Opinion
CIVIL ACTION, NO. 00-1674, SECTION "N".
August 17, 2001
ORDER AND REASONS
Before the Court are (1) a Motion for Summary Judgment Seeking to Dismiss Counts I, II, and III as Time Barred filed by defendants Ruth U. Fertel, Inc.; Philip S. Brooks; William L. Hyde. Jr.; and James Ryder, Jr and (2) a Motion for Summary Judgment filed by defendant Ruth U. Fertel. For the following reasons, the defendants' motions are GRANTED IN PART and DENIED IN PART.
BACKGROUND
Plaintiff Ralph J. Giardina ("Giardina") was employed by defendant Ruth U. Fertel, Inc. ("RUFI") for fourteen years. He was hired as manager of the Broad Street Ruth's Chris Steakhouse restaurant in 1981, became the president of RUFI in 1993, served on the board of directors from its inception until August of 1995, and served as a consultant to RUFI for a period of ten months during 1994 and 1995.
In February 1994, the RUFI board of directors issued ten shares of stock to Giardina. In August 1995, RUFI bought back eight of those shares for $362,432.00 and bought out Giardina's consulting contract for approximately $500,000.00. Giardina sold his remaining shares, which had become 10,000 shares through a series of stock splits, back to RUFI in 1998 for $140,000.00.
Giardina claims that the defendants deceived him, breached their fiduciary duty, and violated federal securities laws by withholding information about the possible sale of RUFI, buying back his stock at a discounted value, and fraudulently inducing him to step aside as president of RUFI and give up his consulting contract. The defendants now move to dismiss several of Giardina's claims on the grounds that they have prescribed.
LAW AND ANALYSIS
The defendants contend that Giardina's claims for violations of the Securities and Exchange Act of 1934 and state law fraud, fraudulent inducement, and breach of fiduciary duty have all prescribed because Giardina learned about the alleged fraud by 1998 but did not file suit until 2000.
A. Section 10(b) and Rule 10b-S Violations
Giardina contends that the defendants violated Section 10(b) and Rule 10b-S of the Securities Exchange Act of 1934 by fraudulently failing to disclose material information in relation to his 1998 stock sale. Such a cause of action must be brought "within one year after the discovery of the facts constituting the violation and within three years after such violation." Lampf. Pleva. Lipkind. Prupis and Petigrow v. Gilbertson, 501 U.S. 350, 364 (1991), superseded by 15 U.S.C. 78 aa-1 (limitingLampf prescriptive period to prospective application and not retroactively to actions filed on or before June 19, 1991). The limitations period does not begin to run until the plaintiff discovers, or in the exercise of reasonable diligence should discover, the alleged fraudulent conduct. Jensen v. Snellings, 841 F.2d 600, 606 (5th Cir. 1988) (citing Breen v. Centex Corp., 695 F.2d 907, 911 (5th Cir. 1983)). Giardina seeks damages for three specific misrepresentations.
1. The Starwood Offer
First, Giardina claims that RUFI bought his last shares of stock in February 1998 without disclosing the existence of an offer by an outside investor to purchase the company, despite Giardina's repeated requests for such information. Specifically, he argues that the defendants failed to tell him about a letter sent in September 1997 from Starwood Capital Group ("Starwood") to RUFI's investment banking firm, Johnson Rice and Company ("Johnson Rice"), advising that Starwood would purchase 70% of RUFI's stock based on the company's approximate value of $110 million. However, in a deposition taken on May 16, 2001, Giardina admitted that Nick Bonura, RUFI's former director of construction, told him about the Starwood offer before Giardina's February 1998 stock sale. See Giardina Dep. at 124-126. Despite this admission, Giardina argues that summary judgment is inappropriate for three reasons.
Giardina first claims that his own testimony is unreliable because Bonura stated that "he could not recall any specific conversations with Giardina about Starwood and did not think he had any such conversations." Giardina Opp. Mem. at 12 (citing Bonura Dep. at 41). Giardina argues that Bonura's testimony casts doubt on his own statements and that summary judgment is inappropriate because the Fifth Circuit has "clearly indicated a reluctance to grant summary judgments on the issue of when a prescriptive period begins to run." Ward v. Succession of Freeman, 735 F. Supp. 692, 695 (E.D.La. 1990)(Mentz, J.) (citing In re Beef Industry Antitrust Litigation, 600 F.2d 1148, 1170 (5th Cir. 1979)). "Short of either an admission by the plaintiff of knowledge or a situation where the defendant's acts are public knowledge, few scenarios present the Court with circumstances where, as a matter of law, it can be said that the prescriptive period began on or about a certain day." Id. The Court finds that Giardina's argument fails even under this limited theory of summary judgment because Giardina clearly admitted that he knew about the Starwood offer in 1998:
Q. Did you specifically ask Mr. Hyde, Miss Fertel, Mr. Brooks, or Mr. Ryder if RUFI had been approached in connection with or was contemplating merging with or being purchased by another entity in January of 1998?
A. I-I knew at the time that they had gotten a letter from a company making an offer to purchase Ruth's Chris Steakhouse.
Q. Do you recall what company the letter was from?
A. Starwood.
Giardina Dep. at 124, 1. 9-16 and 126, 1. 4-6.
Second, Giardina submits that a disputed issue of fact exists because the letter Bonura saw may nor have been the same letter the defendants allegedly concealed. See Bonura Dep. at 41. In other words, Giardina claims that the defendants failed to disclose both (1) the existence of the Starwood offer and (2) Starwood's valuation of RUFI at $110 million as set forth in the September 1997 letter. He admits that he learned about the existence of the offer, but he asserts that both pieces of information were pertinent to his decision to sell his stock. The prescriptive period on this alleged fraud began to run when Giardina knew or should have known the fraudulent conduct. Jensen, 842 F.2d at 606. By his own admission, Giardina discovered the fraudulent scheme to conceal the Starwood offer in 1998. The Court finds that Giardina's knowledge of the existence of that offer put him on notice to inquire into the offer's value. Accordingly, even if Bonura did not tell Giardina about the 1997 letter, the prescriptive period still began to run in 1998 when Giardina learned about the offer itself.
Finally, Giardina attempts to raise a genuine issue of material fact through his own affidavit taken on July 14, 2001. In this affidavit Giardina swears that he did not learn of Starwood's letter of September 1997 until the trial of Earles v. Ruth U. Fertel. Inc., No. 99-866 (E.D.La. March 2, 2000). However, as the Court has already explained, regardless of whether or not Giardina saw that specific letter, he knew that the defendants were concealing Starwood's offer to buy the company because he "repeatedly inquired . . . whether RUFI had been approached in connection with, or was contemplating, merging with or being purchased by another entity" and the defendants "responded to Giardina's repeated inquiries in the negative." Compl. at ¶ 18 and 19. Since Giardina unequivocally admitted at his deposition that he knew about the Starwood offer prior to selling his stock in February 1988 and since he did not file suit for the alleged concealment of the Starwood offer until more than two years later on June 7, 2000, the Court finds that any cause of action relating to the alleged concealment of that offer has prescribed.
2. The Copp Negotiations
Giardina also claims that the defendants concealed their negotiations with Copp Ventures, L.L.C. about the possible acquisition of RUFI. The defendants argue that any cause of action based on this alleged concealment has prescribed because Giardina admitted that he learned of the Copp discussions in 1998. However, in his May 2001 deposition Giardina repeatedly stated that he could not remember whether he learned about the Copp negotiations in 1998 or 1999. Giardina Dep. at 153, 1. 14-15, 1.25; 154, 1. 11-14, 1.25. Since the defendants offer no evidence on this issue other than Giardina's equivocal testimony, the Court finds that a genuine issue of material fact exists as to whether his cause of action for fraudulent concealment of the Copp negotiations has prescribed.
3. The Madison Dearborn Offer
Although not specifically pled in his complaint, Giardina suggests that the defendants withheld the existence of an offer by Madison Dearborn to purchase RUFI. Defendant Fertel argues that Giardina discovered Madison Dearborn's interest during a shareholder's meeting before his 1998 stock sale. However, Giardina avers that the meeting was held after he sold his last shares of RUFI stock and that he was invited to attend because he still owned options on 10,000 shares. See Giardina Aff. at 2. Since neither party has identified the date of the shareholder's meeting, the Court finds that an issue of fact precludes summary judgment on the grounds of prescription.
4. The Johnson Rice Valuation
Finally, Giardina claims that the defendants concealed the true value of his stock when they bought it. In February 1998, Giardina sold his remaining shares of stock back to RUFI for $140,000.00. Giardina admits that, before he entered into the sale agreement, he reviewed the valuation letter prepared for RUFI by Johnson Rice:
Q. I'm gonna show you a letter from Johnson Rice to Ruth U. Fertel dated December 29, 1997, and ask you if you've ever seen this letter.
A. (Views document) I've seen this letter before, yes.
Q. At the time you sold your stock
A. Apparently —
Q. — prior thereto, did you see this correspondence?
A. Uh . . . apparently I did because I remember the $13.97.
Giardina Dep. at 103-104. Giardina further testified that "[y]ou always doubt" the valuation of a stock, but he accepted the price recommended by Johnson Rice anyway. Id. at 104. The defendants argue that Giardina's duty to investigate his "doubts" about the valuation arose when he learned of Johnson Rice's method in 1998, and that his cause of action for the alleged fraudulent concealment of the true value prescribed before he filed suit in 2000.
However, although he may have had "doubts" about whether Johnson Rice's valuation was accurate in 1998, Giardina claims that he did not suspect he was defrauded until the Earles trial in February 2000, when he learned that the December 29, 1997 valuation was prepared for the estate planning purposes of one of Ruth Fertel's sons and that the $13.97 share price reflected a 45% discount from each share's full value.
The Court recognizes that Giardina was not free to ignore "storm warnings" that would alert him to a possibility of fraud and that he had a duty to investigate his stock valuation once he learned of facts "which would cause a reasonable person to inquire further." Jensen v. Snellings, 841 F.2d 600, 607 (5th Cir. 1988). However, the Court does not find that Giardina's recognition that people "always doubt" the valuation of their stocks equates to a realization that he was being defrauded. Accordingly, Giardina's cause of action for fraud in relation to his stock valuation has not prescribed.
B. Fraudulent Inducement
In Count II of his Amended Complaint, Giardina alleges that the defendants fraudulently induced him to step aside as president and accept a five year consulting agreement with RUFI instead of a ten year contract. The defendants allegedly told Giardina that, in order to more aggressively pursue an initial public offering (I.P.O.), RUFI needed a president with more I.P.O. experience and could not be tied down to a long-term contract with any one employee. However, after making these representations, the defendants allegedly failed to take any steps toward an I.P.O.
Under Louisiana's doctrine of contra non valentem, prescription does not begin to run "unless a plaintiff either knew or should have known of a cause of action." Bergeron v. Pam Am. Assurance Co., 731 So.2d 1037, 1042 (La.App. 4th Cir. 1999). The defendants assert that Giardina learned of their alleged fraudulent inducement during his first stock sale in 1995, when RUFI president Tom Cangemi told Giardina that the company was not going public. In his May 2001 deposition, Giardina stated that in 1995 Cangemi "did not indicate to me that the company was ever gonna go to the public marketplace. Nor did I believe that the Board of Directors was directing the new president and C.E.O. to take it to an I.P.O. offer." Giardina Dep. at 71. Giardina now claims that his belief in 1995 that RUFI was not going to go public was "mistaken" and that "its efforts [toward an initial public offering] were likely continuing through mid-1999." Giardina Opp. Mem. at 20. Accordingly, he asserts that his fraudulent inducement claim did not accrue until 1999 when the defendants abandoned their efforts toward an I.P.O. and Giardina realized that he stepped aside as president for false reasons.
The prescriptive period for fraud begins to run when the plaintiff knew or should have known of a cause of action. See Bergeron, 731 So.2d at 1042. The defendants allegedly told Giardina to step aside as president so that the company would have a better chance of going public, and Giardina claims that the defendants defrauded him because they never intended to take the company public. The Court finds that when Cangemi indicated to Giardina in 1995 that the company was not ever going public, Giardina knew or should have known that the defendants' reason for asking him to step down as president and take a consulting contract were false. Accordingly, in 1995 Giardina knew of the defendants' alleged fraudulent inducement. That the defendants pursued a possible I.P.O. until 1999 is irrelevant. Since Giardina knew about the alleged fraud in 1995 and did not file suit until 2000, his claim for fraudulent inducement has prescribed.
"In light of Giardina's allegation that the defendants continued to pursue an I.P.O. until 1999, the Court is puzzled by Giardina's cause of action for fraudulent inducement. Giardina claims that the defendants lied to him in 1994 when they asked him to step aside as president for the allegedly false reason that they wanted to more aggressively pursue an I.P.O. However, he also asserts that his claim has not prescribed because the defendants did in fact pursue an I.P.O. until 1999. Although the substance of Giardiana's cause of action is not presently before the Court, the Court finds that this inconsistency casts serious doubt on the viability of his claim.
C. State Law Fraud, Misrepresentation and Negligence
In Count III Giardina alleges that the defendants breached their state law duties of care by failing to relay to him (1) the information contained in the Starwood letter, (2) the information pertaining to the Copp Group, and (3) the true value of his RUFI stock. These are the same claims for which Giardina seeks damages under the Securities and Exchange Act of 1934, and under Louisiana law they are subject to the same one-year prescriptive period. See La. Civ. Code art. 3492. Accordingly, for the reasons set forth in the Court's discussion of Giardina's Securities and Exchange Act claims, Giardina's cause of action concerning the Starwood offer has prescribed, but his causes of action concerning the Copp Group and the stock valuation have not.
D. State Law Breach of Fiduciary Duty
Finally, in Count IV Giardina claims that the defendants breached their fiduciary duty in failing to disclose information relating to the sale of his stock. Under Louisiana law, breach of fiduciary duty claims are governed by the general ten-year prescriptive period under Civil Code article 3499. See Simmons v. Templeton, 723 So.2d 1009, 1012 (La.App. 4 Cir. 11/10/98). Accordingly, Giardina's claim for breach of fiduciary duty has not prescribed.
CONCLUSION
For the reasons stated above, IT IS ORDERED that:
(1) the defendants' Motions for Summary Judgment on Counts I and III is GRANTED as to the plaintiffs claims concerning the Starwood offer and DENIED as to those claims concerning the Copp negotiations, the Madison Dearborn offer, and Giardina's stock valuation;
(2) the defendants' Motion for Summary Judgment on Count II is GRANTED; and
(3) the defendants' Motion for Summary Judgment on Count IV is DENIED.
New Orleans, Louisiana, this 17th day of August 2001.
EDITH BROWN CLEMENT, CHIEF JUDGE UNITED STATES DISTRICT COURT