Opinion
CIVIL ACTION 99-12469-RWZ
February 19, 2002
MEMORANDUM OF DECISION
Plaintiff, Barry J. Hershey ("Hershey"), founded Capital American Financial Corporation ("CAF"), an insurance company, and for several years served as its CEO, president, and chairman of its board of directors. During the 1980s, he gave up his positions as CEO and president, but retained his position as chairman until 1993. Defendant, David Gunning ("Gunning"), joined the CAF board in 1992, and in February, 1993, became the president and CEO. At that time, he also took over from Plaintiff as chairman of the board. Plaintiff remained a member of the board until early 1995, and throughout the period at issue was also the company's major shareholder. He controlled approximately 33% of CAF's outstanding shares himself, and together with his siblings, controlled over 50%.
In October of 1995, after he had ceased to be a member of the board, Plaintiff contacted Mark Gormley ("Gormley") of Defendant Donaldson, Lufkin Jenrette ("DLJ"), to discuss the sale of CAF. On November 2, 1995, Plaintiff countersigned an agreement ("Confidentiality Agreement") prepared and signed by DLJ, and which stated that it was between DLJ and CAF. Although no longer a director or officer at that time, Plaintiff signed the Confidentiality Agreement on a signature line below the statement, "Agreed and Accepted: CAPITOL AMERICAN FINANCIAL CORPORATION." He crossed out the word "Director" after his name under the signature line, but otherwise behaved as if he was signing on behalf of CAF. Gunning, then CEO, president, and chairman of CAF, knew that Plaintiff was entering into the agreement.
Through the end of 1995 and the first half of 1996, Plaintiff worked with DLJ to identify a buyer. DLJ focused its attention on Conseco, Inc. ("Conseco"), which was considering an acquisition of American Travelers Corporation ("ATC"), another client of DLJ's. According to Plaintiff, at an August 8, 1996 meeting, the ATC board discussed the possibility of Conseco acquiring CAF. On August 11, 1996, a special meeting of the CAF board was convened to allow Plaintiff to make a presentation concerning the proposed sale to Conseco. DLJ's Gormley also made a presentation regarding the proposed sale, and disclosed DLJ's representation of Conseco's other acquisition target, without identifying ATC by name. The CAF board authorized the retention of DLJ as financial advisor with respect to the sale to Conseco and formally retained it on August 12.
The deal proceeded toward conclusion; CAF's board scheduled a meeting for August 25, to finalize the decision to sell to Conseco. On August 24, Plaintiff's Boston counsel received, by overnight mail, a packet of documents prepared by DLJ concerning the terms of the deal. Plaintiff, then in California, had not received a set of the materials by mail, but DLJ faxed the entire contents of the packet to him on August 24.
CAF management had prepared a due diligence report, which Plaintiff had also not received. Gunning faxed the report to him on August 24, but "Exhibit B," which Plaintiff describes as a Pro Forma Consolidated Statement spreadsheet, was illegible. Plaintiff does not allege that this mis-transmission was Gunning's fault, and he never notified Gunning that the fax had not come through clearly. Neither Plaintiff nor his counsel suggested to Gunning, DLJ or the CAF board that they wished for more time to review the terms of the deal, which they knew would be considered the next day at the CAF board meeting.
Plaintiff and his counsel attended the August 25 board meeting by telephone. DLJ disclosed to the board that it would be compensated by ATC in connection with Conseco's acquisition of ATC, and presented a "fairness opinion," which stated that in its opinion the transaction was fair to CAF's shareholders. The CAF board then approved the sale, and Plaintiff signed a shareholder agreement, agreeing to vote in favor of the sale. Three months later, on November 26, 1996, CAF's shareholders, including Plaintiff, voted to approve the sale. The sale could not close, however, until resolution of a shareholder derivative action brought by Plaintiff's brother in Arizona. On March 4, 1997, the Arizona suit was dismissed, and immediately thereafter the sale of CAF to Conseco closed. By that time, however, Plaintiff was unhappy with the price he had received for his shares.
In 1999, Plaintiff filed suit against Gunning and DLJ in Massachusetts Superior Court. The complaint contained counts against Gunning and DLJ for breach of fiduciary duty (Count 1 and Count 2, respectively), against DLJ for misrepresentation and breach of contract (Counts 3 and 4), and against Gunning for fraudulent inducement (Count 5). Defendants removed to Federal Court, and now move for summary judgment on all counts.
Although there are factual disputes as to events surrounding the transaction, Plaintiff has failed to set forth any evidence in support of several essential elements of each claim. Celotex v. Catrett, 477 U.S. 317, 323 (1986) ("a complete failure of proof concerning essential elements of the nonmoving party's case necessarily renders all other facts immaterial"). Therefore, summary judgment must enter as to all counts as a matter of law.
Counts I and II: Breach of Fiduciary Duty
Counts I and II allege breaches of fiduciary duty by Gunning and DLJ, respectively. I address both counts together because as to neither count has plaintiff adduced any evidence of a fiduciary relationship between Plaintiffs and Defendants.
The parties do not dispute that Ohio law governs the existence or nonexistence of any fiduciary relationship. The general rule in Ohio is as follows:
"[o]nly a corporation and not its shareholders can complain of an injury sustained by, or a wrong done to, the corporation. However, this general principle has no application where the wrongful acts are not only against the corporation but are also violations of a duty arising from contract or otherwise owed directly by the wrongdoer to the shareholder."
Adair v. Wozniak, 492 N.E.2d 426, 428 (Ohio 1986) (citations omitted). The Ohio Supreme Court defines a fiduciary relationship as one in which "special confidence and trust is reposed in the integrity and fidelity of another and there is a resulting position of superiority or influence, acquired by virtue of this special trust." Ed Shory Sons, Inc. v. Society Nat'l Bank, 662 N.E.2d 1074, 1081 (Ohio 1996) (citations omitted). Under Ohio law, a party that gives suggestions or advice to another does not thereby become that person's fiduciary. See e.g. Id. (summary judgment properly entered where plaintiff debtor failed to show that he could have reasonably expected that defendant creditor who provided advice "would act solely or primarily on [his] behalf").
First, DLJ never held a position of superiority or influence over Plaintiff. As a highly experienced and accomplished lawyer/businessman, with degrees from the University of Pennsylvania's Wharton School and Harvard Law School, Plaintiff was familiar with the nature of business transactions similar to the CAF sale. In addition, he retained an experienced mergers and acquisitions partner from a major Boston law firm to advise him on the sale. Although he obtained some limited advice from DLJ with respect to his personal interests, his own deposition testimony demonstrates that before the sale and at the time he agreed to vote his shares in support of a sale to Conseco, he reposed no special trust in DLJ. Plaintiff recognized that DLJ was simply an investment bank looking to maximize its fee by pushing through a deal. He had no reasonable expectation that DLJ would act solely or primarily on his personal behalf.
Second, there is no evidence to support a finding that DLJ understood, or should have understood, that it was acting as a fiduciary for Plaintiff in his personal capacity, rather than acting on behalf of CAF to arrange a sale that would benefit Plaintiff indirectly as CAF's major shareholder. Indeed, the November 2, 1995 Confidentiality Agreement stated that it was between CAF and DLJ. Plaintiff has failed to set forth any evidence to support his assertion that during the time when DLJ was working to identify a buyer for CAF, he ever indicated to DLJ that it was simultaneously working as his personal financial advisor. He does not even assert that he personally paid DLJ for its services or ever contracted with DLJ to become his personal advisor.
With respect to Count I, against Gunning, Plaintiff likewise failed to demonstrate any genuine issue of material fact with respect to the existence of a fiduciary relationship between them. A fiduciary relationship need not arise by formal appointment, but may arise de facto from an informal confidential relationship in which "one person comes to rely on and trust another in his important affairs[.]" Craggett v. Adell Insc. Agency, 635 N.E.2d 1326, 1331 (Ohio App.Ct. 1993) (citations omitted). This informal relationship must be based on a mutual understanding "that a special trust or confidence has been reposed." Id. at 1331-1332 (citations omitted). In this case, Plaintiff's alleged dependence on Gunning reflects a purely unilateral placement of trust, insufficient to create a fiduciary duty. Although he obtained limited personal advice from Gunning, Plaintiff's deposition testimony makes clear that he reposed no special trust in Gunning to look out for his personal interests. Indeed, Plaintiff was well aware of Gunning's obligations to CAF and to its other shareholders.
Count III: Misrepresentation
Count III alleges that DLJ committed material misrepresentations and omissions in connection with the information it provided to Plaintiff prior to his signing the shareholder agreement, which obligated him to vote his shares in favor of the sale to Conseco. DLJ moves for summary judgment on the grounds that Plaintiff has failed to set forth any evidence of misrepresentations, and that in any case, he could not have reasonably relied on these misrepresentations when he agreed to the deal.
First, in his memorandum in opposition to DLJ's motion, Plaintiff fails to identify specific misrepresentations or omissions of fact by DLJ, sufficient to sustain a misrepresentation claim where no fiduciary duty exists. He points to instances that cannot be attributed to DLJ, such as the fact that the faxed copy of Exhibit B was illegible. Plaintiff's next argument tacitly acknowledges his inability to identify specific instances of misrepresentation by Defendants.
He asserts that "where a fiduciary relationship exists and the fiduciary obtains a benefit by virtue of the relationship, the law indulges in a presumption of misrepresentation[.]" Craggett, 635 N.E.2d at 1331. Defendant may rebut this presumption, however, by showing that he "had competent and disinterested advice or that [he] entered into the transaction voluntarily, deliberately and advisedly, knowing its nature and effect, or that [his] consent was not obtained by reason of the power of the influence to which the relation gave rise." Id. Any presumption of misrepresentation is therefore amply rebutted by the competent, independent advice that Plaintiff received from Boston counsel. According to Plaintiff, he spoke with counsel on an almost daily basis about the CAF sale. This expert advice enabled him to enter into the transaction voluntarily, deliberately and informed.
Count IV: Breach of Contract
Count IV alleges that DLJ breached the Confidentiality Agreement it had with CAF, by informing ATC of Conseco's possible acquisition of CAF. As evidence of that breach, Plaintiff asserts that at an ATC board meeting on August 8, 1996, the Conseco — CAF deal was discussed. DLJ moves for summary judgment on the ground that Plaintiff lacks standing to bring this claim because he is neither a party to, nor a third-party beneficiary of, the Confidentiality Agreement.
The Confidentiality Agreement is by its terms an agreement between CAF and DLJ, and although Plaintiff signed the agreement, he did so on behalf of CAF. The fact that he crossed out "Director" under his name does not create a genuine issue of fact on this point. Plaintiff cites no authority that would grant him standing, to sue in his individual capacity under the agreement. DLJ is therefore entitled to judgment on Count IV as a matter of law. Because Plaintiff lacks standing to bring this claim, I need not address DLJ's other arguments in support of summary judgment on Count IV.
Count V: Fraudulent Inducement
Count V alleges that Gunning fraudulently induced Plaintiff to sign the Shareholders Agreement authorizing the sale of CAF. He bases his fraud claim on the mistaken belief that management had prepared, and the board had been presented with, an analysis of his alternative financial strategy. The record reflects, however, that he and his counsel received a packet of materials on August 24, 1996 (one day before the August 25 meeting), containing no such analysis. In addition, Plaintiff's deposition testimony recounts a conversation between him and Gunning, wherein he learned that his analysis had not been included as a variable in the deal. His alleged reliance on Gunning's response, which made it clear that no analysis of his alternate financial strategy had been created or presented to the board, is unreasonable as a matter of law. See Columbia Gas Transmission Corp. v. Ogle, 51 F. Supp.2d 866, 875-76 (S.D.Ohio 1997), aff'd 172 F.3d 47 (6th Cir. 1998) (one on notice as to the propriety of representation is under a duty to investigate before relying on that representation). Any questions regarding the information contained in or omitted from the pre-meeting materials, or pertaining to the conversation between them after the meeting, could have been raised by Plaintiff or by his experienced mergers and acquisitions counsel at that time.
Accordingly, Defendants' motion for summary judgment is allowed with respect to all counts. Judgment may be entered for Defendants.