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Beezley v. Fenix Parts, Inc.

United States District Court, N.D. Illinois, Eastern Division

June 26, 2018

AMANDA BEEZLEY, Individually, and on Behalf of All Other Similarly Situated. Plaintiff,
v.
FENIX PARTS, INC., et al., Defendants.

          OPINION AND ORDER

          CHARLES RONALD NORGLE, JUDGED UNITED STATES DISTRICT COURT

         Plaintiff Amanda Beezley (''Plaintiff'), individually, and on behalf of all others similarly situated, brings this action against Defendants Fenix Parts, Inc. ("Fenix"), Kent Robertson ("Robertson"), Scott Pettit ("PettiC"), BMO Capital Markets Corp. ("BMO Capital"), Stifel, Nicolaus & Company, Inc. ("Stifel"), BB&T Capital Markets C'BB&T"), and Barrington Research Associates, Inc. ("Barrington Research"), for alleged violations of § 10(b) and § 20(a) of the Securities Exchange Act of 1934, codified at 15 U.S.C. § 78 ("Exchange Act") and § 11 and § 15 of the Securities Act of 1933, codified at 15 U.S.C. § 77 ("Securities Act"). Before the Court is Defendants BMO Capital, Stifel, BB&T, and Barrington Research's (collectively "Underwriter Defendants") motion to dismiss Count I of Plaintiff s Amended Complaint because the applicable statute of limitations has expired. For the reasons stated, the motion is granted.

         I. BACKGROUND

         This is a putative federal securities class action. Plaintiffs are all persons and entities who purchased shares of Fenix securities: (1) in Fenix's initial public offering on May 15, 2015 (the "IPO"); and/or (2) on the public market between May 15, 2015 and June 28, 017 (the "Class Period"). Fenix is incorporated in Delaware and headquartered in Westchester, Illinois. Robertson was the Chief Executive Officer and director of the Company and Pettit was the Chief Financial Officer of Fenix. Underwriter Defendants served as underwriters of the Company's IPO-each received an underwriting discount plus reimbursement for reasonable out-of-pocket expenses.

         Fenix was a recycler and reseller of original automotive products and formed by merging eight different companies (the "Founding Companies"). In determining the aggregate consideration to be paid by Fenix, Fenix did not obtain independent valuations, appraisals, or fairness opinions to support the consideration that it agreed to pay for the Founding Companies. Fenix relied solely on Robertson and Pettit to negotiate with the Founding Companies-both of whom were hired by the owners of the Founding Companies to start Fenix. To fund the acquisitions, company officers decided to take Fenix public. Plaintiff alleges that initially Fenix wanted to go public at $10.00 per share, but was forced to open at $8.00 per share due to lack of interest.

         Plaintiff alleges that in order to raise investor interest in the IPO, Robertson and Pettit misrepresented to potential investors that Fenix would acquire an additional ten to fifteen companies in the next two years, one to three per quarter. To help acquire ten to fifteen companies and continue as a going concern, Fenix entered into an agreement with BMO Harris Bank N.A., for a proposed $35, 000, 000 senior secured credit facility (''Credit Facility"). Plaintiff alleges that the value of Fenix"s inventory significantly affected Fenix's ability to withdraw under the Credit Facility.

         Fenix"s offering document and registration statement reported that as of December 31, 2014, the consolidated inventories were valued at $42, 190, 000 and the goodwill was valued at $58, 879, 000. Goodwill is an intangible asset which represents the excess of the amount a company pays for its acquisitions over the fair value of the acquired net assets. Fenix allegedly performed goodwill impairment tests annually during the fourth quarter and between annual tests. Goodwill impairment occurs when a reporting unit's goodwill is in excess of its fair value.

         Plaintiff alleges that Fenix did not have adequate internal controls or procedures to prepare, document, or review areas of significant judgments and accounting estimates, including: purchase accounting; contingent consideration; potential goodwill impairment; and inventory valuation. Plaintiff argues that as a result of Fenix's lack of adequate internal controls and procedures, it was unable to make an accurate inventory valuation. Plaintiff argues that such inability is evidenced by Fenix's disclosure of $14.88 million loss of value in its inventories within a year of the registration statement. Furthermore, despite the alleged substantial decrease in inventory value, Fenix stated that its goodwill value had increased $24, 792 million to $83, 671 million over the same time period.

         On March 30, 2016, and April 4. 2016, Fenix made a filing with the SEC which Plaintiff admits '"partially revealed to the market that Fenix was having liquidity issues with their Credit Facility." Pl."s Compl. ¶¶ 163-167. On April 15, 2016, Plaintiff admits that, during an Earning Conference Call, Robertson made statement which "partially revealed to investors that Fenix was in violation of the appropriate [generally accepted accounting principles ("GAAP")] and struggling with its internal controls." Id. at ¶ 184. On May 23, 2016, Fenix filed a report with the SEC stating it was unable to timely file its quarterly form due to accounting issues, including a potential goodwill impairment and inventory valuation. One June 28, 2016, Fenix filed its quarterly report for the period ending March 30, 2016, the report disclosed that Fenix was taking a goodwill impairment charge of $43.3 million to reduce the carrying value of goodwill. Plaintiff admits that this disclosure also "partially revealed the truth about Fenix's improper accounting policies and inability to adequately account for goodwill and inventory." Id. at ¶ 199.

         On July 11, 2016, Fenix filed a report with the SEC announcing the company dismissed its public accounting firm and replaced them with Crowe Horwath LLP. Plaintiff states this announcement revealed to the market that Fenix was having significant difficulties with its internal controls and evaluation. On August 16, 2016, Fenix filed a quarterly report with the SEC which "partially revealed to investors that Fenix was in violation of the Credit Facility and would no longer be able to borrow under it." Id. at ¶ 217. Finally, on August 23, 2016, Fenix filed a form with the SEC which Plaintiff alleges "partially revealed that Fenix was in breach of covenants in the Credit Facility." Id. at ¶ 220. By August 24, 2016, Fenix's original IPO value of $8.00 per share had decreased to an intra-day low of $4.63-almost half the original value per share.

         Subsequently, Plaintiff alleges that the SEC began an investigation into Fenix's change of auditors, the recent goodwill impairment charge, the effectiveness of its internal control over financial reporting, and its inventory valuation methodology. Plaintiff alleges that these events result a violation of Fenix" s Credit Facility which created substantial doubt to Fenix's ability to continue as a going concern and on June 29, 2017, Fenix was delisted from NASDAQ. Plaintiff filed her Amended Complaint August 28, 2017, naming the Underwriter Defendants as defendants under Count I. The Underwriter Defendants now move to dismiss Plaintiffs claim, arguing that the claim is barred by the applicable statute of limitations.

         II. ANALYSIS

         A. Standard of Review

         A motion under Rule 12(b)(6) tests the sufficiency of the complaint under the plausibility standard, Bell Atlantic Corporation v. Twombly, 550 U.S. 544, 570 (2007), not the merits of the suit. Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990) (citation omitted). "[A] plaintiffs claim need not be probable, only plausible: *a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very remote and unlikely.'" Indep. Trust Corp. v. Stewart Info. Servs. Corp., 665 F.3d 930, 935 (7th Cir. 2012) (quoting Twombly, 550 U.S. at 556). '"A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.' To rise above the 'speculative level' of plausibility, the complaint must make more than '[t]hreadbare recitals ...


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