In the
United States Court of Appeals
For the Seventh Circuit
No. 95-1292
WHIRLPOOL FINANCIAL CORPORATION,
Plaintiff-Appellant,
v.
GN HOLDINGS, INC., f/k/a CCHP DELAWARE, INC.,
W.R. GRACE & COMPANY - CONNECTICUT, KEVIN CLARK,
MICHELLE CLARK, ROBERT BOK, and DIANE BOK,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 94 C 4192--Milton I. Shadur, Judge.
ARGUED JUNE 6, 1995--DECIDED SEPTEMBER 28, 1995
Before ESCHBACH, KANNE, and ROVNER, Circuit
Judges.
KANNE, Circuit Judge. Whirlpool Financial Corporation
filed this securities action on July 11, 1994, against GN
Holdings, Inc., W.R. Grace & Co. - Connecticut, Kevin and
Michelle Clark, and Robert and Diane Bok seeking rescis-
sion of Whirlpool's $10 million loan to GN. In its com-
plaint, Whirlpool alleged: (Count 1) violation of Section
10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 thereunder; (Count 2) violation of Section 13 of the
Illinois Securities Law of 1953; and (Count 3) violation of
Section 12(2) of the Securities Act of 1933. In response
to a motion filed by the defendants pursuant to Fed. R.
Civ. P. 12(b)(6), the district court dismissed Whirlpool's
federal claims with prejudice because they were filed be-
yond their respective statutes of limitation. The court also
dismissed the state claim without prejudice. The end
result was that the action was dismissed in its entirety.
For our review of the district court's Rule 12(b)(6) dis-
missal of this action, we summarize and take as true the
facts alleged by Whirlpool in its complaint and support-
ing documents.
In July 1991, Whirlpool Financial Corporation made a
$10 million loan to GN Holdings, Inc., to partially finance
GN's purchase of Cross Country Healthcare Personnel,
Inc. ("CCHP"). CCHP provided hospitals across the United
States with temporary health care personnel such as
nurses, physical therapists, and occupational therapists.
GN, which W.R. Grace had created as the vehicle through
which it would purchase CCHP, executed a promissory note
in favor of Whirlpool for the loan. Under the terms of
the note, Whirlpool was to receive 15.5 percent annual interest
(payable in quarterly installments) with a balloon payment
of the principal in 1998. GN also borrowed $44.8 million
from Heller Financial, Inc., and W.R. Grace invested $25.2
million through the purchase of stock.
To solicit financing for the purchase, the defendants,
with the help of Shearson Lehman Brothers, circulated a
Private Placement Memorandum, which provided narrative
information,/1 historical financial data, and projections for
future performance. These projections were later, before
Whirlpool purchased the note, "revised and made signifi-
cantly less optimistic." The Private Placement Memoran-
dum and the subsequent amendment set out projections
for, among other things, net sales, operating profit, pretax
profit and net income during the remainder of 1991 and
fiscal years 1992 and 1993. To allow Whirlpool to monitor
GN's performance, the loan agreement required GN to
send to Whirlpool monthly, quarterly, and yearly finan-
cial statements accompanied by management reports. GN
complied with these requirements and Whirlpool received
the financial statements as scheduled.
As often happens with new ventures, the projections
painted a much rosier picture than what actually unfolded.
In fact, in the years 1991 through 1993, net sales were
32 to 48 percent lower than projected, operating profit was 50
to 73 percent lower than projected, pretax profit was 95 to 257
percent lower than projected, and net income was 104 to 283
percent lower than projected. On September 12, 1991, shortly
after receiving the first financial statement, Whirlpool
account executive Steven Furman first traveled to Boca
Raton, Florida (GN's headquarters) to question GN execu-
tives about the discrepancies between the financial pro-
jections and actual performance. Furman made similar
trips on February 5, 1992; July 24, 1992; October 16, 1992;
and June 23, 1993. At these meetings, GN executives ex-
plained that the general economic recession was soften-
ing the demand for traveling nurse services but that bet-
ter times were just around the corner. Happy days did
not arrive, and GN defaulted on the interest payment due
Whirlpool on April 1, 1994. Whirlpool filed this suit in July
of 1994.
We review de novo the district court's Rule 12(b)(6) dis-
missal of this action and take, as we have, Whirlpool's
factual allegations as true, giving Whirlpool the benefit
of all reasonable inferences drawn therefrom. Murphy v.
Walker, 51 F.3d 714, 717 (7th Cir. 1995). However, as we
have observed in the context of securities litigation, if a
plaintiff pleads facts that show its suit barred by a statute
of limitations, it may plead itself out of court under a Rule
12(b)(6) analysis. Tregenza v. Great Am. Communications
Co., 12 F.3d 717, 718-19 (7th Cir. 1993), cert. denied, 114
S.Ct. 1837 (1994).
Before reviewing the dismissal of its action for failing
to meet the statutes of limitation for Rule 10b-5 and Sec-
tion 12(2), we make note of the major thrust of Whirlpool's
complaint. Whirlpool's brief summarizes what it views as
the highly significant factual underpinnings as follows:
The Revised Projections were unreasonable when
made because they were based on GN's historical
performance while defendants knew, but did not dis-
close, that the industry was subject to material
adverse trends including proposed and enacted state
and federal legislative and regulatory actions which
would limit GN's revenue, increased competition to
recruit nurses, trends toward reduced usage of tem-
porary nurses, trends toward increased compensation
and benefits for traveling nurses, shifts from inpa-
tient to ambulatory care and trends toward hospital
closings and a decrease in licensed beds.
(Whirlpool brief at 8) (emphasis added). The highlighted
portion of the foregoing quote could be read to mean that
Whirlpool asserts that the defendants had a duty to dis-
close this information--apart from a duty to make reason-
able projections.
If the failure to disclose the above information formed
the sole basis for Whirlpool's Rule 10b-5 claim, the matter
would be at an end. The information Whirlpool states that
the defendants failed to disclose is widely available public
information and, therefore, by definition is available to any
and all who take the time to discover it.
For example, Whirlpool says that the defendants failed
to disclose the existence of state and federal legislation
and regulations which exemplified a negative trend that
affected the viability of GN's projections. Specifically,
Whirlpool in its complaint cites legislation adopted prior
to 1991 in California, Connecticut, Florida, Massachusetts,
New Jersey, and New York regulating the fees charged
by traveling nurse agencies, as well as attempts to take
similar action in Kentucky, Louisiana, Michigan, and Rhode
Island. Moreover, the information regarding adverse in-
dustry trends, which Whirlpool alleges defendants failed
to disclose, is public information and was available at the
time Whirlpool purchased the note. See, e.g., Emily Fried-
man, Nursing: Breaking the Bonds?, 264 JAMA 3117
(1990) ("In spite of nursing's historic ability to beat the
odds and its recent record of accomplishment and grow-
ing power, the profession's future is uncertain. It is, like
most of health care, facing restricted funding, work force
shortages, rationing, and political upheavals.")
The nondisclosure of enacted or pending legislation and
industry-wide trends is not a basis for a securities fraud
claim. See Wielgos v. Commonwealth Edison Co., 892
F.2d 509, 515 (7th Cir. 1989) ("Securities laws require
issuers to disclose firm-specific information; investors and
analysts combine that information with knowledge about
the competition, regulatory conditions, and the economy
as a whole to produce a value for stock."); Acme Pro-
pane, Inc. v. Tenexco, Inc., 844 F.2d 1317, 1323-24 (7th
Cir. 1988) ("The securities laws require the disclosure of
information that is otherwise not in the public domain.
Sellers of securities need not 'disclose' the statutes at
large of the states in which they operate . . . .") (citation
omitted).
However, we discern that it is not the failure of the
defendants to disclose adverse legislation and industry
trends that forms the basis of Whirlpool's Rule 10b-5
claim. Rather the thrust of its argument is that the defen-
dants' revised projections were made without a reason-
able basis. In other words, there was no reasonable basis
for the defendants' revised projections in light of the
adverse legislative, regulatory, and industry trends known
to them. Such a Rule 10b-5 claim based on projections
made in bad faith or without a reasonable basis is cogniza-
ble under the securities laws. Stransky v. Cummins
Engine Co., Inc., 51 F.3d 1329, 1333 (7th Cir. 1995). With
this clarification of the appropriate nature of Whirlpool's
claim, we examine the district court's rationale for the
dismissal of Whirlpool's action--its failure to comply with
the applicable statutes of limitation.
As alluded to above, in both Section 12(2)/2 and Rule
10b-5 actions, a plaintiff must file its claim for relief within
one year from the time that its action accrues. 15 U.S.C.
secs. 77m, 78i(e); see Lampf, Pleva, Lipkind, Prupis & Peti-
grow v. Gilbertson, 501 U.S. 350, 361-62, 111 S. Ct. 2773,
2781 (1991). Moreover, inquiry notice is sufficient to begin
the limitations clock. See 15 U.S.C. sec. 77m; Tregenza, 12
F.3d at 722. Inquiry notice starts the running of the stat-
ute of limitations "when the victim of the alleged fraud
became aware of facts that would have led a reasonable
person to investigate whether he might have a claim."
Id. at 718. Thus, to determine if inquiry notice has been
triggered an objective "reasonable" diligence standard
must be applied to the facts.
The defendants argue that, assuming they committed
any fraud, reasonable diligence by Whirlpool would have
suggested the possibility of fraud before July 11, 1993 (one
year prior to the date Whirlpool filed its complaint). They
point to the dramatic discrepancies (Whirlpool's own de-
scription) between the projections and the actual results,
which the defendants argue would have led a reasonable
investor to suspect fraud.
In Tregenza, Great American Communications Company,
with the help of Shearson Lehman Brothers, sold several
million shares of common stock to the public in order to
retire debt it incurred from purchasing Taft Broadcasting
Company for $1.5 billion. Potential purchasers were told
"that the stock was greatly undervalued and within two
years its price should be well above $20 [and] that the
stock's downside risk at its current price level of $12 to
$12.50 was less than 10 percent." Tregenza, 12 F.3d at
719-20. Within one year, the price of the stock had fallen
to $1.50. The complaint alleged that at the time of these
statements the stock was grossly overvalued and the
downside risk was immense because Great American was
so debt ridden. We held that the precipitous fall in the
price of Great American's stock was sufficient to put the
plaintiffs on inquiry notice. We reasoned that "an investor
would have become suspicious and investigated when Leh-
man's emphatic and precise prediction was so swiftly and
dramatically falsified." Id. at 720.
Likewise, in this case, the dramatic discrepancies be-
tween the very precise projections made by the defen-
dants and the actual results, which Whirlpool learned
through the financial statements, were sufficient to give
notice to Whirlpool and spur them to investigate--inquiry
notice which started the limitations clock./3 This is not to
say that the discrepancies proved fraud, but simply that
a reasonable investor would have believed that fraud was
a possible explanation.
Moreover, once the significant discrepancies between the
projections and actual results placed Whirlpool on notice
regarding the possibility of fraud, the information Whirl-
pool says it needed to "uncover" the alleged fraud was
in the public domain. In today's society, with the advent
of the "information superhighway," federal and state legis-
lation and regulations, as well as information regarding
industry trends, are easily accessed. A reasonable investor
is presumed to have information available in the public
domain, and therefore Whirlpool is imputed with construc-
tive knowledge of this information. See Eckstein v. Balcor
Film Investors, 58 F.3d 1162, 1169 (7th Cir. 1995).
When examined consistent with an objective reasonable
diligence standard, the only reasonable inference that
could be drawn from the facts as alleged by Whirlpool
was that it was put on inquiry notice before July 11, 1993.
Thus, the district court properly determined that Whirl-
pool's federal claims, not asserted until its complaint was
filed on July 11, 1994, were time barred.
Whirlpool finally argues that even if it were put on in-
quiry notice before July 11, 1993, the defendants should
be equitably estopped from arguing the statute of limita-
tions because they "lulled" Whirlpool into missing the
statute of limitations. Whirlpool contends that the explana-
tions Furman received for GN's poor performance--pri-
marily the general economic recession--concealed the defen-
dants' alleged fraud. Equitable estoppel may apply where
a defendant took active steps to conceal evidence from
the plaintiff that the plaintiff needed in order to deter-
mine it had a claim. Singletary v. Continental Ill. Nat'l
Bank, 9 F.3d 1236, 1241 (7th Cir. 1993). However, in light
of our determination that the information Whirlpool needed
to uncover the fraud was in the public domain, GN's con-
tinued attempts to explain away the discrepancies be-
tween the revised projections and the actual earnings
could not have prevented Whirlpool from filing its com-
plaint on time.
AFFIRMED.
FOOTNOTES
/1
The Private Placement Memorandum included several
optimistic and self-laudatory statements, such as describ-
ing CCHP as "the largest, most respected and most im-
itated firm in the travel nurse industry"; stating that the
travel nurse industry was "one of the 25 hottest careers
for the 1990s"; and citing "one industry expert" as esti-
mating "the size of the industry at approximately $350
million in 1990 and growing in excess of 20 percent per year."
/2
After the district court dismissed Whirlpool's complaint,
the Supreme Court held that a "prospectus" for sec. 12(2)
purposes includes only public offerings by issuers or their
controlling shareholders. Gustafson v. Alloyd Co., __
U.S. __, __, 115 S.Ct. 1061, 1073-1074 (1995). As this
case does not concern a public offering, sec. 12(2) is inap-
plicable, and this serves as an alternative ground for af-
firming the district court's dismissal of Whirlpool's sec. 12(2)
claim.
/3
Whirlpool maintains that the limitations clock should
not have run because, notwithstanding its investigation
of the discrepancies (Furman's trips to Boca Raton), it
could not uncover the fraud. In essence, Whirlpool is argu-
ing that the statute of limitations should be equitably
tolled--in spite of reasonable diligence, it could not
discover the facts underlying the defendants' fraud. See
Tregenza, 12 F.3d at 721. However, as we noted in
Tregenza, the plain import of the Supreme Court's deci-
sion in Lampf, Pleva, Lipkind, Prupis & Petigrow v.
Gilbertson, 501 U.S. 350, 111 S.Ct. 2773 (1991), is that
"when knowledge or notice is required to start the statute
of limitations running, there is no room for equitable toll-
ing." Tregenza, 12 F.3d at 721. Therefore, consistent with
our determination that Whirlpool was on notice of the
facts that would have led a reasonable person to in-
vestigate whether he had a claim, the one-year statute
of limitations was not subject to equitable tolling.
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