Winer Family Trust v. Queen

503 F.3d 319

The WINER FAMILY TRUST, Individually and on behalf of all others similarly situated, Appellant Sean Fitzpatrick, (Intervenor in D.C.) v. Michael QUEEN; Thomas McGreal; Joseph W. Luter, IV; Michael H. Cole; Smithfield Foods, Inc.; Pennexx Foods, Inc.; Showcase Foods, Inc.

No. 05-3622.

United States Court of Appeals, Third Circuit.

Argued November 9, 2006.

Filed September 24, 2007.

Kimberly M. Donaldson, Esquire, (Argued), Steven A. Schwartz, Esquire, Chimicles & Tikellis LLP, Haverford, PA, Avi N. Wagner, Esquire, Glancy, Binkow & Goldberg LLP, Los Angeles, CA, Attorneys for Appellant.

Ronald J. Mann, Esquire, (Argued), Austin, TX, Maurice R. Mitts, Esquire, Mitts Milavec, Eric F. Spade, Esquire, Philadelphia, PA, Attorneys for Appellees, Michael Queen, Thomas McGreal, Pennexx Foods, Inc.

Terence J. Rasmussen, Esquire, (Argued), Edward J. Fuhr, Esquire, Eric H. Feiler, Esquire, Jessica M. Erickson, Esquire, Monica S. Call, Esquire, Hunton & Williams LLP Richmond, VA, Alan K. Cotler, Esquire, Milind M. Shah, Esquire, Reed Smith LLP, Philadelphia, PA, Attorneys for Appellees, Joseph W. Luter, IV, Michael H. Cole, Smithfield Foods, Inc., Showcase Foods, Inc.

Before: SCIRICA, Chief Judge, McKEE and STAPLETON, Circuit Judges.

OPINION OF THE COURT

SCIRICA, Chief Judge.

At issue in this private securities fraud class action is whether plaintiffs properly pleaded false and misleading statements and material omissions on the company's earnings potential and stock value, in violation of the Securities and Exchange Act of 1934. The District Court granted defendants' motions to dismiss for failure to meet the pleading requirements of the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 et seq ("PSLRA"). While this appeal was pending, the Supreme Court set forth the pleading standard for the PSLRA. Tellabs, Inc. v. Makor Issues & Rights, Ltd., ___ U.S. ___, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007); Key Equity Investors, Inc. v. Sel-Leb Marketing, Inc., No. 06-1052, 2007 WL 2510385 (3d Cir. Sept.6, 2007). We will affirm.

I. Facts and Procedural History

Plaintiffs are former shareholders of Pennexx Foods, Inc., a Pennsylvania corporation that provides case-ready meat to customers in the northeastern United States. Defendants are Pennexx; Smithfield Foods, Inc., a Virginia corporation that produces, processes, and markets a variety of meat products; directors and officers of Pennexx and Smithfield Foods; and Showcase Foods, Inc., a subsidiary of Smithfield Foods.

In June 2001, Pennexx entered into a stock purchase agreement with Smithfield Foods. Smithfield Foods agreed to purchase fifty percent of the outstanding shares of Pennexx for $6 million and to extend Pennexx a revolving line of credit up to $30 million, secured by Pennexx's assets. Smithfield Foods nominated two of its executives, defendants Joseph Luter IV and Michael Cole, to Pennexx's board of directors. In April 2002, Pennexx purchased a meat processing facility in Philadelphia, the Tabor Facility. In May 2002, with Smithfield Foods's assistance, Pennexx began renovating the building, and in July 2002 moved its operations into the Tabor Facility. Renovations continued for the next several months.

Shortly thereafter, Pennexx defaulted on its repayment obligations to Smithfield Foods. Over the objections of Luter and Cole, Pennexx issued additional stock to raise capital. In January 2003, Luter and Cole resigned as Pennexx directors. Subsequently, Smithfield Foods demanded all delinquent amounts under its credit agreement and pursued a replevin action. On June 9, 2003, under a consent decree, Smithfield Foods foreclosed on all of Pennexx's real and personal property. Showcase Foods then took over the Tabor Facility.

This class litigation followed. The Winer Family Trust had purchased 5000 shares of Pennexx stock on May 22, 2002. Based on this purchase, Winer filed a class action complaint against Pennexx, Smithfield Foods, executives and officers of both companies, and Showcase Foods. Winer claimed Pennexx had inflated the price of its stock through public statements and earnings reports that omitted or misstated material facts. Winer was appointed lead plaintiff in November 2003.

Winer's suit alleged federal and state causes of action on behalf of two separate classes. On behalf of public investors who purchased Pennexx securities during the period from February 8, 2002, until June 12, 2003, Winer alleged violations of § 10(b) of the Securities and Exchange Act, as amended by the Private Securities Litigation Reform Act of 1995, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5, see 17 C.F.R. § 240.10b-5, against Pennexx and individual defendants Michael Queen, President of Pennexx; Thomas McGreal, a director and Vice President of Sales for Pennexx; and Smithfield Foods executives Luter and Cole ("Individual Defendants"). Winer also alleged violations of § 20(a) of the Securities and Exchange Act against Smithfield Foods and the Individual Defendants. On behalf of public investors who currently own Pennexx securities, Winer asserted state law claims for breach of fiduciary duty against Queen and Smithfield Foods, aiding and abetting claims against Luter and Cole, and successor liability claims against Smithfield Foods and Showcase Foods.

On September 27, 2004, the District Court granted defendants' motions to dismiss the Rule 10b-5 claims, except for several claims against Pennexx and Queen based on the challenged statements and omissions made after May 22, 2002, the date Winer purchased its stock. The Court also granted the motions to dismiss with respect to the breach of fiduciary duty claims against Queen, Smithfield Foods, Luter, and Cole. The Court denied defendants' motions to dismiss the § 20(a) claims and successor liability claims based on Rule 10b-5 for several statements and omissions occurring after May 22, 2002.

Winer then sought leave to amend, purportedly curing pleading deficiencies and amplifying previous allegations based on new information. This new information came from additional discovery permitted in July 2004 involving the June 2004 closing of the Tabor Facility. In an order dated January 18, 2005, the District Court denied Winer leave to file the proposed amendments, finding them futile.

Winer's only remaining claims were based on statements made by defendants after the date of Winer's stock purchase. As a result, Smithfield Foods filed a motion to dismiss contending Winer lacked standing. On February 11, 2005, the court entered an order that by agreement of the parties Winer withdrew as lead plaintiff without prejudice to pursue an appeal as former lead plaintiff. After plaintiffs failed in their attempt to substitute other lead plaintiffs, the District Court, on June 29, 2005, dismissed the case for lack of prosecution.

Winer timely appeals the September 27, 2004 Order partially granting defendants' motions to dismiss, the January 18, 2005 Order denying leave to file its proposed amendments, the February 11, 2005 Order withdrawing Winer as lead plaintiff, and the June 29, 2005 Order dismissing the action.

The focus of this appeal is Pennexx's statements about its business relationship with Smithfield Foods and the renovation of the Tabor Facility. Winer contends Smithfield Foods "abused" Pennexx in a prior business deal, and that Pennexx omitted material facts about this prior relationship in a February 8, 2002 press release. The February 8 press release credited Smithfield Foods's loan to Pennexx as a factor allowing Pennexx to list its stock on the over the counter Bulletin Board. The press release also referred favorably to Pennexx's business prospects and "growing demand."

Winer also challenges statements and filings involving renovations to the Tabor Facility. On February 20, 2002, Pennexx announced its agreement to acquire the Tabor Facility, stating it was "perfectly suited to our needs," and required "minimal improvements." In a March 29, 2002 SEC filing, Pennexx estimated the cost of purchasing, renovating, and equipping the Tabor Facility to be between $10.5 million and $15 million. Pennexx purchased the Tabor Facility on April 2 for $2 million and announced the acquisition on April 3. In an April 17 filing, Pennexx's revised estimates ranged from $8.5 million to $16 million total for purchasing, renovating, and equipping the Tabor Facility. On May 15 Pennexx again revised its cost estimate for purchasing, renovating, and equipping the Tabor Facility to between $11.5 million and $16 million. Pennexx began renovating the Tabor Facility with Smithfield Foods's assistance in May, and moved into the facility in July 2002.¹

As lead plaintiff, Winer also asserted state law claims for breach of fiduciary duty. Winer contends Queen breached his fiduciary duty by signing a forbearance agreement on May 29, 2003, which called for a broad release of claims that could have been asserted against Smithfield Foods by Pennexx and its shareholders. In the forbearance agreement, Pennexx agreed to pay outstanding loan obligations and expenses totaling approximately $13 million by June 9, 2003 and generally release Smithfield Foods from all obligations and liabilities other than those set forth in the agreement. Smithfield Foods agreed to forbear from exercising its rights and remedies until June 18, 2003, provided Pennexx complied with its obligations, and to assist Pennexx in its efforts to redomesticate itself in Delaware. Winer maintains that Smithfield Foods, frustrated in its attempts to purchase Pennexx outright, implemented a scheme to undermine Pennexx's ability to operate so that it could acquire Pennexx's assets and business opportunities at a discount and to the detriment of Pennexx's shareholders.

II. Jurisdiction and Standard of Review

Winer filed this securities class action under § § 10(b) and 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § § 78j(b) and 78t(a). The...