Opinion
CIVIL ACTION NO. 01-10729-RWZ
March 9, 2004
MEMORANDUM OF DECISION
Owens Corning, Inc. ("OC") incurred a $1.8 billion unsecured bank debt pursuant to a Credit Facility provided by a group of lending institutions. In 1997, the debt was guaranteed by several OC subsidiaries, including Owens Corning Fiberglas Technology, Inc. ("OCFT"). OC also entered into a licensing agreement with OCFT whereby OC transferred its most valuable intellectual property to OCFT and then made royalty payments, part of which were in the form of promissory notes, for use thereof.
In 1998, OC, through the underwriters named as defendants, offered and sold debt securities worth approximately $950 million on two separate occasions: (1) on April 30, 1998, two series of unsecured notes (the 2005 notes and the 2008 notes), and (2) on July 22, 1998, a series of debentures (the 2018 debentures). Both offers were made pursuant to registration statements (each of which included a prospectus and a prospectus supplement) signed by OC officers and directors (named as individual defendants) and filed with the Securities and Exchange Commission ("SEC"). Both of the prospectuses stated that the debt securities would "rank equally with all other unsecured and unsubordinated indebtedness of the Company." (Amended Compl. at 16). Some time in 1998, the investment officer for John Hancock Life Insurance Company, John Hancock Variable Life Insurance Company, and Investors Partner Life Insurance Company (collectively "Hancock"), Ms. Stacey Agretelis, met with OC management, including OC's chief financial officer, and at least one representative of the defendant underwriters. Hancock characterizes the meeting as "part of a standardized `road show visit' which used a prepackaged flip chart to present information to prospective investors" and merely confirmed the information set forth in the registration statements, which did not disclose the OCFT licensing agreement. (Pl's Reply at 14). Thereafter, Hancock purchased some of the debt securities.
The import of the meeting is that Ms. Agretelis contends that OC's chief financial officer told her that the debt securities and the bank debt were pari passu, which conformed with Hancock's reading of the registration statements.
In October 2000, OC filed for Chapter 11 bankruptcy. OC, then for the first time, publicly disclosed the licensing agreement it had with OCFT and OCFT's financial statements which reflected $814 million in transferred assets. On January 30, 2001, OC filed a Form 8-K with the SEC and Lehman Brothers issued a related report. As a result, Hancock alleges the market price of the bank debt increased significantly in comparison to that of the various debt securities, and as of April 26, 2001, it was trading at a price that is more than twice that of debt securities.
Hancock filed a Complaint on April 27, 2001, which they amended to add allegations regarding the July offering and John Hancock Life Assurance Company as the fourth plaintiff. Hancock alleges that the registration statements were misleading as were the oral representations by the defendant underwriters; Hancock was led to believe that the debt securities were equal to OC's other unsecured and unsubordinated debt. However, upon discovering the transfer of assets to OCFT, Hancock realized that the subsidiary guarantees to the lending institutions had real value. Furthermore, the amounts owed by OC under the promissory notes, according to their terms, were subordinate to the bank debt, but not the securities debt.
Hancock has moved for certification of a class and three subclasses, one for each of the two series of the notes and one for the debentures. Each subclass is represented by a different combination of the Hancock entities. For each of the subclasses, Hancock alleges three violations of the Securities Act: (1) material misstatements and omissions in the registration statement by both the underwriters and the individual defendants pursuant to 15 U.S.C. § 77k (imposing civil liability on account of false registration statements) (Counts 1, 4, and 7); (2) material oral misstatements and omissions made by the underwriters pursuant to 15 U.S.C. § 771(a)(2) (imposing civil liability in connection with prospectuses and oral communications) (Counts 2, 5, and 8); and (3) material misstatements and omissions in the registration statements by the individual defendants only pursuant to 15 U.S.C. § 77o (imposing liability on those who control anyone who is found liable under § 77k or § 77I) (Counts 3, 6, and 9).
"There is little question that suits on behalf of shareholders alleging violations of federal securities laws are prime candidates for class action treatment and that Rule 23 of the Federal Rules of Civil Procedure has been liberally construed to effectuate that end." Grace v. Perception Technology Corp., 128 F.R.D. 165, 167 (D. Mass. 1989).
When determining issues of class certification, district courts have broad discretion. Id. Hancock contends that the requirements under Rule 23(a) as well as Rule 23(b)(3) have been met. The four prerequisites to a class action are:
(1) the class is so numerous that joinder of all members is impracticable;
(2) there are questions of law or fact common to the class;
(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and
(4) the representative parties will fairly and adequately protect the interests of the class.
Civ. Pro. Proc. R. 23(a). Rule 23(b)(3) requires that "the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy." Civ. Pro. Proc. R. 23(b)(3).
Defendants assert that Hancock is not a typical nor an adequate plaintiff, and furthermore, that Hancock's unique issues will dominate the litigation. "The proper inquiry [when determining typicality] is whether other members of the class have the same or similar injury, whether the action is based on conduct, not special or unique to the named plaintiffs, and whether other class members have been injured by the same course of conduct." Berenson v. Faneuil Hall, 100 F.R.D. 468, 470 (D. Mass. 1984) (quoting Dura-Bilt Corp. v. Chase Manhattan Corp., 89 F.R.D. 87, 99 (S.D.N.Y. 1981)). Where there is an arguable defense peculiar to the named plaintiff or a subset of the plaintiff class, typicality may be destroyed. Kas v. Financial General Bankshares, Inc., 105 F.R.D. 453, 461 (D.D.C. 1985). The "adequacy-of-representation requirement `tend[s] to merge' with the commonality and typicality criteria of Rule 23(a)[.]" Amchem Products. Inc. v. Windsor, 521 U.S. 591, 626 n. 20, 117 S.Ct. 2231, 2251 n. 20 (1997) (citation omitted).
Defendants correctly contend that the claims concerning alleged oral misrepresentations are unique to Hancock and, therefore, are not subject to class certification. The claims arise from Ms. Agretelis' meeting with OC management and do not involve any other potential class members. Hancock's own papers implicitly acknowledge the same. Counts Two, Five, and Eight of the Amended Complaint carve out Hancock by claiming that the underwriter defendants offered, sold, and/or solicited "certain" members of each subclass by means of oral communication. (Amended Compl. at 30, 38 and 47). Furthermore, when arguing that common questions of fact and law apply to all class members, Hancock focuses solely on the alleged misrepresentations in registration statements. (Mem. in Supp. of Pl's Mot. for Class Certification at 14).
The issue then is whether Hancock is an appropriate representative plaintiff for the remaining counts. First, defendants contend that Hancock has no viable claim under the Securities Act of 1933. In connection with Hancock's participation of a previous offering by OC, Ms. Agretelis had, in her files, a copy of OC's June 1997 Form 10-Q along with a copy of the Credit Facility disclosing the subsidiary guarantees. Defendants equate Hancock's possession of the documents with actual knowledge of the subsidiary guarantees. However, it is unclear whether Ms. Agretelis, in fact, reviewed the relevant documents when deciding to invest in the debt securities at issue. In any case, Hancock's purported knowledge of the Credit Agreement and the subsidiary guarantees (which, notably, are publicly filed and accessible to all class members) does not eliminate its claim. Moreover, the subsidiary guarantees, the licensing agreement and the promissory notes work jointly to subordinate the debt securities to OC's other long-term debt contrary to the description in the registration statements, and defendants' singular focus on Hancock's purported knowledge of the subsidiary guarantees is misplaced.
Somewhat inconsistently, elsewhere defendants assert that Hancock relied solely on the alleged oral misrepresentations by OC, and argue that Hancock "saw no reason to read [the written] documents and was not deceived by them. . . ." (Underwriter Def.'s Mem. in Opp. at 12).
Second, defendants argue that Hancock cannot contest the registration statements' omission of inter-company transactions and asset transfers because it was indifferent to the financial state of OC's subsidiaries and knowingly relied on OC's consolidated financials when deciding to invest. However, investment strategy is of no import in the determination of an appropriate class representative. Randle v. Spectran, 129 F.R.D. 386, 391 (D. Mass. 1988). Furthermore, defendants' assertion that Hancock did not rely on the registration statements when deciding to invest is premature. In re Data Access Svs. Securities Litigation, 103 F.R.D. 130, 139 (D. N.J. 1984) (stating that even if defendants can "prove non-reliance as an affirmative defense, this goes to the merits of the case and cannot be considered by the court on a [class] certification motion."). In any case, Hancock's claims are typical as long as they arise from the "same event or course of conduct which in turn had given rise to the claims of other class members. . . ." Id. Defendants contend that Ms. Agretelis' investment recommendation was based on the oral representation — not the "Prospectus and Registration Statement, which she concedes fully disclose the subsidiary guarantees." (Underwriter Def.'s Mem. in App. at 12). However, Ms. Agretelis testified that when deciding whether to recommend the investment, she "looked at the prospectus, which defined [the offering in controversy] as being equal and ratable to the other unsecured, unsubordinated debt of the company. . . ." (Decl. of Christopher Dillon Ex. B at 63). Therefore, insofar as Hancock relied on the registration statement, its claims are typical. Defendants' arguments concerning predominance fail for the same reasons.
Accordingly, plaintiff's Motion for Class Certification is allowed as to Counts One, Three, Four, Six, Seven, and Nine.