Opinion
Case No. 2:03-md-1565
March 25, 2004
ORDER
This matter is before the Court on motions for a suggestion of remand of the two Florida class actions, Michael Mahoney, et al. v. John F. Andrews, et al., Case No. 3:03-467 (M.D. Fla.), and John P. Houlihan v. John F. Andrews, et al., Case No. 3:03-656 (M.D. Fla.). Defendant R.J. Gold and Company, Inc. and defendants Suzanne Hosch, Cedrick Johnson, Sam Romeo, Frank Magliochetti, George Kuselias, and Albert Marston ask this Court to suggest to the Judicial Panel on Multidistrict Litigation that the Florida class actions be remanded to the transferor court, the United States District Court for the Middle District of Florida, on the grounds that they do not belong in the National Century Financial Enterprises ("NCFE") litigation. For the reasons set forth below, the motions for a suggestion of remand are DENIED.
I.
CFE was an Ohio company that financed healthcare providers and other healthcare companies. It did so by purchasing their accounts receivable at a discount. NCFE obtained money to purchase the receivables by issuing notes that were supposed to be collateralized through the purchase of "eligible receivables" and were to be repaid with the proceeds of those receivables. NCFE created numerous wholly-owned subsidiaries, known as "programs," for the purpose of issuing the notes. The two largest such programs were NPF VI, administered by J.P. Morgan Chase Bank as indenture trustee, and NPF XII, administered by Bank One, N.A. as indenture trustee.
NCFE and its principals allegedly engaged in a fraudulent scheme of purchasing ineligible, and often worthless or non-existent, receivables from healthcare providers in which they held a financial interest. NCFE thereby overfunded these companies and later misappropriated the funds for the personal use of NCFE insiders. Moreover, NCFE allegedly wired funds back and forth between programs in order to create the appearance of complying with the program's reserve requirements. In the midst of reports and allegations of wrongdoing, NCFE filed for Chapter 11 bankruptcy on November 18, 2002 in the United States Bankruptcy Court for the Southern District of Ohio.
Both Florida cases are brought as class actions on behalf of shareholders in the healthcare software company e-Medsoft. The class period covers those who purchased stock from December 6, 2000 to February 11, 2002. The complaints assert violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j (b), 78t(a), against persons and entities affiliated with e-Medsoft. Plaintiffs allege that defendants defrauded the market by making false and misleading statements that caused the price of e-Medsoft stock to artificially inflate.
Important to the matter at hand is the alleged connection between e-Medsoft and NCFE. The Florida plaintiffs allege that NCFE controlled e-Medsoft through its "substantial stock ownership" of the company.Houlihan, First Am. Compl., ¶ 3; Mahoney, Second Am. Compl., ¶ 3. In February 2000, the two companies entered into agreements whereby e-Medsoft would provide software services to NCFE and NCFE would give e-Medsoft access to its clients. As part of the deal, NCFE cancelled a debt that e-Medsoft owed to it and acquired 9.5 million shares of e-Medsoft stock. NCFE and its principals owned approximately 33% of e-Medsoft's common stock and became the largest shareholder of the company. NCFE's president, Lance Poulsen, allegedly owned over 8% of e-Medsoft's common stock, and Donald Ayers, a principal of NCFE, was a director of e-Medsoft.
In February of 2000, e-Medsoft and NCFE announced a joint venture in which they planned to create an online network of financing resources for healthcare providers. In December 2000, e-Medsoft announced that it had been "selected" by Chartwell Diversified Services, Inc., a healthcare company, to "build a customized healthcare portal solution." In May 2001, e-Medsoft announced that it would acquire Chartwell.
According to the Florida complaints, e-Medsoft failed to disclose that NCFE had a controlling interest in both e-Medsoft and Chartwell. NCFE principals Poulsen, Ayers, and Rebecca Parrett owned 88% of Chartwell. Had NCFE's ownership of e-Medsoft and Chartwell been disclosed, the announcements of e-Medsoft's ventures with NCFE and Chartwell and its acquisition of Chartwell would have been less impressive to investors.
The Florida plaintiffs also allege that e-Medsoft failed to disclose the true nature of its financial dealings with NCFE. e-Medsoft allegedly became a "piggy bank" of sorts for NCFE's principals. NCFE purchased e-Medsoft's account receivables, but also advanced it funds for worthless or non-existent receivables. NCFE used these worthless receivables as a basis for issuing new notes to institutional investors. At one point, the complaints allege, NCFE had overfunded e-Medsoft by $100 million.
In late 2001 and early 2002, e-Medsoft's insiders sold off their stock holdings. e-Medsoft was delisted from the American Stock Exchange in July 2002, and it filed for bankruptcy on November 27, 2002.
II.
The MDL Panel has exclusive authority to remand an action to the transferor court. See 28 U.S.C. § 1407(a). Under Rule 7.6(c) (ii) of the Rules of Procedure of the Judicial Panel on Multidistrict Litigation, a transferee district court may make a suggestion of remand to the MDL Panel. This typically occurs when the transferee court has reached the completion of consolidated pretrial proceedings. See In re Integrated Resources, Inc., No. 92 Civ. 4555, 1995 WL 234975, at *4 (S.D.N.Y. April 21, 1995) ("Remand is appropriate when the discreet function performed by the transferee court has been completed."). The MDL Panel "will remand an action or actions prior to the completion of coordinated or consolidated pretrial proceedings only upon a showing of good cause." In re South Cent. States Bakery Prods. Antitrust Litig., 462 F. Supp. 388, 390 (J.P.M.L. 1978).
"[A] party seeking remand to the transferor court has the burden of establishing that such remand is warranted." In re Integrated Resources, Inc. Real Estate Ltd. Partnerships Securities Litigation, 851 F. Supp. 556, 562 (S.D.N.Y. 1994) (citing In re Holiday Magic Sees. Antitrust Litig., 433 F. Supp. 1125, 1126 (J.P.M.L. 1977)). The transferee court, in considering whether to make a suggestion of remand, should be guided by the same standards for remand used by Panel. In re Bridgestone/Firestone, Inc., 128 F. Supp.2d 1196, 1197 (S.D. Ind. 2001). "The exercise of that discretion generally turns on the question of whether the case will benefit from further coordinated proceedings as part of the MDL."Id. (citing In re Air Crash Disaster, 461 F. Supp. 671, 672-73 (J.P.M.L. 1978)). Remand is inappropriate when continued consolidation will "eliminate duplicative discovery, prevent inconsistent pretrial rulings, and conserve the resources of the parties, their counsel and the judiciary." In re Heritage Bonds Litigation, 217 F. Supp.2d 1369, 1370 (J.P.M.L. 2002) (citing 28 U.S.C. § 1407).
Here, the MDL Panel consolidated the actions now before this Court upon finding that they were all "connected in one way or another to the financial collapse of [NCFE]." Nov. 13, 2003 Transfer Order. At the Court's December 18, 2003 Case Management Conference, counsel for certain parties to the Florida actions expressed concern that their cases did not belong in the NCFE litigation. The parties to the Florida actions were then provided an opportunity to brief that issue.
Two motions for a suggestion of remand were filed: one by defendant R.J. Gold and Company, Inc. and the other by individual defendants who are former officers and directors of e-Medsoft. The Moving Defendants argue that the Florida actions and the NCFE actions are too dissimilar for consolidation to serve a beneficial purpose. The Florida actions concern the fraudulent public statements made by e-Medsoft to inflate the company's stock prices. In contrast, the other MDL actions concern the fraudulent activities of NCFE in purchasing healthcare receivables and issuing notes. The Moving Defendants argue that NCFE's collapse has no bearing on the legal and factual issues presented in the Florida actions. They point out that the class period in the Florida actions ends on February 11, 2002, well before the financial collapse of NCFE occurred in November 2002.
The Florida plaintiffs filed amended complaints, with leave of the Court, shortly after the motions were filed. As summarized in Part I above, the amended complaints include many specific allegations about NCFE's connections with e-Medsoft and Chartwell. At the same time, plaintiffs filed a response to the motions for a suggestion of remand. They opposed the motions on the grounds that the amended complaints made clear the need for substantial discovery concerning NCFE's ties with e-Medsoft.
Joining plaintiffs in opposing the motions for a suggestion for remand are defendants Lance Poulsen and Barbara Poulsen, who argue that the filing of the amended complaints has rendered the motions moot. Defendants J.P. Morgan Chase Co., The Beacon Group, LLC, Thomas Mendell, Harold Pote, and Eric Wilkinson argue that remand is inappropriate because the Florida actions, like the rest of the cases in the MDL, involve NCFE's fraudulent scheme of using the healthcare companies under its control to purchase ineligible receivables and misappropriate funds.
The Moving Defendants have filed a supplemental memorandum in response to the amended complaints. Though the amended complaints allege that NCFE had a controlling interest in e-Medsoft, the Moving Defendants argue that the simple question of NCFE's ownership interest in e-Medsoft is tangential to the primary issue of e-Medsoft's fraud on the market. They argue that the amended complaints' allegations concerning NCFE are extraneous to the underlying causes of actions.
III.
The Florida class actions are admittedly different from the rest of the cases in the MDL. They are brought by a class of e-Medsoft stockholders whose claims are confined to securities fraud. The other actions, meanwhile, are brought by investors and noteholders against former NCFE principals and directors, the indenture trustees, and NCFE's law and accounting firms, among others. These actions involve an array of legal claims stemming from NCFE's alleged wrongdoing.With that said, however, the Moving Defendants have failed to show good cause why the Florida actions should be remanded. Despite the differences between the Florida actions and the other cases, "[a] complete identity or even majority of common factual issues" is not required for cases to be consolidated for pretrial purposes. In re Heritage Bonds Litigation, 217 F. Supp.2d 1369, 1370 (J.P.M.L. 2002). The key concern is whether the Florida actions will benefit from being part of the MDL, and the Court concludes that judicial economy will best be served by keeping them consolidated with the NCFE litigation.
The Florida complaints allege that NCFE and its principals controlled e-Medsoft throughout the class period and orchestrated e-Medsoft's allegedly fraudulent actions. The complaints further assert that NCFE advanced funds to e-Medsoft for worthless and non-existent receivables. NCFE took the money it obtained from issuing notes and overfunded e-Medsoft by $100 million so it could use the company as its "piggy bank."
These allegations are consistent with the ones being made against NCFE in the rest of the cases. NCFE allegedly purchased ineligible accounts receivables from healthcare companies in which it held undisclosed financial interests. It allegedly issued notes backed by the ineligible receivables in order to obtain funds. NCFE allegedly exercised control over the healthcare companies and advanced them funds in exchange for the receivables. It then misappropriated those funds to the benefit of NCFE insiders, according to the complaints.
The Florida plaintiffs are attacking NCFE's fraudulent scheme from a slightly different angle than the other plaintiffs. The bulk of the MDL plaintiffs are investors who suffered financial loss because the notes they purchased were not properly collateralized. The Florida plaintiffs are investors who suffered financial loss because the stock they purchased was not as valuable as the market thought it was. The Florida plaintiffs felt the loss less directly than the noteholders, but they felt it for the same reason-because NCFE used the companies it controlled to misappropriate funds. e-Medsoft happened to be one of those companies.
It is true, as the Moving Defendants argue, that the Florida causes of action are viable independent of NCFE having committed any wrongdoing. e-Medsoft can be guilty of securities fraud for not disclosing its ties with NCFE, regardless of whether NCFE engaged in massive fraud. However, the Florida plaintiffs chose to make NCFE's wrongdoing an important part of their case and have sued persons and entities affiliated with NCFE. Plaintiffs allege that e-Medsoft was intimately involved in NCFE's scheme to misappropriate funds and defraud investors — a scheme which is at the heart of the MDL. Plaintiffs' allegations regarding NCFE are not extraneous, as the Moving Defendants contend. If NCFE controlled e-Medsoft and used the company to misappropriate funds, then the Florida defendants had all the more reason to hide NCFE's connections with e-Medsoft and Chartwell from the public.
The Moving Defendants also argue that the Florida actions do not belong in the MDL because the class period ended (February 11, 2002) before the financial collapse of NCFE occurred. This is too narrow of a view of what the MDL is about. NCFE's demise began long before it filed for bankruptcy in November 2002. It is unclear when NCFE first began engaging in fraudulent conduct, but its downfall traces back to well before the end of the class period. See Pharos Capital Partners, LP v. Deloitte Touche, LLP, et al., Case No. 2:03-362 (S.D. Ohio), First Am. Compl., ¶ 40 (alleging that NCFE had a shortfall in cash reserves of $100 million by November 1999); Bank One N.A. v. Lance K. Poulsen, et al., Case No. 2:03-394 (S.D. Ohio), Compl., ¶ 100 (alleging that NCFE principals undertook efforts in January 2000 to conceal NCFE's undercollateralization of notes).
In sum, the Court finds that the Florida actions will benefit from being a part of the MDL. The Florida plaintiffs make many of the same factual allegations that are made in the rest of the NCFE cases. Thus, consolidated discovery and pretrial proceedings will promote judicial economy and conserve the resources of the parties. To the extent the Florida actions require discovery on unique issues, this Court has the prerogative to design a pretrial program that:
i) allows discovery with respect to any non-common issues to proceed concurrently with remaining discovery on common issues, . . . and ii) ensures that pretrial proceedings will be conducted in a manner leading to the just and expeditious resolution of all actions to the overall benefit of the parties.In re Heritage Bonds Litigation, 217 F. Supp.2d 1369, 1370 (J.P.M.L 2002) (citation omitted); see also In re Commonwealth Oil/Tesoro Petroleum Securities Litigation, 458 F. Supp. 225, 229-30 (J.P.M.L. 1978) ("The transferee judge, of course, has the broad discretion to design a pretrial program that will allow discovery on any issues unique to any action or party to proceed concurrently with the common discovery.").
IV.
Accordingly, the January 16, 2004 motions of defendant R.J. Gold and Company, Inc. (doc. 51) and defendants Hosch, Johnson, Romeo, Magliochetti, Kuselias, and Marston (doc. 52) for a suggestion of remand are DENIED.
Defendants' request for oral argument (doc. 180) under S.D. Ohio Local Civ. R. 7.1(b)(2) is DENIED.