United States District Court, M.D. Tennessee, Nashville Division
DR. JOSEPH F. KASPER, individually and on behalf of all others similarly situated, Plaintiff,
AAC HOLDINGS, INC., JERROD N. MENZ, MICHAEL T. CARTWRIGHT, ANDREW W. MCWILLIAMS and KIRK R. MANZ, Defendant.
ORDER CONCERNING CLASS CERTIFICATION
McCALLA UNITED STATES DISTRICT COURT JUDGE
Before the Court is Plaintiffs' Motion to Certify the
Class, Appoint Class Representatives, and Appoint Class and
Liaison Counsel, filed October 18, 2016. (ECF No. 77.)
Defendants filed a response in opposition on January 24,
2017. (ECF No. 106.) Plaintiffs filed a reply on February 10,
2017. (ECF No. 108.)
reasons stated below, the Court GRANTS Plaintiffs' Motion
to Certify the Class:
[A]ll persons and entities who purchased or otherwise
acquired AAC securities between October 2, 2014, and [August
4, 2015 at 9:40 a.m. (EST)], inclusive. Excluded from the
class are Defendants, directors, and officers of AAC, as well
as their families and affiliates.
(ECF Nos. 78 at PageID 2513; 119 at PageID 4070.)
Court GRANTS Plaintiffs' Motion to appoint Kaplan Fox,
Kahn Swick and Barrett Johnston as Class Counsel. The Court
GRANTS Plaintiffs' request to appoint Lead Plaintiff as
case involves allegations that Defendants AAC Holdings, Inc.
(“AAC”), AAC's Chairman and Chief Executive
Officer (“CEO”) Michael T. Cartwright, AAC's
Chief Financial Officer (“CFO”) Kirk R. Manz,
former AAC President and Director Jerrod N. Menz, Chief
Accounting Officer Andrew W. McWilliams along with
‘insider defendants'- those that possessed the
power and authority to control the contents of AAC's
press releases, investor and media presentations, and
Securities and Exchange Commission (“SEC”)
filings as well as intimately involved with and aware of, or
deliberately disregarded, all aspects of the Company's
operations-violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 (the “Exchange
Act”), and SEC Rule 10b-5(b) promulgated thereunder.
(Am. Compl., ECF No. 50 ¶ 2.)
provides inpatient substance abuse treatment for individuals
with drug and alcohol addiction. (Id. ¶ 4.)
Gary Benefield was a patient and resident of an AAC facility
called “A Better Tomorrow.” (Id. ¶
6 & n.3.) Benefield died in July 2010 after being
administered drugs by an AAC employee. (Id. ¶ 6
August 29, 2013, in light of Benefield's death,
California Deputy Attorney General Hardy R. Gold executed a
sworn declaration, stating that the California Department of
Justice's “criminal investigation of [AAC
Affiliates] i[s] continuing and nearing completion. I
anticipate that criminal charges will be filed.”
(Id. ¶ 7 (emphasis removed).) This declaration
was filed “in a lawsuit brought by Defendant Menz and
the AAC Affiliates for defamation against a whistleblower who
had provided background information for the California
DOJ's investigation into Mr. Benefield's
death.” (Id.) On September 18, 2013, Defendant
Menz was personally copied on a letter from his counsel,
Barry P. King, to California Chief Deputy Attorney General
Nathan R. Barankin that referenced the Gold declaration.
(Id. ¶ 8.)
went public on October 1, 2014,  offering common stock to
investors in an initial public offering set at $15 per share.
(Id.) The stock began trading on the New York Stock
Exchange on October 2, 2014. (Id.) On July 2, 2015,
the share price reached $44.75 per share. (Id.
¶ 5.) Plaintiffs allege, however, that “AAC's
success as a publicly-traded Company was the result of an
undisclosed fraudulent scheme to deceive investors about an
active criminal investigation by the California [DOJ] of
Defendant Menz and AAC's largest and most profitable
subsidiaries.” (Id. ¶ 6.)
21, 2015, a California grand jury returned a second-degree
murder and dependent adult abuse indictment against Defendant
Menz, AAC affiliates, and others, for the death of Benefield.
(Id. ¶ 19.) On July 29, 2015, the Superior
Court in California unsealed the criminal indictment returned
by a grand jury against Menz and AAC's affiliates.
(Id. ¶ 138.)
July 29, 2015, Plaintiffs allege that “AAC partially
disclosed that ‘charges' had been brought
‘against subsidiaries of AAC and two current and three
former employees.' Defendants, however, failed to
disclose that the charges included the second-degree murder
and dependent adult abuse of Mr. Benefield.”
(Id. ¶ 20.) On the same day, AAC also allegedly
reported better than expected financial results for AAC's
2015 second quarter. (Id. ¶ 21.)
August 1, 2015, the Company hosted an earnings conference
call where Defendant Cartwright claimed that, while he was
‘just now having the opportunity to review [the six
page] indictment, ' he ‘firmly believe[d] that the
California Department of Justice case is without
August 3, 2015, AAC's stock price fell by $5.22 per share
(or by 14%). (Id. ¶ 22.) The next day, Bleeker
Street Research published a report entitled, “American
Addiction Centers: Even More Undisclosed Deaths and the Start
of Real Problems, ” which revealed new facts and
details about the indictment and history of wrongdoing at the
AAC Affiliates. (Id.) On August 4, 2015, AAC's
stock fell to $12.90 per share. (Id. ¶ 23.)
August 5, 2015, Forbes published an article entitled,
“AAC Holdings' Lawyers Knew About Criminal
Investigation in 2013, ” which reported that
“[i]n a response to questions from Forbes about when it
became aware of the criminal investigation, the company said
in a statement last week it learned of the grand jury
investigation into the death of Gary Benefield about six
weeks ago.” (Id. ¶ 23.) The article
further stated that “AAC Holdings had not disclosed the
criminal investigation into Gary Benefield's death in any
of its securities filings that were made with the SEC as it
prepared for its IPO last year or since, until the indictment
was unsealed.” (Id. ¶ 24.)
August 24, 2015, Dr. Joseph F. Kasper, individually and on
behalf of those similarly situated, filed a complaint against
Defendants. (ECF No. 1.) On October 23, 2015, Plaintiffs
filed a Motion to Appoint Lead Plaintiff, Lead Counsel, and
Liasion Counsel, as well as a Motion to Consolidate Cases.
(ECF Nos. 19-25.) On October 26, 2015, the Court consolidated
Tenzyk v. AAC Holdings, Inc., et al. (Case No.
3-15-cv-0986) and Kasper v. AAC Holdings, Inc., et
al. (Case No. 3- 15-cv-0923). (ECF No. 32.) On December
30, 2015, the Court entered a Stipulation and Order
Appointing Lead Plaintiffs, Lead Counsel, and Liaison
Counsel. (ECF No. 47.) The Court's Order appointed
Arkansas Teacher Retirement System (“ATRS”) and
James P. Gills, M.D. as Lead Plaintiffs. (Id.)
February 29, 2016, Plaintiffs filed an Amended Complaint for
consolidated class actions. (ECF No. 50.)
April 14, 2016, Defendants filed a Motion to Dismiss,
asserting that Plaintiffs failed to plead an actionable
misstatement or omission or strong inference of scienter, and
that the Section 20(a) claim should be dismissed. (ECF Nos.
54-55.) Plaintiffs filed their response in opposition on May
31, 2016. (ECF No. 56.) Defendants filed their reply on June
15, 2016. (ECF No. 58.) On July 1, 2016, the Court denied
Defendant's Motion to Dismiss, finding that Plaintiffs
pled with sufficient specificity required by the statute for
an actionable misstatement and omission, and scienter; and
sufficiently alleged a claim for Rule 20(a) to survive a
motion to dismiss. (ECF Nos. 59-60.)
6, 2016, the Court ordered Defendants to serve their answer
to the Consolidated Complaint by July 22, 2016. (ECF No. 62.)
Defendants then filed their answer on July 22, 2016. (ECF No.
65.) On August 31, 2016, the Court entered a Joint Initial
Case Management Order. (ECF No. 72.)
November 4, 2016, the Court entered the Stipulation and
Protective Order for the parties. (ECF No. 84.) On November
28, 2016, Plaintiffs filed a Motion to Set a Case Management
Conference. (ECF Nos. 85-87.) Plaintiffs alleged that
Defendants failed to produce a single document in response to
the Requests Plaintiffs served on July 19, 2016. (ECF No.
86.) As a result, Plaintiffs sought to discuss the case
management schedule to determine how Defendants' failure
effects and/or delays the schedule. (Id.
¶¶ 13-14.) The Court found the motion moot in light
of the teleconference scheduled with Judge McCalla. (ECF No.
Court held a telephonic status conference on December 13,
2016, amending the discovery and trial schedule. (ECF Nos.
91-92.) On December 22, 2016, proposed class representative,
Dr. James Gills, withdrew his request to be appointed class
representative. (See ECF No. 94.) Thus, ATRS is the
one remaining plaintiff seeking to be appointed class
December 22, 2016, Defendants filed a redacted response in
opposition to Plaintiffs' Motion for Class Certification.
(ECF No. 95.) Defendants refiled an un-redacted response in
opposition on January 24, 2017. (ECF No. 106.)
filed a reply on February 10, 2017. (ECF No. 108.) On
February 15, 2017, Defendants moved for Oral Argument on Lead
Plaintiffs' Motion for Class Certification. (ECF No.
110.) The Court granted the motion for oral argument on
February 23, 2017. (ECF No. 111.) A telephonic motion hearing
was set for April 4, 2017 at 9:30 a.m. (CST). (ECF No. 112.)
March 8, 2017, Plaintiffs sought leave to file a sur-reply on
the issue of class certification. (ECF No. 115.) Defendants
opposed the motion on March 10, 2017. (ECF No. 116.)
Defendants filed a response in opposition to Plaintiff's
sur-reply on March 10, 2017. (ECF No. 116.)
April 4, 2017, the Court held a telephonic Motion Hearing
regarding Plaintiffs' pending motions. (Min. Entry, April
4, 2017). Following the hearing, the Court entered an Order
Requiring Supplemental Briefing. (ECF No. 117.) The parties
filed timely supplemental briefs on April 18, 2017 (ECF No.
119) and May 2, 2017 (ECF No. 121).
Court addresses the pending motions. First, the Court
addresses the motion to certify class. Second, the Court
addresses the motions to appoint class counsel and certify
Lead Plaintiff ATRS as representative of the proposed class.
TO CERTIFY CLASS
Implied Prerequisites to Rule 23(a)
courts have implied two . . . prerequisites to class
certification that must be satisfied prior to even addressing
the requirements of Rule 23(a). . . .” City of
Fairview Heights v. Orbitz, Inc., 05-CV-840-DRH, 2008 WL
895650, at *2 (S.D. Ill. Mar. 31, 2008). First, “the
class must be sufficiently defined so that the class is
identifiable.” Id. (citing Alliance to the
End Repression v. Rochford, 565 F.2d 975, 977 (7th Cir.
1977)). Second, the named plaintiffs must fall within the
proposed class and have standing both at the time the
complaint is filed and at the time the class is certified.
Farm Labor Org. Comm. v. Ohio State Highway Patrol,
184 F.R.D. 583, 586 (N.D. Ohio 1998). With respect to the
first prerequisite, “the class description [must be]
sufficiently definite so that it is administratively feasible
for the court to determine whether a particular individual is
a member.” Wright, et al., supra, § 1760,
at 134. “A proposed class may be deemed overly broad if
it would include members who have not suffered harm at the
hands of the defendant.” Faralli v. Hair Today,
Gone Tomorrow, 1:06-CV-504, 2007 WL 120664, at *6 (N.D.
Ohio Jan. 10, 2007) (quoting Chaz Concrete Co. v.
Codell, 2006 WL 2453302, at *6 (E.D. Ky. Aug. 23,
2006)). Moreover, “the proposed class definition must
be sufficiently definite to ascertain class membership and
must not depend on a merits-based adjudication to determine
inclusion.” Schilling v. Kenton Cnty., Ky.,
No. CIV. A. 10-143-DLB, 2011 WL 293759, at *7 (E.D. Ky. Jan.
Rule 23(a) Requirements
Federal Rule of Civil Procedure 23(a), the Court may certify
a class only if:
(1) the class is so numerous that joinder of all members is
(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.
Fed. R. Civ. P. 23(a). “These four requirements -
numerosity, commonality, typicality, and adequate
representation - serve to limit class claims to those that
are fairly encompassed within the claims of the named
plaintiffs because class representatives must share the same
interests and injury as the class members.” In re
Whirlpool Corp. Front-Loading Washer Prods. Liab.
Litig., 722 F.3d 838, 850 (citing Wal-Mart Stores,
Inc. v. Dukes, 131 S.Ct. 2541, 2550 (2011)). “Rule
23 does not set forth a mere pleading standard. A party
seeking class certification must affirmatively demonstrate
his compliance with the Rule - that is, he must be prepared
to prove that there are in fact sufficiently numerous
parties, common questions of law or fact, etc.”
Dukes, 131 S.Ct. at 2551. “[I]f
Plaintiff's definition of the class is found to be
unacceptable, the court may construe the complaint or
redefine the class to bring it within the scope of Rule 23 .
. . .” 7A Charles Alan Wright, et al., Federal Practice
and Procedure § 1759, at 130-31 (3d ed. 2005).
23(a)(1) requires that a class be “so numerous that
joinder of all members is impracticable.” Fed.R.Civ.P.
23(a)(1). The Sixth Circuit has held that there is “no
specific number” that will or will not render joinder
impracticable. In re Am. Med. Sys., Inc., 75 F.3d
1069, 1079 (6th Cir. 1996). “[W]hile there is no strict
numerical test, ‘substantial' numbers usually
satisfy the numerosity requirement.” Daffin v. Ford
Motor Co., 458, F.3d 549, 552 (6th Cir. 2006) (citing
In re Am. Med. Sys., 75 F.3d at 1079).
23(a)(2) requires that there be “questions of law or
fact common to the class.” Fed.R.Civ.P. 23(a)(2). The
Supreme Court has held that “[c]ommonality requires the
plaintiff to demonstrate that the class members have suffered
the same injury.” Dukes, 131 S.Ct. at 2551.
“The interests and claims of the various Plaintiffs
need not be identical. Rather, the commonality test is met
when there is at least one issue whose resolution will affect
all or a significant number of the putative class
members.” Fallick v. Nationwide Mut. Ins. Co.,
162 F.3d 410, 424 (6th Cir. 1998) (quoting Forbush v.
J.C. Penney Co., 994 F.2d 1101, 1106 (6th Cir. 1993)).
23(a)(3) requires that the claims or defenses of the
representative parties be typical of the claims or defenses
of the class. Fed.R.Civ.P. 23(a)(3). A representative's
claim is typical if “it arises from the same event or
practice or course of conduct that gives rise to the claims
of other class members, and if his or her claims are based on
the same legal theory.” In re Am. Med. Sys.,
75 F.3d at 1082. “Typicality determines whether a
sufficient relationship exists between the injury to the
named plaintiff and the conduct affecting the class, so that
the court may properly attribute a collective nature to the
challenged conduct.” Sprague v. Gen. Motors
Corp., 133 F.3d 388, 399 (6th Cir. 1998) (citing In
re Am. Med. Sys., 75 F.3d at 1082). A class
representative is not typical “when a plaintiff can
prove his own claim but not ‘necessarily have proved
anybody else's claim.'” Beattie v.
CenturyTel, Inc., 511 F.3d 554, 561 (6th Cir. 2007)
(quoting Sprague, 133 F.3d at 399). “[A]
representative's claim need not always involve the same
facts or law, provided there is a common element of fact or
law.” Id. In Beattie, the Sixth
Circuit concluded that the named plaintiffs' claims were
typical when the plaintiffs alleged that Defendant billed for
a telephone service under ...