Murray v. EarthLink Holdings Corp.

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ROBERT MURRAY, On Behalf of Himself And All Others Similarly Situated PLAINTIFF v. EARTHLINK HOLDINGS CORP, et al. DEFENDANTS

No. 4:18-cv-202 JM

United States District Court, E.D. Arkansas, Central Division

June 30, 2023

ORDER

James M. Moody Jr., United States District Judge

Plaintiff Robert Murray filed this purported class action for securities violations arising out of the 2017 merger between Windstream Holdings, LLC and Earthlink Holdings Corp. Pending are two motions to dismiss the Second Amended Complaint (“SAC”).^[1]One motion was filed by Defendants Windstream Holdings, Inc. (“Windstream”); its directors Carol B. Armitage, Samuel E. Beall III, Jeannie H Diefenderfer, Robert E. Gunderman, Jeffrey T. Hinson, William G. LaPerch, Larry Laque, Kristi Moody, Michael G. Stoltz Tony Thomas and Alan L. Wells; and EarthLink Holdings Corp. (“EarthLink”) (all collectively referred to as the “Windstream Defendants”). (Doc. No. 78). The remaining defendants, directors of Earthlink-Susan D. Bowick Joseph F. Eazor, Kathy S. Lane, Garry K. McGuire, R. Gerard Salemme, Julie A. Shimer, Marc F. Stoll and Walter L. Turek (“EarthLink Directors”), filed the second. (Doc No. 80). The defendants have adopted each other's arguments. Plaintiff filed a single response to both. The Court will also address the two motions collectively.

I. Procedural History

Plaintiff, a former EarthLink stockholder, filed this case on March 3, 2018 for violations of federal securities law in connection with the merger of EarthLink and Windstream. An amended complaint was filed on July 27, 2018 before Defendants responded to the original complaint. Defendants filed motions to dismiss the first amended complaint (“FAC”) for failure to state a claim and as being barred by the statute of limitations. (Doc. Nos. 21, 25). A hearing was set for oral arguments but was continued after Windstream filed for Chapter 11 bankruptcy on February 25, 2019.^[2]The bankruptcy court determined that the automatic stay extended to all the defendants in this case, but it granted Plaintiff limited relief from the stay for this Court to hear oral argument and rule on the pending motions to dismiss. (Doc. No. 50-1). The Court heard argument on the then-pending motions to dismiss (Doc. Nos. 21, 25) on August 22, 2019. The automatic bankruptcy stay was lifted on June 26, 2020 when the bankruptcy court confirmed Windstream's plan of reorganization. Plaintiff filed a motion for leave to amend a second time, attaching a redlined copy of the proposed SAC, and the parties jointly moved for an order accepting the filing of the SAC. (Doc. Nos. 69, 72). Briefing on the motions to dismiss the SAC was completed in October of 2021. Plaintiff filed a notice of recent authority on April 20, 2022 which spawned more briefing. Plaintiff filed another notice of recent authority on October 7, 2022, to which no response was filed. The Court apologizes to the parties for the delay in ruling.

II. The Second Amended Complaint

The SAC alleges that as of August 8, 2016, Earthlink was a strong, consistently performing company that had generated positive income for the second quarter in a row. On October 5, 2016, Windstream submitted an indication of interest to Earthlink contemplating a merger. One month later, the EarthLink Directors unanimously approved the merger which was then completed on February 27, 2017. Windstream filed for Chapter 11 bankruptcy relief two years following the merger. When its reorganization plan was confirmed by the bankruptcy court in June of 2020, all of Windstream's shares of common stock were declared “cancelled, discharged and of no force and effect.” (Doc. No. 74, ¶53).

Plaintiff seeks to represent a class of individuals who acquired Windstream shares as a result of “Offering Documents” filed with the SEC in advance of the merger and also individuals who held Earthlink stock at the time of the merger. The Offering Documents include a registration statement filed by Windstream on December 8, 2016 (the “Registration Statement”); a joint proxy statement/prospectus filed by Windstream on January 24, 2017 (the “Joint Proxy/Prospectus”); and a proxy statement filed by EarthLink on January 24, 2017 (the “Proxy”).

The SAC alleges that Windstream historically paid robust dividends, and the Offering Documents stated that the merger would provide support for the continued payment of the $.60 per share annual dividends, which was a ‘substantial increase in the annual dividend currently received by the EarthLink stockholders.” (Doc. No. 74, ¶ 149). When Earthlink and Windstream merged, each share of EarthLink common stock was exchanged for .818 shares of Windstream common stock. The Windstream stock was valued at $39.25 at that time of the merger.

Things did not go well for Windstream following the merger. It struggled to keep up with the competitive market and had increasingly poor quarterly returns. On August 3, 2017, about five months after the merger, Windstream announced that it was ending its quarterly stockholder dividends effective immediately. By June of 2018 Moody's had downgraded Windstream's debt level to “distressed,” and Windstream filed for bankruptcy soon after.

Over a third of the SAC relates to a complex arrangement Windstream^[3]had with Uniti Group, Inc. that began in March of 2015 (the “Uniti Arrangement”). Plaintiff alleges that Windstream established Uniti as a new publicly traded Real Estate Investment Trust (“REIT”).

Next Windstream's operating subsidiaries, Windstream Services, transferred assets they valued at $7.4 billion to Uniti in exchange for cash and Uniti stock. Then Windstream and Uniti entered a lease in which Uniti leased the assets back to Windstream Services in exchange for annual payments from Windstream for an initial rate of $650,000 million which included rent, real estate taxes, insurance, and maintenance of the assets. (Doc. No. 75, ¶¶ 54-56). These lease payments were not set at fair market value. The Uniti Arrangement was “disguised financing” in an attempt to provide a short-term economic solution for Windstream's growing challenges. Plaintiff alleges that Windstream misrepresented the Uniti Arrangement to the SEC, allowing it to underreport the size of its liabilities and to avoid a breach of restrictive covenants in an indenture from a $700 million note. Plaintiff alleges that the mischaracterization of the Uniti Arrangement the Offering Documents supports its claims for securities act violations.

In the SAC, Plaintiff asserts five claims arising out of the Offering Documents. Count I alleges violations of §14(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 14a-9 based on materially misleading statements and failure to disclose material facts in the Joint Proxy/Prospectus and the Proxy. Count II asserts a controlling persons claims against the Windstream Defendants and the Earthlink Directors pursuant to §20(a) of the Exchange Act. Count III alleges violations of §11 of the Securities Act of 1933 (“Securities Act”) against the Windstream Defendants based on inaccurate, misleading, and omitted facts contained in the Registration Statement. Count IV alleges violations of §12(a)(2) of the Securities Act against the Windstream Defendants based on the Joint Proxy/Prospectus. Count V alleges a controlling persons claim pursuant to §15 of the Securities Act against the Windstream Individual Defendants who promulgated the Prospectus. Plaintiff explicitly states that he is bringing claims for strict liability or negligence under the statutes, not fraud or recklessness. These are the same five claims contained in the FAC.

III. Motions to Dismiss

A. Statute of Repose

Statutes of repose “protect defendants from prolonged exposure to liability.” Fedance v. Harris, 1 F.4th 1278, 1284 (11th Cir. 2021). They are “statutes of limitations more severe cousins” that “strike a stronger defendant-friendly balance” and serve as “an absolute bar on a defendant's temporal liability.” Se. Pennsylvania Transportation Auth. v. Orrstown Fin. Servs. Inc., 12 F.4th 337, 341 (3d Cir. 2021) (citations omitted). The parties agree that the statute of repose for each of Plaintiff's claims is three years, and “[i]n no event shall any such action be brought” outside that time. See 15 U.S.C.A. § 77m and Dekalb Cnty. Pension Fund v. Transocean Ltd., 817 F.3d 393 (2d Cir. 2016), as amended (Apr. 29, 2016).

Defendants argue that the statute of repose began running on February 27, 2017, the date the merger was completed. They do not challenge that both the original complaint and the FAC were filed well within the three-year statute of repose (March 3, 2018 and July 27, 2018, respectively). Defendants argue that when he filed the SAC, Plaintiff asserted new claims, that they call the Uniti Claims, for the first time. It is these “claims” that Defendants argue are barred. The Court finds that Defendants “had no right to repose as long as [Plaintiff's] action was pending.” SEPTA at 353.

B. Statute of Limitations

As an affirmative defense, the statute of limitations can be considered on a motion to dismiss only “when there is some obvious bar to securing relief on the face of the complaint.” York Cnty. on Behalf of Cnty. of York Ret. Fund v. HP, Inc., 65 F.4th 459, 466 (9th Cir. 2023) (quotation omitted). It is “[o]nly when the plaintiff pleads itself out of court-that is, admits all the ingredients of an impenetrable defense-may a complaint that otherwise states a claim be dismissed under Rule 12(b)(6).” Weatherly v. Ford Motor Co., 994 F.3d 940, 943-44 (8th Cir. 2021) (quoting Xechem, Inc. v. Bristol-Myers Squibb Co., 372 F.3d 899, 901 (7th Cir. 2004)).

The statute of limitations for Plaintiff's claims under §14(a) of Exchange Act and §§ 11...