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Kasper v. AAC Holdings, Inc.

United States District Court, M.D. Tennessee, Nashville Division

July 14, 2017

DR. JOSEPH F. KASPER, individually and on behalf of all others similarly situated, Plaintiff,



         Order 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.)

         For the 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.)

         The 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 Class Representative.

         I. BACKGROUND

         A. Factual Background

         This 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[1]-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.)

         AAC 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 n.3.)

         On 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.)

         AAC went public on October 1, 2014, [2] 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.)

         On July 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.)

         Also on 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.)

         “[O]n 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 merit.'” (Id.)

         On 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.)

         On 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.)

         B. Procedural Background

         On 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.)

         On February 29, 2016, Plaintiffs filed an Amended Complaint for consolidated class actions. (ECF No. 50.)

         On 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.)

         On July 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.)

         On 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. 90.)

         The 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 representative.

         On 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.)

         Plaintiffs 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.)

         On 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.)

         On 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).

         The 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.



         A. Legal Standard

         1. Implied Prerequisites to Rule 23(a)

         “[The] 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. 27, 2011).

         2. Rule 23(a) Requirements

         Under 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 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.

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).

         Rule 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).

         Rule 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)).

         Rule 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 ...

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