dismiss unless the motion is converted to one for summary judgment under Fed.R.Civ.P. 56.” Jackson v. City of Columbus, 194 F.3d 737, 745 (6th Cir. 1999) (quoting Weiner v. Klais & Co., 108 F.3d 86, 88 (6th Cir. 1997)) (abrogated on other grounds by Swierkiewicz v. Sorema N.A., 534 U.S. 506 (2002)). However, “when a document is referred to in the pleadings and is integral to the claims, it may be considered without converting a motion to dismiss into one for summary judgment.” Commercial Money Ctr., Inc. v. Ill. Union Ins. Co., 508 F.3d 327, 335-36 (6th Cir. 2007).

         Plaintiff refers to the Conway Report in the Amended Complaint as an example of how Brian Simon misrepresented USM's capacity and operational issues. (Doc. 25 at PageID 1763). The Conway Report is also central to arguments regarding plaintiff's reliance on defendants' alleged misrepresentations and/or omissions. As such, the Court will consider the Conway Report.

         B. Count I - Section 10(b) of the Securities Exchange Act

         Count I alleges securities fraud under Section 10(b) of the Securities and Exchange Act and SEC Rule 10b-5. See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Plaintiff alleges that “Brian Simon and Roll made a series of material misrepresentations and omissions to [plaintiff] on behalf of or acting for USM.” (Doc. 35 at PageID 1785). These misrepresentations and omissions involve information about (1) the state of USM's manufacturing capital, (2) USM's relationship with Dana, and (3) USM's relationship with AAM.

         The heightened pleading standards of both Rule 9(b) and the PSLRA apply to a section 10(b) claim. A “plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, 552 U.S. 148, 157 (2008).

         1. Relevant Elements of a Section 10(b) / Rule 10b-5 Claim

         a. Material Misrepresentation or Omission

         The first element of a section 10(b) or Rule 10b-5 claim is “a material misrepresentation or omission by the defendant.” Id. at 157. The PSLRA's heighted pleading requirements apply to this element. A plaintiff must allege “(1) that a defendant made a statement or omission that was false or misleading; and (2) ...


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