Opinion
Civil Action No. 00-1674 Section "N"
August 29, 2001
ORDER AND REASONS
Before the Court are (1) defendants Ruth U. Fertel, Inc.'s; Philip S. Brooks'; William L. Hyde, Jr.'s; and James E. Ryder, Jr.'s Motion for Summary Judgment and (2) defendant Ruth U. Fertel's Motion for Summary Judgment. 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 duties, and violated federal securities laws by (1) withholding information about the possible sale of RUFI, (2) buying back his stock at a discounted value, and (3) fraudulently inducing him to step aside as president and give up his consulting contract. The Court has already ruled that Giardina's claims for fraudulent concealment of an offer by Starwood Capital Group ("Starwood") to purchase RUFI and for fraudulent inducement have prescribed. The defendants now seek summary judgment on Giardina's remaining claims.
STANDARD OF REVIEW
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 judgment as a matter of law." FED. R. Civ. P. 56(c). A genuine issue of fact exists where the evidence is such that a reasonable jury could return a verdict for the non-moving party. See Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 248 (1986). The party seeking summary judgment bears the burden of demonstrating an absence of evidence to support the non-movant's case. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the opposing party bears the burden of proof at trial, the moving party need not submit evidentiary documents to properly support its motion, but need only point out the absence of evidence supporting the essential elements of the opposing party's case. See Saunders v. Michelin Tire Corp., 942 F.2d 299, 301 (5th Cir. 1991). To oppose a motion for summary judgment, the non-movant must set forth specific facts to establish a genuine issue of material fact and cannot merely rest on allegations and denials. See Celotex, 477 U.S. at 324. Factual controversies are to be resolved in favor of the non-moving party. See Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994).
LAW AND ANALYSIS
The defendants seek summary judgment on Giardina's claims for federal securities violations and for state law breach of contract, breach of fiduciary duty, fraud and negligence.
A. Securities Fraud
In Count I of his complaint, Giardina claims that the defendants violated Rule 10b-5 of the Securities Exchange Act of 1934. To obtain damages under Rule 10b-5, Giardina must prove "(1) a misstatement or omission (2) of material fact (3) occurring in connection with the purchase or sale of a security, that (4) was made with scienter and (5) upon which the plaintiff justifiably relied, (6) and that proximately caused injury to the plaintiff." Trust Co. of La. v. N.N.P., Inc., 104 F.3d 1478, 1488 (5th Cir. 1998) (citation omitted). The Fifth Circuit also requires that a plaintiff exercise due diligence. Mercury Air Group. Inc. v. Mansour, 237 F.3d 542, 546 (5th Cir. 2001).
In the instant case, Giardina claims that the defendants committed securities fraud by misrepresenting the value of his stock and concealing two offers to purchase RUFI. Giardina's claim for fraudulent concealment of an offer by Starwood to purchase RUFI has prescribed. See Rec. Doc. No. 82. Accordingly, the Court need only consider Giardina's allegations that the defendants lied about the value of his stock and concealed an overture by Copp Ventures ("Copp") to purchase the company.
1. Johnson Rice Stock Valuation
Giardina first alleges that the defendants committed securities fraud by telling him his stock was worth $14.00 a share when they knew it was worth more. In particular, he claims that the defendants told him $14.00 was the full, undiscounted value of his stock when it was actually the minority value. Had he known the truth, Giardina would have held on to his stock in the hopes that a purchaser seeking to take control of the company would pay a control premium. This is in fact what happened in 1999, when Madison Dearborn Partners, L.L.C. purchased RUFI for $31.17 per share. Pl.'s Opp. at 5.
The defendants seek summary judgment on the grounds that no misrepresentation occurred because Giardina knew the sale price for his stock was based on a minority value. In support of this position, the defendants cite the following excerpt from Giardina's deposition, in which Giardina allegedly admitted that he knew $14.00 was a minority value and not the full, undiscounted value of his stock:
Q. And [the defendants] didn't tell you it was a — or you didn't request whether it was the fully undiscounted value of the RUFI stock?
A. I — is that — I asked if that's the full value of the stock, and that's —
Q. You
A. — what I was told.
Q. You used the word "full" value?
A. Yeah. Yeah. "What is the value of my stock."
Giardina Dep. at 129-130. From this testimony the defendants infer that Giardina did not ask for the "full" value and therefore knew he was getting the minority value for his stock. The Court disagrees with that conclusion and cannot grant summary judgment based on Giardina's ambiguous statements.
Even if the so-called admission is inadequate for summary judgment, the defendants argue that Giardina learned of the minority valuation when he read a letter to Ruth Fertel from her investment banker at Johnson Rice Company ("Johnson Rice"). In a December 1997 letter, Johnson Rice partner F. Del Agnew advised Fertel that:
[i]n light of our review and analysis of the facts available to us, and based on generally accepted investment banking procedures and practice, it is our opinion that, as of December 29, 1997, the minority interests in the common stock of Ruth U. Fertel, Inc. had a value of $63 million or $13.97 per share based on 4,508,842 shares outstanding.
Johnson Rice Letter, Dec. 29, 1997. The defendants claim Giardina admitted seeing this letter before he sold his stock in February 1998:
Q. I'm gonna show you a letter from Johnson and 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. I'm sorry.
A. I've seen this letter before, yes.
Q. Do you recall when you saw it?
* * *
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. However, Giardina also testified that, with respect to his February 1998 stock sale:
A. I didn't see a Johnson and Rice valuation on this one. I was told what it was worth.
Q. And you were never told that that purchase price was based on the valuation by Johnson and Rice.
A. No.
Q. Where did you assume they got the value?
A. I assumed they got it from Johnson and Rice. That's who they were doing business with. I didn't know if they had hired another firm or not, but I assume that's where they got the value from.Id. at 123-24. Based on this conflicting deposition testimony, Giardina argues that an issue of material fact exists as to whether he saw the Johnson Rice letter or whether he was merely told the value that Johnson Rice placed on his shares. In light of this discrepancy and the absence of any other evidence proving that Giardina saw the letter, the Court finds that a genuine issue of fact exists as to Giardina's pre-sale knowledge of the information contained in the Johnson Rice letter. See Crescent Towing Salvage Co., Inc. v. Motor Vessel Anax, 40 F.3d 741, 743 (5th Cir. 1994) (holding that courts must view the facts and inferences from the evidence in the light most favorable to the non-moving party). Accordingly, the Court cannot find that Giardina knew RUFI purchased his stock at a minority value.
Finally, the defendants argue that no misrepresentation was made because Giardina did in fact receive the full value of his stock. In other words, Giardina was a minority shareholder, he received minority value, and he does not contest the accuracy of that value. This may be true, but the fact that Giardina actually got the minority value is irrelevant to his claim that the defendants told him it was the full, undiscounted value.
Even though the Court cannot rule out the possibility that a misrepresentation of a material fact may have occurred, the defendants claim that they did not have the required scienter to support a cause of action under Rule 10b-5. Specifically, they argue that "[a]ny statement made to Giardina as to his stock's value were based upon reasonable reliances of the valuations provided by RUFI's financial consultant/investment banker, Johnson Rice." RUFI Mem. Opp. at 11. Reliance on Johnson Rice may protect the defendants from a claim that $14.00 was an inadequate minority value, but it does not absolve them from allegedly telling Giardina that $14.00 was the full value. Accordingly, the Court does not find that the defendants' reliance on Johnson Rice rules out the possibility that they intentionally deceived Giardina in order to purchase his stock at a lower price.
2. Copp Negotiations
Giardina also alleges that, despite his repeated inquiries, the defendants failed to disclose their ongoing negotiations with Copp concerning its possible acquisition of RUFI. The defendants submit that there is not "one shred of evidence" to support this claim and "[t]he bottom line is that there was no communication by and between Copp Ventures and [the defendants] before Giardina sold his stock in February of 1998." RUFI Mem. Supp. at 15. In addition, the defendants assert that they did not learn of Copp's interest in acquiring the company until March 1998 and "the first contact [Hyde] had with Mr. Copp was approximately a week before receiving the March 26, 1998 letter from Copp Ventures." Id. Finally, the defendants point to the fact that Hyde did not relay any of his discussions with Copp to the RUFI board until May 1998.
Contrary to the defendants' position that there was no contact before February 1998, Giardina points out that Hyde's phone logs note telephone calls from Tony Copp on January 26, 1998 and on February 13, 1998. See Pl.'s Ex. J at 3 and 8. The defendants respond that these calls pertained to Copp's interest in purchasing a Ruth's Chris franchise, not in purchasing the entire company. In light of the fact that the Copp overture culminated in an offer to purchase RUFI in October 1998, the Court is skeptical of the defendants' explanation.
However, even if the defendants did consult with Copp about a possible merger before Giardina's February 1998 stock sale, they argue that any discussions were not material and, therefore, the alleged concealment of such discussions is inactionable under Rule 10b-5. In Basic, Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court set forth the test for determining whether information related to corporate merger discussions is material under Rule 10b-5. The Court explained that "[am omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote" and that "there must be 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 available." Id. at 449 (quoting TSC Indus., Inc. v. Northway, Inc. 426 U.S. 438, 449 (1976)). The Court further instructed that the materiality of statements about mergers should be assessed by evaluating (1) the probability of the merger reaching fruition and (2) the magnitude of the proposed merger. Id. at 238. Courts should determine probability by examining the "indicia of interest in the transaction at the highest corporate levels," and magnitude by considering "the size of the two corporate entities and of the potential premiums over market value." Id. at 239-40.
In the instant case, neither the plaintiff nor the defendants address the magnitude of the alleged Copp merger. Since the merger of a small corporation is "the most important event that can occur in [it's] life," information about the proposed merger of a small, closely-held company "can become material at an earlier stage than would be the case as regards lesser transactions," despite the fact that the "mortality rate of mergers in such formative stages is doubtless high." Id. at 238 (quoting in SEC v. Geon Indus., Inc., 531 F.2d 39, 47-48 (3d Cir. 1976)). Because RUFI was a relatively small, privately held company at the time of the Copp discussions and because its ultimate merger with Madison Dearborn doubled RUFI's value, the Court finds that the magnitude of any proposed merger was high.
Despite the high magnitude of a merger, the Court finds that in February 1998 the probability of the Copp merger actually occurring was too low for any reasonable juror to find it to be material. "The mere fact that a company has received an acquisition overture or that some discussion has occurred will not necessarily be material." Glazer v. Formica Corp., 964 F.2d 149, 155 (2d Cir. 1992). Whether merger discussions in any case are material will normally depend on the facts of the case. Id. To determine the probability of the merger, the Supreme Court explained that the factfinder should "look to the indicia of interest in the transaction at the highest corporate levels." Basic at 239. By way of example, the Court noted that "board resolutions, instructions to investment bankers, and actual negotiations between principals or their intermediaries may serve as indicia of interest." Id.
In the instant case, the only indicia of interest in February 1998 were the preliminary discussions between Hyde and Copp. In Taylor v. First Union Corp. of South Carolina, 857 F.2d 240, 244 (4th Cir. 1988), the Fourth Circuit applied the Basic test and found that "preliminary, contingent and speculative" merger discussions were not material to the plaintiff's decision to sell her stock. "At best, the merger discussions culminated in a vague 'agreement' to establish a relationship. There was no agreement as to the price or structure of the deal . . . no evidence of board resolutions, actual negotiations, or instructions to investment bankers to facilitate a merger." Id. The court acknowledged that, in light of Basic, while these factors are not dispositive of materiality, they are "certainly not irrelevant to the totality of the circumstances test articulated in that case." Id. The Taylor court reasoned that:
The materiality of information concerning a proposed merger is directly related to the likelihood the merger will be accomplished; the more tentative the discussions the less useful such information will be to a reasonable investor in reaching a decision. Information of speculative and tentative discussions is of dubious and marginal significance to that decision. To hold otherwise would result in endless and bewildering guesses as to the need for disclosure, operate as a deterrent to the legitimate conduct of corporate operations, and threaten to "bury the shareholders in an avalanche of trivial information"; the very perils that the limit on disclosure imposed by the materiality requirement serves to avoid.Id. at 244-245 (citing Susquchanna Corp. v. Pan American Sulphur Co., 423 F.2d 1075, 1085-86 (5th Cir. 1970)). See, also, Panfil v. ACC Corp, 768 F. Supp. 54, 58-59 (W.D.N Y 1991) (stating that the "mere 'intention' to pursue a possible merger at some time in the future, without more, is simply not a material fact under rule 10b-5. The probability of merger prior to any contact with potential suitors — prior to any evidence that a suitor is in any way interested in merger — is too remote.")
In the case at bar, Giardina contends that the Copp discussions were material because, in October 1998, RUFI's board of directors acknowledged the receipt of Copp's letter of intent to purchase the company and forwarded to Copp its required changes to that letter of intent. Pl.'s Ex. H. Giardina submits "that such activity evidences taking Copp's offers seriously." Giardina Mem. Opp. at 16. However, to determine whether the Copp overture was material at the time of Giardina's February 1998 stock sale, the Court must look at the "indicia of interest" that existed at that time. The only "indicia of interest" in February 1998 are the two phone calls from Tony Copp to William Hyde. These calls were clearly nothing more than an overture. The first meeting between Copp and Hyde did not occur until mid-March of 1998, after Giardina sold his stock. See Copp Letter. Even if this meeting had occurred before Giardina sold his stock, it did not rise to the level of serious, ongoing negotiations between principals. Tony Copp's letter to Hyde after the meeting contains no specifics about a merger or acquisition and merely sets forth the philosophy and long-term goals of Copp Ventures' "Global Franchise Fund." Pl.'s Ex. K. In addition, Copp indicates that Hyde initially rebuffed any offer to acquire RUFI: "Alternatively, you have suggested a joint venture relationship, which is fine. You would retain control of all operational decisions and management. We also concur in this approach and can be a 50/50 or even minority partners in the company, or in selected U.S. restaurant locations." Id. at 2.
Even viewing the facts in the light most favorable to Giardina, the Court does not find that a reasonable jury could conclude that RUFI and Copp were involved in ongoing merger negotiations at the time Giardina sold his stock in February 1998. The evidence does not support a finding that anything more than two phone calls occurred by that time. Even after the March 1998 meeting, it is clear that the parties discussed nothing more than a vague "relationship" between Copp and RUFI. There is no evidence that the possibility of an acquisition was seriously discussed, and certainly no prices were quoted. Even if the meeting had occurred before February 28, 1998, the Court does not find that a single meeting, which culminated in nothing more than a merger overture, amounts to ongoing merger negotiations. Based on the information contained in Copp's letter and the two phone messages, it is clear that there was little probability in February 1998 that Copp's overtures or desire to negotiate would result in anything concrete. The Court simply does not find that these vague, preliminary discussions rise to the level of a material fact within the meaning of Rule 10b-5. Accordingly, the Court grants the defendants' motion for summary judgment with respect to Giardina's Rule 10b-5 claim for fraudulent concealment of the Copp discussions.
B. Breach of Contract
In Count II of his complaint, Giardina alleges that the defendants fraudulently induced him to step aside as president, accept a consulting contract, and sell out the contract for $500,000. He claims that the defendants talked him into stepping aside with the promise that he would profit handsomely when the company went public, but that they failed to take any steps toward an initial public offering. The Court has already ruled that Giardina's fraudulent inducement claim has prescribed. See Rec. Doc. 81. However, Giardina also claims that the defendants breached his consulting contract by hiring him for 5 years instead of ten. He alleges that at a special meeting of RUFI's board of directors on February 25 and 28, 1994, he was awarded a ten year employment contract at an annual salary of $150,000 per year, but that the defendants ultimately gave him only a five year Consulting and Non-competition Agreement. See Def.'s Ex. K.
The defendants contend that Giardina cannot state a claim for breach of contract because there was no ten year contract to begin with. Giardina admitted that he contemplated a written future contract with RUFI, see Giardina Dep. at 158-159, and Article 1947 of the Louisiana Civil Code provides that "[w]hen, in the absence of a legal requirement, the parties have contemplated a certain form, it is presumed that they do not intend to be bound until the contract is executed in that form." La. Civ. Code art. 1947 (West 2001). In light of the fact that a ten year employment contract was never drafted, the Court does not find that such a contract could have been breached by the defendants. Accordingly, the Court grants the defendants' motion for summary judgment with respect to the breach of contract claim.
C. State Law Claims
Finally, Giardina asserts claims against the defendants for breach of fiduciary duty, fraud and negligent misrepresentation. The defendants first argue that they are immune from any breach of fiduciary duty claim related to the stock valuation by virtue of La. Rev. Stat. Ann. § 12:92(E) (West 2001), which provides that:
A director shall, in the performance of his duties, be fully protected in relying in good faith upon the records of the corporation and upon such information, opinions, reports, or statements presented to the corporation, the board of directors, or any committee thereof by any of the corporation's officers or employees, or by any committee of the board of directors, or by any counsel . . . or independent or certified public accountant. . . .Id. Accordingly, the defendants' claim that their reliance on Johnson Rice's stock price extinguishes any potential liability. This would be true if Giardina were claiming that his stock was not actually worth $14.00 per share. However, Giardina is complaining that the defendants failed to tell him that $14.00 per share was a minority value. Accordingly, the Court finds that the defendants' reliance on Johnson Rice's evaluation is irrelevant to the ultimate question of whether the defendants breached their fiduciary duty by fraudulently concealing the price of the stock. Accordingly, the defendants' motion for summary judgment on that claim is denied.
With respect to Giardina's breach of fiduciary duty claim as it relates to Copp Ventures, the defendants argue that, as a minority shareholder. Giardina was not entitled to that information. Giardina asserts that the defendants owed him a duty to disclose "all material non-public facts concerning the value of RUFI stock prior to causing the company to complete the repurchase." Giardina Mem. Opp. at 22. The Court has already explained that, in February 1998, the Copp overture was not material. Accordingly, the Court grants the defendants' motion for summary judgment on Giardina's breach of fiduciary duty claim with respect to Copp.
Finally, Giardina asserts claims for fraud and negligent misrepresentation. Fraud is a misrepresentation or suppression of the truth made with an intention to obtain an unjust advantage for one party or cause a loss or inconvenience to another. See Ballard's v. N. American Land Development, 677 So.2d 648, 650 (La.App. 2 Cir. 6/26/96). To prevail in an action for negligent misrepresentation, Giardina must prove that the defendants had a duty to supply correct information, that they breached that duty, and that their breach caused damages to the plaintiff.
The defendants submit that both causes of action must fail because they made no material fraudulent or negligent misrepresentations. The Court agrees that the Copp overture was not material, and the defendants' motion for summary judgment is granted with respect to the Copp claim. However, the defendants have not established the immateriality of the minority valuation, and summary judgment on that claim is denied.
CONCLUSION
For the reasons stated above, the defendants' Motions for Summary Judgment are GRANTED with respect to (1) Giardina's claim for securities fraud in connection with the Copp overture, (2) Giardina's claim for breach of contract, and (3) Giardina's claims for breach of fiduciary duty, fraud, and negligent misrepresentation of the Copp overture. In all other respects, the defendants' motion is DENIED.