Opinion
No. C 97-1254 SI
March 22, 2002
ORDER GRANTING TIMOTHY DONMOYER'S MOTION FOR SUMMARY JUDGMENT; DENYING DEFENDANTS' MOTION
On March 15, 2002, the Court heard argument on defendant Donmoyer's motion for summary judgment. Having considered the arguments of counsel and the papers submitted, the Court hereby GRANTS defendant's motion for the reasons discussed below.
A separate motion, for entry of final judgment as to certain defendants in whose favor summary judgment was previously granted, was unopposed by plaintiff However, because the Court's determination in favor ofdefendant Donmoyer is dispositive of this action, the other defendants' motion is DEMED as moot.
BACKGROUND
A. Procedural BackgroundThis action arises out of the 1996 sale of outdoor advertising billboards by plaintiff Richard Traverso ("Traverso") to Eller Media Company ("Eller"). The agreement of sale provided that any dispute arising out of the agreement would be submitted to binding arbitration.
The action was filed in state court in early 1997, and removed to this court on April 9, 1997. On April 16, 1997, this Court stayed the case pending a final determination in the arbitration proceeding between Traverso and Eller. At the conclusion of the arbitration proceedings, the arbitrator ruled against Traverso on every claim presented. The arbitration award was confirmed and judgment entered thereon by the Superior Court of California, County of San Francisco on March 13, 2000.
On December 15, 2000, this Court lifted its stay on this case. The operative complaint (the Second Amended Complaint ("SAC"), filed July 11, 2000) named several defendants including Biter, EMC (Eller's parent company), and various directors and officers of Biter. The complaint also named as defendants Heliman Friedman Associates and its officers. Defendants answered the Second Amended Complaint on January 26, 2001.
Although only Biter had been a party to the underlying contract of sale, and thus to the arbitration, the various Biter director/officer defendants moved for summary judgment based on the res judicata effect of the arbitration decision, contending that they stood in privity with Biter for purposes of the litigation. In an order dated July 11, 2001, this Court granted summary judgment as to alt defendants except one, finding that they were in privity with Biter and that this action was barred against them by res judicata. However, the Court found that Timothy Donmoyer, who was Chief Financial Officer of Biter and EMC during the relevant time frame, and who owned stock and stock options in EMC, was not in privity with the other defendants for the purposes of res judicata, based on various statements made by the arbitrators in their decision. The Court therefore denied summary judgment as to Donmoyer.
The Second Amended Complaint asserts the following causes of action against Donmoyer: (1) violation of Rule 10b-5 of the 1934 Securities exchange Act; (2) material misrepresentation in securities transactions under California Corporations Code §§ 25401,25501 and 25504; (3) liability for materially assisting in fraud and misrepresentation in violation of Cal. Corp. Code § 25401, 25501, 25504; (4) negligent misrepresentation; (5) fraudulent concealment of fact; (6) breach of fiduciary duty; and (7) conspiracy to defraud. SAC ¶¶ 76-170.
On January 11, 2002, defendant Donmoyer moved for summary judgment as to alt of plaintiffs claims against him. Donmoyer's motion is presently before this Court.
Donmoyer moves to strike Traverso's entire opposition brief because defendant received it three days late, and portions of the Traverso and Bshoo declarations as inadmissible. The Court DENIED the motion and overrules the objection.
B. Relevant Factual Background
The transaction underlying this lawsuit is the sale of advertising billboards by plaintiff Traverso to Eller in return for a Promissory Note convertible into stock of Eller Media. Traverso claims that his decision to enter into the agreement was based upon assurances by "individuals at Eller" that Eller's sole business plan was to conduct an Initial Public Offering (IPO) in which Traverso would participate. Traverso Decl. at ¶ 4. The individual at Eller with whom Traverso communicated in October 1996 was William Hooper, president of EMC's Northern California Division and president of Eller. Id.; SAC at ¶ 12. Traverso claims that he called off negotiations on October 16, 1996, but had his interest revived two days later when Hooper called to report that Eller "had just announced its plan to have an IPO, which Hooper called `the deal of a lifetime' for me." Traverso Decl. at ¶ 4. According to Traverso, Hooper reported Traverso's interest "to the Eller headquarters in Phoenix." Id.
Meanwhile, Michael Garstin, a representative of Clear Channel, contacted Donmoyer in the summer of 1996 concerning a possible acquisition of Eller by Clear Channel. Traverso Decl. at ¶ 11; Campbell Decl. Ex. I ("Garston Depo.") at 15. Garstin and Donmoyer communicated frequently by phone from the summer of 1996 onward. Traverso Decl. at ¶ 11. In early October 1996, a "Confidentiality Agreement" was signed by Donmoyer on behalf of Eller, and by Clear Channel. Traverso Decl. at ¶ 12. Donmoyer provided non-public financial information about Eller to Garstin under this agreement. Id. Donmoyer did so without seeking or receiving authorization from Eller. SAC at ¶ 36.
On October 23, 1996, the principals of Eller and Clear Channel met in Arizona in an event characterized by defendants as a "seminar" on Eller. Traverso Decl. at ¶ 13; Campbell Decl. Ex. J ("Mays Testimony") at 804-07,810. Clear Channel's CFO, Randall Mays, testified that he left the meeting with "a very distinct impression that they [Eller's representatives] were not interested in having further discussions." Mays Testimony at 810-11. After this meeting, Donmoyer encouraged Garstin to have Clear Channel make an acquisition proposal to Eller, to inspire Eller's interest in an acquisition. Traverso Decl. at ¶ 15; Eshoo Decl. at Ex. J ("Donmoyer Depo.") at ¶. 2015-2016; Campbell Decl. at Ex. J, 827. Donmoyer testified that he pursued the Clear Channel acquisition primarily to promote his own financial interests, and secondarily to further the interests of Eller. Donmoyer Depo. at 1979.
Traverso met in person with Hooper on October 31, 1996. According to Traverso, at that meeting Hooper twice offered him an additional $1 million if he would accept a non-convertible note in exchange for his billboards, but Traverso refused. Traverso Decl. at ¶¶ 4,6. Donmoyer was not present at this meeting, but Traverso "believed, based upon comments of Mr. Hooper, that information was being faxed to Mr. Donmoyer" during the meeting. Traverso Decl. at ¶ 6. At that meeting, Traverso signed a binding Memorandum Agreement on the advice of Paul Meyer, vice president and general counsel to EMC and Eller. Traverso Decl. at ¶ 7; SAC at ¶ 9. Traverso states that "Donmoyer was on telephone calls with Hooper" during the negotiations and did not indicate to Traverso that Clear Channel might acquire Eller. Traverso Decl. at ¶ 7.
A second meeting took place on November 6, 1996 in Arizona. Traverso Decl. at ¶ 8. Present at this meeting were Traverso and his attorneys, George Bshoo and Joseph Forest; and "various representatives" of Eller Media, including Meyer and Donmoyer. Id. Traverso claims that Meyer assured him that an IPO registration statement would be filed soon with the SEC. Id. (An S-1 was eventually filed on December 11, 1996. Def's Brief at 6:16-17.) Traverso testified that Donmoyer came in and out of the meeting, getting papers and taking papers out of the room. Campbell Decl. Ex. D ("Traverso 2001 Depo") at ¶. 131,230-31. Traverso does not allege that Donmoyer made any assurances, or any statements at all, to Traverso but claims instead that Donmoyer was the "primary moving force behind the acquisition" and should have disclosed to Traverso, "at the November 6, 1996 meeting and thereafter," the existence of a confidentiality agreement between Eller and Clear Channel, and the possibility of Clear Channel acquiring Eller. Traverso Decl. at ¶¶ 7, 8, 24; Traverso 2001 Depo. at ¶. 154-55.
Clear Channel made an acquisition offer to eller on November 18 or 19, 1996. Traverso DecI. at ¶¶ 15,18; Def's Brief at 6:6-7. According to Mays, this offer was an attempt to "get [Eller's] attention," and a "fishing expedition" in an attempt to begin a dialogue between Eller and Clear Channel. Mays Testimony at 82,831,837. Within a week, Eller rejected the proposal and communicated to Clear Channel that it would not put forth a counteroffer. Id. at 846. From this reaction, Clear Channel surmised that Eller was not interested in an acquisition by Clear Channel at any price. Id. at 850. After Eller rejected the offer, Donmoyer told Garstin that Eller was not interested in the offer. Garstin Depo. at 111-12. Garstin believed that Eller was not interested because it was pursuing the IPO. Id.
On December 9, 1996, Traverso signed an Asset Purchase Agreement ("APA") effecting the sale of his billboards. Traverso Decl. at ¶¶ 4,5. A closing of the Traverso-Eller deal took place on January 3, 1997. Traverso Decl. at ¶ 18. On February 25, 1997, it was publicly announced that Clear Channel would purchase the outstanding shares of EMC, and the deal was closed on April 10, 1997. Def's Brief
at 6:20-22.
LEGAL STANDARD
Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. Civ. P. 56(c). The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317,323,106 S.Ct. 2548,2553 (1986). The moving party, however, has no burden to negate or disprove matters on which the non-moving party will have the burden of proof at trial. The moving party need only point out to the Court that there is an absence of evidence to support the non-moving party's case. See id. at 325,106 S.Ct. at 2554.
The burden then shifts to the non-moving party to "designate `specific facts showing that there is a genuine issue for trial.'" EL at 324, 106 S.Ct. at 2553 (quoting Rule 56(e)). To carry this burden, the non-moving party must "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Blectric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574,586,106 S.Ct. 1348,1356 (1986). "The mere existence of a scintilla of evidence . . . will be insufficient; there must be evidence on which the jury could reasonably find for the [non-moving party]." Anderson v. Liberty lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 2519 (1986).
In deciding a motion for summary judgment, the evidence is viewed in the light most favorable to the non-moving party, and all justifiable inferences are to be drawn in its favor. See id. at 255,106 S.Ct. at 2513. "Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge [when she] is ruling on a motion for summary judgment."Id.
DISCUSSION
The apparent absence of communication between Traverso and Donmoyer raises questions as to whether Donmoyer made misrepresentations or omissions to Traverso, and whether Donmoyer owed a duty toward Traverso. The Court examines these questions as to the federal and state statutes in turn, then addresses the issues of materiality and secondary liability.A. Misrepresentations and Omissions Under Federal Securities Law
Rule 10b-5, implementing § 10b of the Securities Bxchange Act of 1934, states:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.17 C.F.R. § 240.10b-5.
Traverso's claim against Donmoyer is that Donmoyer failed to make material disclosures to Traverso concerning the possibility that Eller would be acquired by Clear Channel. See, e.g., Pl.'s Oppo. at 3:22-27. In his motion for summary judgment, Donmoyer points out that Rule 10b-5 requires that, to create liability, a material omission must be in the context of an affirmative statement. aee, 17 C.F.R. § 240. 10b-5(b) (making it unlawful to "omit to state a material fact necessary in order to make the statements made . . . not misleading"). Donmoyer argues that the absence of any affirmative statement by Donmoyer to Traverso requires the grant of summary judgment for Donmoyer.
It is true that subsection (b), by its own terms, operates only if some statement is made. See, Alan R. Bromberg Lewis D. Lowenfels, Bromberg and Lowenfels on Securities Fraud Commodities Fraud ("Bromberg Lowenfels") (2nd Ed. 2001), § 2.6(2),51. Total silence, however, may violate subsections (a) or (c), because it may constitute a "device, scheme, or artifice to defraud" or an "act, practice, or course of business which operates or would operate as a fraud or deceit." Id. Because Traverso's complaint asserts all subsections of Rule 10b-5 against Donmoyer and the other defendants, Donmoyer cannot rely upon the language of subsection (b) alone as a basis for dismissal.
The only other basis for Donmoyer's argument for dismissal based on the absence of a representation is a factually dissimilar case involving an allegation of common law fraud. Lee Def's Brief at 14:20-15:13 (citingMoore v. Brewster, 96 F.3d 1240 (9th Cir. 1996)). Defendant's motion for summary judgment of plaintiffs federal securities law claim based on the absence of an affirmative statement is therefore DENIED.
B. Absence of Duty Under Rule 10b-5 and State Law
In the absence of an affirmative representation by defendant, a plaintiff asserting a claim under Rule 10b-5 claim must demonstrate that the defendant had a duty of disclosure to defendant. Sees, e.g., Monroe v. Huges, 31 F.3d 772,775 (9th Cir. 1994). In particular, an allegation of nondisclosure must be founded on a duty to speak. See Chiarella v. United States, 445 U.S. 222,235 (1980). Traverso argues that Donmoyer's position in Eller gave rise to a duty on Donmoyer's part to disclose his knowledge of a possible acquisition by Clear Channel to Traverso, based on either on Donmoyer' s insider status or on a special relationship to Traverso. See Pl.'s Oppo. at 16:6-21:22.
Turning first to Traverso s insider status theory, which is supported in an undefined way by citation to cases involving prohibited insider trading, the Court finds that it cannot stand because Donmoyer was not engaged in insider trading. For Traverso's theory to survive summary judgment, Traverso would have to present some evidence that Donmoyer traded in Eller securities on the basis of material, nonpublic information. See United States v. O'Hagan, 521 U.S. 642, 669 (1997);Chiarella, 445 U.S. at 231. Traverso does not allege that Donmoyer traded in Eller securities, only that he profited from an increase in their value as a result of the Clear Channel acquisition. See, e.g., Pl.'s Oppo. at 17:23-25 ("Donmoyer benefitted handsomely form the eventual acquisition of Eller by Clear Channel.").
Nor does Traverso raise a material issue as to the existence of special relationship giving rise to a duty. To sustain such a § 10b-5 claim, a plaintiff must identify a relationship between the parties which could give rise to a duty of disclosure. Chiarella, 445 U.S. at 231. The Supreme Court has rejected a "parity of information" interpretation of securities laws in which every instance of financial unfairness arising from unequal information constitutes a violation of § 10b. Id. at 233. Traverso must show that Donmoyer was his agent, or his fiduciary, or someone in whom Traverso had placed his trust and confidence. Id. Traverso has not alleged, much less shown, such a relationship. The only contacts Traverso alleges with Donmoyer are that Traverso believed Hooper to be in communication with Donmoyer during the October 31, 1996 meeting, and that both Traverso and Donmoyer were present at the meeting of November 6, 1996. Traverso Decl. at ¶ 6; Traverso 2001 Depo at 131,230-31. No reasonable jury could conclude that these facts give rise to the requisite duty under federal securities law.
The cases upon which Traverso attempts to rely are distinguishable from the instant case, because they involve a duty arising between a corporation's officers and its shareholders. See, e.g., Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972); Speed v. Transamerica Corp., 99 F. Supp. 808 (D.Del. 1951). Traverso was not a shareholder of Eller during the relevant time frame.
Finding no material issue of fact as to a duty owed by Donmoyer to Traverso, the Court GRANTS defendant's motion for summary judgment on plaintiffs federal securities law claims. For the same reasons, the Court GRANTS defendant's motion to dismiss plaintiffs state law claim for breach of fiduciary duty. The existence of a fiduciary relationship is, self-evidently, an essential element of a cause of action for breach of fiduciary duty. See, e.g., Oates v. Lincoln, 93 Cal.App.4th 25, 34 (2001). Traverso has shown no such relationship between himself and Donmoyer. The Court also GRANTS summary judgment as to plaintiffs sixth cause of action alleging that Donmoyer committed fraudulent concealment by failing to inform Traverso of Donmoyer's negotiations with Clear Channel and the possibility that an acquisition would result from those discussions. SAC at ¶¶ 138-45. An essential element of a cause of action for fraudulent concealment is a duty to disclose material facts.Lovejoy v. ATT Corp., 92 Cal.App.4th 85, 92-96 (2001).
C. Misrepresentations and Omissions Under State Law
The complaint alleges causes of action under California Corporations Code sections 25401, 25501 and 25504. The language of section 25401 resembles that of 10b-5(b):
It is unlawful for any person to offer or sell a security in this state or buy or offer to buy a security in this state by means of any written or oral communication which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.
Cal. Corp. Code § 25401. Section 25501 describes a suit of rescission or damages available to the victim of a violation of § 25401, and § 25504 describes joint and several liability under § 25401. Cal. Corp. Code §§ 25501, 25504.
As defendant points out, Traverso asserts no communication whatsoever made to him by Donmoyer. DeL's Brief at 9:20-9:24. Traverso's claim against Donmoyer is that Donmoyer was totally silent. See Traverso 2001 Depo at 208:16-18. This conduct does not transgress § 25401, which requires some affirmative statement. Cal. Corp. Code § 25401; Lynchs v. Cook, 148 Cal.App.3d 1072, 1088 (1983). Donmoyer's motion for summary judgment as to Traverso's claims against him under California Corporations Code sections 25401,25501 and 25504 is therefore GRANTBD.
The Court GRANTS defendant's motion for summary judgment as to plaintiffs state law claim for negligent misrepresentation for the same reasons. For a cause of action for negligent misrepresentation, representation is an essential element. See Byrum v. Brand, 219 Cal.App.3d 926, 942 (1990). Plaintiff has shown no representation, thus summary judgment is appropriate as to this claim.
D. Lack of Materiality
Defendants also make a strong showing that the information Donmoyer possessed during the relevant time period does not meet the objective standard for materiality. Summary judgment may properly be granted based on lack of materiality. See, e.g., MeGonigle v. Combs, 968 F.2d 810,817 (9th Cir. 1992) (affirming summary judgment in favor of defendants where "no rational jury could find the comparative figures [in the prospectus] to have been material in light of their openly hypothetical nature and the specific disclaimers" in the document), cert. dismissed, 506 U.S. 948 (1992).
Materiality is measured, under federal law, by balancing the magnitude of the corporate event in question and the likelihood of its occurrence.Basic v. Levinson, 485 U.S. 224,238 (1987). A fact
is material if "there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix' of information made available." Id. at 231-32. The materiality standard under state law is identical to that under federal law. McCormick v. Fund American Companies, Inc., 26 F.3d 869 (9th Cir. 1994). Applying this standard to the instant case, the abandonment of a planned IPO and acquisition by another corporation are undeniably corporate events of great magnitude. However, uncontroverted evidence on the record establishes that, prior to Traverso signing the APA, there appeared to all concerned to be little to no possibility that these events would occur. Clear Channel had made a tentative offer to BIler that BIler had quickly and unreservedly rejected. Clear Channel's executives were left with the impression that Eller was totally uninterested in doing business with Clear Channel, and Donmoyer confirmed to Garstin that this was the case. Based on this undisputed record, the Court has little trouble finding that Donmoyer was not in possession of material information prior to the signing of the APA.
E. Secondary Liability Under Securities Law and Common Law Conspiracy
A showing of derivative liability for those aiding and abetting or controlling persons who commit securities fraud requires a showing of a primary violation. See In re Worlds of Wonder Securities Litigation, 35 F.3d 1407,1428 (9th Cir. 1994) (federal securities law); Lubin v. Sybedon Corp., 688 F. Supp. 1425 (S.D. Cal. 1988) (state securities law). Traverso's claims against the other defendants in this action were dismissed by this Court's order of July 11, 2001. Because Traverso cannot make the required showing of a primary violation, defendant's motion for summary judgment as to derivative liability under federal and state securities law is GRANTBD.
Likewise, a conspiracy claim brought under California law requires, interalia, a showing of the formation of a conspiracy. See, e.g., Duncan v. Stuetzle, 76 F.3d 1480,1490 (9th Cir. 1996). Plaintiff makes no factual allegations supporting the formation of a conspiracy; indeed, his claims against the other defendants in this action have been dismissed. Moreover, plaintiff's opposition to the present motion for summary judgment makes no argument in support of his conspiracy claim. Finding that no material issue exists as to the formation of a conspiracy, the Court GRANTS defendant's motion to dsmiss this cause of action.
CONCLUSION
For the foregoing reasons, the Court GRANTS defendant Donmoyer's motion for summary judgment. The Court DENIED as moot the other defendants' motion for entry of partial judgment. [Docket #150,151]