USM Holdings Inc. v. Simon et al
ORDER granting 45 defendants' Motion to Dismiss and dismissing the case. Signed by District Judge George Caram Steeh. (MBea)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
USM HOLDINGS, INC.,
Plaintiff / Counter-defendant,
Case No. 15-14251
HON. GEORGE CARAM STEEH
BRIAN A. SIMON,
Defendant / Counterclaimant,
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,
BRIAN A. SIMON,
WYNNCHURCH CAPITAL PARTNERS
III, L.P., and U.S. MANUFACTURING CORP.,
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS THE
AMENDED COMPLAINT (DOC. 45) AND DISMISSING THE CASE
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 IXI with prejudice and dismiss Counts XII-IVI without prejudice.
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, thedefendant-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, 25556 (6th Cir. 2012).
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  each
statement alleged to have been misleading,  the reason or reasons why
the statement is misleading, and  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. § 78u6
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).
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
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
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) that this statement or omission concerned a material
fact.” Omnicare I, 769 F.3d at 470.
A misrepresentation is “an affirmative statement that is false or
misleading based on facts held by the defendant when the statement was
made.” In re Yuma Brands, Inc. Securities Litigation, 73 F. Supp. 3d 846,
859 (W.D. Ky. 2014). Claiming that a statement is untrue is insufficient. A
complaint must specify each false or misleading statement, the reasons
why it is false or misleading, and, if an allegation regarding the statement or
omission is made on information and belief, the complaint must state with
particularity all facts on which that belief is formed. 15 U.S.C.A. § 78u4(b)(1).
The Sixth Circuit has divided misrepresentations into two categories:
those that concern “hard information” and those that concern “soft
information.” Omnicare I, 769 F.3d at 470. “Hard information ‘is typically
historical or other factual information that is objectively verifiable.’” In re
Sofamor Danek Grp., Inc., 123 F.3d 394, 401-02 (6th Cir. 1997) (quoting
Garcia v. Cordova, 930 F.2d 826, 830 (10th Cir. 1991)). Soft information
“includes predictions and matters of opinion.” Sofamor Danek, 123 F.3d at
401; see also Helwig v. Vencor, Inc., 251 F.3d 540, 559 (6th Cir. 2001),
overruled on unrelated grounds by Tellabs, Inc. v. Makor Issues & Rights,
Ltd., 551 U.S. 308 (2007) (“This type of information is defined only by its
uncertainty: predictions, matters of opinion, and asset appraisals have all
been regarded in this Circuit as ‘soft.’”). Misrepresentations can concern
either type of information, but misrepresentations that concern soft
information must satisfy a heightened scienter requirement: knowledge,
rather than mere recklessness. Omnicare I, 769 F.3d at 470. This
heightened scienter requirement will be explained in the following section.
The Supreme Court recently held that statements of opinion (one
form of soft information) are generally not actionable. Omnicare, Inc. v.
Laborers Dist. Council Const. Indus. Pension Fund (Omnicare II), 135 S.
Ct. 1318, 1326 (2015). An opinion is actionable, however, if the person
stating the opinion does not “actually hold the stated belief” or if the
opinion contains a materially false “embedded statement of fact.” Id. at
1326-27. An opinion statement may also become actionable if it is paired
with a sufficiently material omission. An opinion statement does not
become actionable merely because the speaker “knows, but fails to
disclose, some fact cutting the other way.” Id. at 1329. But if the speaker
“omits material facts about the . . . inquiry into or knowledge concerning
[the] statement of opinion, and if those facts conflict with what a reasonable
investor would take from the statement itself,” then that omission is
The PSLRA’s “safe harbor” for “forward-looking” statements also
renders certain misrepresentations not actionable. 15 U.S.C. § 78u-5(c). A
forward-looking statement is not actionable if (1) the statement was
“identified as a forward-looking statement, and [was] accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially” or (2) was not made “with actual
knowledge . . . that the statement was false or misleading.” Id. § 78u5(c)(1). Some examples of forward-looking statements are projections,
predictions, and statements of plans or objectives. See id. § 78u-5(i)(1).
Omissions are actionable only if the defendant had a duty to disclose
the omitted information. In re Ford Motor Co. Sec. Litig., 381 F.3d 563, 569
(6th Cir. 2004) (citing Basic, Inc. v. Levinson, 485 U.S. 224, 239 n.17
(1988)). One situation in which a duty to disclose arises is when there has
been “an inaccurate, incomplete or misleading prior disclosure.” City of
Monroe Employees Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 669 (6th
Cir. 2005) (quoting In re Digital Island Sec. Litig., 357 F.3d 322, 329 n.10
(3d Cir. 2004)) (internal quotation marks omitted). Generally speaking,
there is no duty to disclose soft information unless it is “virtually as certain
as hard fact.” Helwig, 251 F.3d at 559 (quoting Sofamor Danek, 123 F.3d at
402) (internal quotation marks omitted); see also Omnicare I, 769 F.3d at
A representation or omission must not only be false or misleading,
but it must also concern a “material” fact. Materiality is evaluated at the
time of the transaction. Michaels v. Michaels, 767 F.2d 1185, 1195 (7th
Cir.1985) (stating that for the purposes of § 10(b) and Rule 10b-5, the
“materiality of the information misstated or withheld is determined in light of
what the defendant knew at the time the plaintiff committed himself to sell
the stock, in this case by signing the agreement to sell…”); see also
Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 181 (2d Cir. 2001).
“Misrepresented or omitted facts are material only if [there is a substantial
likelihood that] a reasonable investor would have viewed the
misrepresentation or omission as ‘having significantly altered the total mix
of information made available.’” Sofamor Danek, 123 F.3d at 400 (quoting
Basic, 485 U.S. at 232) (emphases added). Vague statements and
“statements that are ‘mere puffing’ or ‘corporate optimism’” are immaterial,
because a reasonable investor would not rely upon them. Ford Motor Co.
Sec. Litig., 381 F.3d at 570 (quoting Grossman v. Novell, Inc., 120 F.3d
1112, 1119 (10th Cir. 1997)).
Pursuant to the PSLRA, to establish scienter, a plaintiff must state,
with particularity, facts that, in the aggregate, give rise to a strong inference
that the defendant acted with the required mental state. 15 U.S.C. § 78u4(b)(2)(A). The defendant must have made misrepresentations or
omissions with recklessness at least. Omnicare I, 769 F.3d at 472. Such
“recklessness [is] highly unreasonable conduct which is an extreme
departure from the standards of ordinary care. While the danger need not
be known, it must at least be so obvious that any reasonable [person]
would have known of it.” In re Comshare Inc. Sec. Litig., 183 F.3d 542, 550
(6th Cir. 1999) (en banc) (quoting Mansbach v. Prescott, Ball & Turben,
598 F.2d 1017, 1025 (6th Cir. 1979)) (internal quotation marks omitted)
(first alteration in original). Although proof of recklessness is ordinarily
sufficient to satisfy the scienter element, a plaintiff must prove a higher
level of scienter if a plaintiff accuses a defendant of misrepresenting or
omitting soft information or if the misrepresentation or omission was
forward-looking. In these situations, the plaintiff must “plead facts showing
that the defendant knowingly misrepresented or omitted facts[,] to
deceive, manipulate, or defraud . . . .” Omnicare I, 769 F.3d at 472
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.’” Omnicare I, 769 F.3d at
473 (quoting Tellabs, 551 U.S. at 322- 24) (citations omitted) (emphases
c. Reliance / Transaction Causation
Reliance, also referred to as transaction causation, analyzes the
connection between a defendant’s misrepresentation and a plaintiff’s injury.
A plaintiff typically demonstrates reliance by showing an awareness of the
defendant’s statement and, based on the misrepresentation, plaintiff
engaged in a relevant transaction. Amgen Inc. v. Connecticut Retirement
Plans and Trust Funds, 568 U.S. 455, 461 (2013). A plaintiff’s reliance
must be reasonable or justifiable. See id. at 469. A defendant may defeat
a showing of reliance by illustrating that a plaintiff had knowledge of the
material facts that the defendant allegedly failed to disclose.
d. Loss Causation
A plaintiff establishes loss causation by pleading facts that tend to
show a “causal connection between the material misrepresentation [or
omission] and the loss.” Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 342
(2005). Loss causation “has been likened to proximate cause in tort law.”
Brown v. Earthboard Sports USA, Inc., 481 F.3d 901, 920 (6th Cir. 2007)
(citing AUSA Life Ins. Co. v. Ernst & Young, 206 F.3d 202, 213 (2d Cir.
2000)). A plaintiff cannot establish loss causation if some other intervening
cause is responsible for the loss. See Erica P. John Fund, Inc. v.
Halliburton Co., 563 U.S. 804, 813 (2011).
Courts are split on whether a heightened pleading standard applies to
the element of loss causation. Defendants ask the Court to apply the Rule
9(b) standard, arguing that within this split, more courts apply the Rule 9(b)
standard. Plaintiff asks the Court to apply the Rule 8 standard, citing Dura
Pharms., for the proposition that a complaint need only allege facts
showing a “causal connection between the material misrepresentation and
the loss.” 544 U.S. at 342. The Court did not select an applicable standard
in its prior opinion, but instead dismissed the claim after finding that it did
not even meet the requirements of Rule 8.
a. Alleged Misrepresentations and/or Omissions
Concerning USM’s Finances
Defendants argue that plaintiff failed to adequately plead materiality
and scienter for the misrepresentations and/or omissions related to USM’s
financial statements. Defendants refer to these misrepresentations and/or
omissions as the GAAP Theory. Plaintiff responds that, although it brings
contract claims based on misstatements and errors in USM’s financial
statements, it is not bringing a securities fraud claim based on the same.
Defendants’ argument here is, therefore, moot.
b. Alleged Misrepresentations and/or Omissions
Concerning USM’s Capital
Plaintiff alleges numerous misrepresentations and/or omissions
regarding USM’s capital expenditure. Plaintiff relies on defendants alleged
statements as well as representations and warranties in the Merger
§ 2.9(g), which states that no USM company “failed to make
any material expenditures in connection with the normal
maintenance, repair and replacement of the material assets
used in connection with the operation of the Business in
accordance with its past custom and practice;”
§ 2.12, which states that “the assets owned or leased by” USM
“are sufficient in order to conduct the Business as presently
§ 2.13, which states that “assets of the USM Companies (a)
have been maintained and repaired in the Ordinary Course of
Business, and (b) are in such condition and repair, reasonable
wear and tear excepted, as is suitable for the purposes for
which they are presently used by the USM Companies.”
Plaintiff asserts that these misrepresentations and/or omissions
distorted USM’s capacity to successfully launch three Dana programs
(P473, P558, and VN127), USM’s ability to complete existing business in
line with industry standards, and capacity issues at the Mexico and Warren
plants. Plaintiff pleads that, as a result, it was forced it to spend tens of
millions of dollars to purchase new machines, repair existing machines,
replace capacity on an emergency basis, and pay extraordinary amounts of
overtime in order to meet USM’s customer demands.
Defendants group the alleged misrepresentations and/or omissions
into three categories. The Upkeep Theory concerns the condition and
efficiency of USM’s capital equipment. The Forecast Theory concerns the
capital expenditure budget for three Dana programs; P473, P558, and
VN127. The Failure to Spend Theory concerns capital expenditure
defendants allegedly represented that USM would spend between April 1,
2014 and closing. The Court addresses each category below.
i. Upkeep Theory
The Upkeep Theory concerns alleged misrepresentations and/or
omissions about the sufficiency of USM’s equipment. At issue are
statements about the quality and run time of USM’s machinery. First,
plaintiff alleges that defendants repaired USM’s machines by re-purposing
old parts from the company’s “boneyard” of old equipment. (Doc. 35 at
PageID 1760). Defendants assert that this practice was USM’s regular
custom and practice, and therefore, does not constitute a
misrepresentation. The Court agrees. The representations and warranties
in the Merger Agreement do not guarantee that all of USM’s equipment is
new or in perfect order. They merely assert that are in a condition suitable
for their present use and are sufficient to conduct present business.
Plaintiff generally alleges that it incurred significant costs to purchase and
repair certain machines because the old, over-used, and rebuilt equipment
could not function at rates that would enable USM to meet the ongoing
demands. (Doc. 35 at Page ID 1774). It specifically identifies only a single
piece of equipment that was allegedly in disrepair; the Rockford machine.
(Id.). Plaintiff lists six other types of machines it purportedly purchased.
(Id.). But plaintiff does not plead specifics regarding the equipment these
new machines replaced. It is not clear whether that equipment was
unsuitable for USM’s use at the time of the sale or insufficient to conduct
USM’s then existing business such that it violated defendants’
representations. Plaintiff additionally fails to plead with particularity any
facts showing that Simon and Roll made reckless or knowing
misrepresentations and/or omissions concerning the quality of USM’s
machinery. Plaintiff has not pleaded facts showing that defendants knew or
should have known that the Rockford, or any other machine, was in
disrepair, or that their general statements in the Merger Agreement were
false in light of the machines’ condition.
Second, plaintiff alleges that USM ran its machines at excessive
rates. Defendants respond that information about USM’s machine
operation rates was available to plaintiff before closing. Defendants point to
the Conway Report, which recaps “due diligence procedures. . . designed
to focus on the objectives identified by” plaintiff, including “operational
metrics and the current state of . . . capacity utilization” as well as “overall
plan functions and systems and the capabilities of the operations team.”
(Doc. 45-2 at PageID 2919). Defendants assert that, following this due
diligence, plaintiff was aware of USM’s run rates.
Plaintiff has failed to plead securities fraud based upon the run rates.
These run rates appeared to be normal for USM prior to the sale and USM
often ran at high rates in order to keep up with business. As such, plaintiff
has not shown that defendants knowingly misrepresented USM’s
equipment’s ability to conduct business in the manner in which it was
executed before the sale. In addition to failures in pleading
misrepresentation and scienter, plaintiff did not establish transaction
causation. The due diligence investigation described in the Conway Report
reveals that plaintiff was aware of USM’s overtime run rates prior to the
sale. With this knowledge, plaintiff cannot establish that any of the alleged
misrepresentations on this issue caused its injury.
ii. Forecast Theory
The Amended Complaint recounts a discrepancy between a draft
capital expenditure budget, that defendants alleged shared with plaintiff,
stating that necessary equipment and tooling for the P473, P558, and VN
127 programs would cost about $8,500,000, and an internal capital
summary, that plaintiff did not see before the closing, stating that the same
items would cost about $20,500,000. Plaintiff alleges that defendants
purposefully concealed a $12 million discrepancy, leaving plaintiff to cover
these costs after closing.
Again, plaintiff fails to state a claim for securities fraud. Plaintiff’s
allegations regarding misrepresentations and/or omissions are insufficient.
Plaintiff does not provide specific information about the capital expenditure
figures it complains of here. It is not clear what specific commitments to
spend are represented in these figures. Further, it is not clear that these
figures represent guaranteed spending as opposed to mere idealizations.
The Court also questions how much money plaintiff actually spent as a
result of the allegedly concealed $12 million discrepancy. Plaintiff’s
spending impacts a materiality assessment. While plaintiff alleges a series
of problems and pairs some with a dollar figure, the Court cannot find that
plaintiff specifically stated each false or misleading statement and/or
omission, the reasons why it is false or misleading, and that there is a
significant likelihood that a reasonable investor would have viewed the
misrepresentation or omission as having significantly altered the total mix
of information made available. Furthermore, plaintiff has failed to plead
reliance. In discussing “capital expenditures,” the Conway Report states
that USM “Management has an extensive ‘wish list’ from which to build
future capital plans. Review and consolidation occur; final plan reviewed
and approved by the BOD. During the course of executing an annual plan,
non-critical CapEx projects often end up being de-prioritized as running the
business takes priority.” (Doc. 45-2 at PageID 2949). This language
precludes reasonable reliance on the alleged misrepresentations regarding
capital expenditure budgets.
iii. Failure to Spend Theory
Finally, plaintiff alleges that, between April 1, 2014 and the closing,
defendants intentionally committed less than half of the $10.8 million that
they promised to spend on necessary capital expenditures between April 1
and June 27, 2014. Plaintiff further asserts that defendants deferred other
capital purchases until just before the closing so that plaintiff would be
obligated to bear the expenses.
Defendants argue that these statements, made in USM’s budgets,
are not guarantees to spend, and therefore, are not misrepresentations.
Defendants further argue that the Capital Expenditure Budget for April 1st
through June 27, 20114, (Doc. 36-1 at PageID 2464) lists approximately
$2.6 million in “spending on capital from April 11 through May 20th, 2014,”
approximately $2.1 million in “capital payments expected to be made prior
to June 27, 2014,” and approximately $6 million in “existing capital
commitments or commitments expected to be made prior to June 27,
These forward-looking statements are soft information. As such,
plaintiff “must plead facts showing that the defendants knowingly
misrepresented or omitted facts to deceive, manipulate, or defraud.”
Omnicare I, 769 F.3d at 472. Plaintiff has failed to meet this burden. It
does not plead specific facts illustrating that Brian Simon and Roll knew
that USM had guaranteed to spend these figures, failed to do so, and
knowingly concealed this from plaintiff.
c. Alleged Misrepresentations and/or Omissions
Dana represented over 38% of USM’s sales and was its second
largest customer in 2013. Plaintiff alleges that USM’s relationship with
Dana was a central focus during pre-sale due diligence. Brian Simon was
questioned about this relationship and claimed that there were no
developments or issues. (Doc. 35 at PageID 1724-25). Brian Simon and
Roll also provided written representations about Dana, including that USM
had not breached any contract with Dana, and that Dana had not
expressed any intention to alter the parties’ relationship. (Doc. 35 at
PageID 1747; Doc. 35-2 at PageID 1855-57). Defendants classify these
misrepresentations and/or omissions into two categories; the relationship
theory and the material dispute theory. Plaintiff asserts that the Dana fraud
should not be separated into two separate claims, but rather viewed as a
single claim of fraud. (Doc. 633-2 at PageID 4522).
Plaintiff argues that these representations were false. Brian Simon
breached a contract with Dana for components for the P473 and VN127
programs in Spring 2014. Plaintiff alleges that Dana was enraged. (Doc.
35 at PageID 11751-52). Dana purportedly made it clear to Brian Simon
that it considered his conduct to constitute a breach for which it intended to
hold USM financially responsible. (Doc. 35 at PageID 1751). Dana further
threatened that this conduct would impact its willingness to award USM
future projects. (Doc. 35 at PageID 1752). Dana thereafter demanded
repayment of $428,396.71 in charges caused by the breach. (Doc. 35 at
Defendants argue that plaintiff’s alleged misrepresentations about
USM and Dana are immaterial because the $428,396.71 figure is not
critical to a reasonable investor and plaintiff does not plead any other
significant losses. Plaintiff argues that materiality is not based on a strict
numerical threshold, and that Dana’s repayment demand does not reflect
the impact of the breach. Plaintiff claims that the deterioration of USM’s
relationship with its second largest customer, and its threats to withhold
future business, is something that a reasonable investor would have found
Customer size is important to the Court’s materiality assessment.
USM bears a greater risk of harm if a larger customer withholds its
business. The greater the harm, the greater the odds that a reasonable
investor would find that the misrepresentation significant. The Amended
Complaint pleads losses of $428,396.71 and Dana’s reluctance “to award
USM new business or replacement business.” (Doc. 35 at PageID 1756).
Plaintiff specifically mentions the loss of the Jeep Wrangler JL line, but
does not enumerate any other lost business. (Id.). These pleadings are
insufficient. Years have passed since Dana purportedly threatened to
withhold business, but plaintiff does not plead any other losses to suggest
that its fears were realized. There is no evidence that Dana withdrew any
of its existing business from USM nor failed to award USM any other new
business because of the alleged misrepresentations and/or omissions. As
a matter of law, there is not a substantial likelihood that a reasonable
investor would have viewed the $428,396.71 payment and the loss of the
Jeep Wrangler JL line as significantly altering the mix of information
available. The Court, therefore, cannot find that these misrepresentations
and/or omissions are material.
Furthermore, plaintiff has not pleaded facts sufficient to establish that,
at the time of the alleged misrepresentations and/or omissions, defendants
knew Dana’s threats would harm USM through the loss of existing or future
business. In fact, except for the loss of the Jeep Wrangler JL line, plaintiff
does not plead that such consequences ever occurred. The Court,
therefore, finds that plaintiff has failed to plead scienter with particularity.
d. Alleged Misrepresentations and/or Omissions
AAM accounted for 47% of USM’s sales and was its largest customer
in 2013. Plaintiff alleges that defendants misrepresented and concealed
information about disputes between USM and AAM – including that AAM
was seeking roughly $4 million in cost recovery claims – as well as the
parties’ negotiations for a long-term agreement (LTA).
Like the Dana misrepresentations and/or omissions analyzed above,
customer size is important to the Court’s materiality assessment regarding
the AAM fraud. The Amended Complaint alleges that AAM asserted nearly
$4 million in cost recovery claims against USM. (Doc. 35 at PageID 1737).
This sum represent roughly 1.48% of the purchase price. Plaintiff does not
state whether the parties resolved these claims. The Court, however, is
familiar with this issue as pleaded in the original complaint. (Doc. 1).
There, plaintiff stated that it settled AAM’s cost recovery claims for $1.35
million. (Doc. 1 at 30-31). This sum represent roughly 0.5% of the
purchase price. Plaintiff further alleges that deteriorations in the parties’
relationship would cause tens of millions of dollars in losses. But plaintiff
does not plead specifics. It is not clear what programs, if any, were lost or
how much money, if any, was lost. Like the alleged Dana fraud, plaintiff’s
lack of specificity is particularly troubling in light of the years that have
passed since USM’s sale. Finally, plaintiff alleges that the parties’
deteriorating relationship led to a less favorable LTA. But plaintiff again
fails to plead specifics. It alleges a $12 million earnings loss but does not
provide sufficient information on how that number was calculated. Plaintiff
also failed to attach the LTA. The Court, therefore, does not know the
terms, duration, pricing, or other relevant matters. Plaintiff’s lack of
sufficient specificity precludes the Court from finding that it has met the
heightened pleading requirements of the PSLRA. Additionally, the Court
cannot find that there is a substantial likelihood that a reasonable investor
would have viewed these alleged misrepresentations and/or omissions as
significantly altering the mix of information available. Plaintiff has,
therefore, failed to sufficiently plead material misrepresentations and/or
omissions. This lack of specificity dooms plaintiff’s attempt to plead
scienter. Plaintiff has not pleaded that these consequences occurred much
less that defendants knew that they would occur. Plaintiff has, therefore,
failed to state a claim in Count I, and it shall be dismissed.
C. Count II – Violation of Section 20(A) of the Securities Exchange Act
In Count II, Buyer alleges that George Simon, Eric Simon, and Paul
Simon are secondarily liable for Brian Simon and Roll’s conduct in Count I
because they were “controlling persons” under section 20(a) of the
Securities Exchange Act. See 15 U.S.C. § 78t(a). In order to make out a
claim under section 20(a), a plaintiff must establish an underlying violation
of the Securities Exchange Act and establish that the defendant controlled
the violator. See id. Plaintiff failed to state a claim in Count I, and therefore,
has not established a violation of the Securities Exchange Act. Plaintiff
has, therefore, failed to state a claim in Count II and it shall be dismissed.
D. Count III and IV – Michigan Uniform Securities Act
In Count III, plaintiff alleges that Simon and Roll violated the Michigan
Uniform Securities Act (MUSA), Mich. Comp. Laws § 451.2101 et seq. The
factual basis for Count III is identical to the basis for Count I. The parties
agree that “a securities claim under [the MUSA] is nearly identical to the
corresponding federal securities fraud claim.” JAC Holding Enters., Inc. v.
Atrium Capital Partners, LLC, 997 F. Supp. 2d 710, 739 (E.D. Mich. 2014)
(quoting The MJK Family LLC v. Corp. Eagle Mgmt. Servs., Inc., No. 0912613, 2009 WL 4506418, at *4 (E.D. Mich. Nov. 30, 2009)) (internal
quotation marks omitted). As such, because the Court ruled that plaintiff
failed to state a claim in Count I, the Court finds that plaintiff failed to state
a claim in Count III. Count III shall be dismissed.
In Count IV, plaintiff asserts that the Simon Directors and the Voting
Shareholders are secondarily liable under the MUSA for Simon and Roll’s
primary MUSA violations. The MUSA provides for secondary liability for
controlling persons, see Mich. Comp. Laws § 451.2509(7)(a), as well as
“managing partner[s], executive officer[s], [and] director[s] of a [primary
violator].” Id. § 451.2509(7)(b). Plaintiff failed to state a claim in Count III
regarding a primary violation. Count IV, therefore, also fails to state a claim
and shall be dismissed.
E. Counts V – XI – Common-Law Fraud and Misrepresentation Claims
In Counts V through XI, Plaintiff alleges various forms of common-law
fraud; fraudulent inducement (Count V), fraudulent misrepresentation
(Count VI), concert of action as to fraud (Count VII), silent fraud (Count
VIII), concert of action as to silent fraud (Count IX), negligent
misrepresentation (Count X), and innocent misrepresentation (Count XI).
Counts V through IX involve claims against Simon and Roll. Counts X and
XI are claims against the Simon Directors, the Voting Shareholders, Simon,
and Roll. The parties agree that Michigan law governs these claims.
Under doctrine first set forth in Hart v. Ludwig, 347 Mich. 559 (1956),
an action in tort can arise only out of a “violation of a legal duty separate
and distinct from the contractual obligation” of the defendant. Rinaldo’s
Const. Corp. v. Michigan Bell Tel. Co., 454 Mich. 65, 84 (1997); see also
Brock v. Consol. Biomedical Labs., 817 F.2d 24 (6th Cir. 1987); Hart, 347
Mich. at 565 (“[I]f a relation exists which would give rise to a legal duty
without enforcing the contract promise itself, the tort action will lie,
otherwise not.” (quoting William Prosser, Handbook of the Law of Torts §
33 (1st ed.)) (internal quotation marks omitted)). Defendants argue that the
Hart Doctrine bars Counts V-XI.
Plaintiff argues that the Hart doctrine does not apply because the
claims rely on duties distinct from contractual obligations, and further states
that Hart does not apply when the fraud of one party precludes the other
party from making an informed decision to enter into a contract. Eagle
Trim, Inc. v. Eagle-Picher Indus., Inc., 205 F. Supp. 2d 746, 753-54 (E.D.
Mich. 2002); JAC Holding, 997 F. Supp. 2d at 732 (quoting Hart, 347 Mich.
at 565) (“A fraud action may proceed where that tort action would lie
without having recourse to the contract itself.”). Plaintiff asserts that the
Amended Complaint pleads with particularity a series of specific precontract misrepresentations and omissions that are distinct from the written
representations of the Merger Agreement. Plaintiff filed a document
summarizing these alleged misrepresentations and omissions. (Doc. 49-2).
Defendants argue that all of the alleged pre-contract misrepresentations
overlap with R&Ws. (Doc. 50-3). The Court agrees with defendants. The
alleged violations in Counts V-XI arise out of legal duties that are not
separate or distinct from defendants’ contractual obligations. Counts V-XI
are, therefore, barred by the Hart doctrine and shall be dismissed.
F. Counts XII – XVI
A district court “may decline to exercise supplemental jurisdiction over
a claim” if the court “has dismissed all claims over which it has original
jurisdiction.” 28 U.S.C. § 1367(c)(3). Counts XII-XVI, as contract claims
arising under Michigan law, address predominately state interests. The
Court, therefore, shall decline to exercise supplemental jurisdiction over
Counts XII-XVI and dismiss the case. For the same reasons, the Court
shall decline to exercise supplemental jurisdiction over the Third Party
Complaint, (Doc. 40), as all of its claims arise under Michigan law.
For the reasons stated above, defendants’ Motion to Dismiss is
IT IS HEREBY ORDERED that Counts I-XI of the Amended
Complaint are dismissed with prejudice.
IT IS FURTHER ORDERED that Counts XII-XVI of the Amended
Complaint are dismissed without prejudice.
IT IS FURTHER ORDERED that the Third Party Complaint is
dismissed without prejudice.
Dated: September 12, 2017
S/George Caram Steeh
GEORGE CARAM STEEH
UNITED STATES DISTRICT JUDGE
CERTIFICATE OF SERVICE
Copies of this Order were served upon
attorneys of record on
September 12, 2017, by electronic and/or
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