Opinion
CV-00-1175-ST.
May 22, 2002
FINDINGS AND RECOMMENDATIONS
INTRODUCTION
The background of this action has been discussed at length in two previous opinions, and is incorporated herein by this reference. Plaintiffs, Frederick O. Paulsell ("Paulsell"), Frederick O. Paulsell III, Michael Paulsell, Leigh Ann Paulsell, and David Paulsell, are major stockholders in TRM Corporation ("TRM"), a publicly held Oregon company traded on the NASDAQ Stock Exchange ("Nasdaq") and headquartered in Portland, Oregon. Plaintiffs allege that defendants, Edward Cohen, Daniel Cohen, ReadyCash Investment Partners, L.P. ("ReadyCash LP"), and ReadyCash GP Corp. ("ReadyCash Corp") (also collectively referred to as the "ReadyCash entities"), agreed to purchase one million shares of TRM for $13 per share which represented 65% of plaintiffs' TRM stock holdings. Defendants deny that they are obligated to purchase plaintiffs' stock.
See Findings and Recommendations dated November 14, 2000 (docket #18), adopted by District Court Judge Ancer L. Haggerty by Order dated December 12, 2000 (docket #20) and Findings and Recommendations dated August 31, 2001 (docket #57), adopted by District Court Judge Ancer L. Haggerty by Order dated November 26, 2001 (docket #70).
The current pleadings are the Fourth Amended Complaint ("Complaint"), filed on April 9, 2001 (docket #37), which alleges four claims for common law fraud, Oregon securities fraud, breach of contract, and promissory estoppel, and the Second Amended Answer, Affirmative Defenses, and Counterclaims ("Answer"), filed on September 18, 2001 (docket #62), which alleges three counterclaims against Paulsell for common law fraud, Oregon securities fraud, and attorney fees. Defendants have now filed a Motion for Summary Judgment (docket #71) against all of plaintiffs' claims. In addition, Paulsell has filed a Motion for Summary Judgment Against Defendants' Counterclaims (docket #93). For the reasons that follow, both motions should be granted in part and denied in part.
LEGAL STANDARD
FRCP 56(c) authorizes summary judgment if no genuine issue exists regarding any material fact and the moving party is entitled to judgment as a matter of law. The moving party must show an absence of an issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party shows the absence of an issue of material fact, the non-moving party must go beyond the pleadings and designate specific facts showing a genuine issue for trial. Id at 324. A scintilla of evidence, or evidence that is merely colorable or not significantly probative, does not present a genuine issue of material fact. United Steelworkers of Am. v. Phelps Dodge Corp., 865 F.2d 1539, 1542 (9th Cir), cert denied, 493 U.S. 809 (1989).
The substantive law governing a claim or defense determines whether a fact is material. T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir 1987). The court must view the inferences drawn from the facts in the light most favorable to the non-moving party. Thus, reasonable doubts about the existence of a factual issue should be resolved against the moving party. Id at 630-31. However, when the non-moving party's claims are factually implausible, that party must come forward with more persuasive evidence than would otherwise be required. California Architectural Bldg. Prods., Inc. v. Franciscan Ceramics Inc., 818 F.2d 1466, 1468 (9th Cir 1987), cert denied, 484 U.S. 1006 (1988), citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). The Ninth Circuit has stated, "No longer can it be argued that any disagreement about a material issue of fact precludes the use of summary judgment." Id.
FACTS
Because all material facts must be viewed in the light most favorable to the non-movant, this court will view the evidence relevant to defendants' Motion for Summary Judgment (docket #71) in the light most favorable to plaintiffs and the evidence relevant to Paulsell's Motion for Summary Judgment Against Defendants' Counterclaims (docket #93) in the light most favorable to defendants. Moreover, because the facts of this case have been discussed at length in this court's prior opinions, no detailed factual statement is necessary. Instead, as pertinent to each motion, specific facts revealed in the parties' submissions, including affidavits, declarations, and deposition excerpts, will be discussed in detail when analyzing each motion. Simply by way of background, the following is a brief chronology of the events leading up to this dispute:
Excerpts from affidavits, declarations, and depositions are identified by the last name of the affiant, declarant, or deponent, and citations are to the paragraph(s) of the affidavit or declaration, or page(s) of the deposition transcript.
TRM, formerly known as TRM Copy Centers Corporation, is a publicly-held company headquartered in Portland, Oregon. Prior to June 1998, TRM's principal business was maintaining self-service photocopiers in retail establishments in the United States, Canada, Great Britain, France, and Belgium. At all material times prior to June 24, 1998, Paulsell was the chairman of both TRM's board of directors and its executive committee.
In late 1996, at Paulsell's suggestion, TRM engaged Paulsell's investment banking firm, Olympic Capital Partners ("OCP"), to sell TRM. The code name for that project was "Project Blue." OCP tried to sell TRM for $100 million, a price that translated into approximately $13 per share. This represented a premium of almost one-third over the value of TRM's publicly traded stock at that time. OCP and its principals spoke to more than 40 potential investors, several of whom expressed a strong initial interest in TRM. Ultimately, however, no investor was willing to finalize an investment in TRM at that price. Some time between July 15 and August 22, 1997, OCP's engagement came to an end.
At approximately the same time TRM terminated this relationship with OCP, TRM hired a new President and CEO, Fred Stockton ("Stockton"), and a new CFO, Paul Brown ("Brown").
At all material times prior to June 24, 1998, TRM had approximately 7,056,811 shares of common stock outstanding. Laifer Capital Management ("Laifer CM") owned approximately 1,052,900 shares, equal to 14.9%, and Paulsell owned approximately 917,242 shares, equal to 13.0%, of TRM's outstanding common stock. Paulsell's shares did not include shares owned by other members of his family.
In 1996, Laifer CM invested in defendant, Resource America, Inc. ("RAI"). As a result of that investment, Lance Laifer ("Laifer"), Laifer CM's President, became acquainted with defendants Edward Cohen, RAI's CEO, and Daniel Cohen, Edward Cohen's son and RAI's Vice President.
In 1997, Laifer, who was disappointed with TRM's performance, approached the Cohens with his concepts for recapitalizing TRM and offered to set up a meeting between the Cohens and TRM management. Laifer Depo, pp. 29-30. Thereafter, the Cohens and their business associates at RAI spent considerable time examining TRM's publicly filed documents and talking with Laifer. Laifer told the Cohens that he believed that TRM was "poorly managed" and that he was "very disappointed with the performance of TRM through 1996, especially in 1997[.]" E. Cohen Depo, Vol II, p. 98; Hirsh Depo, p. 70. However, Laifer also told the Cohens that if they invested in TRM, he wanted Laifer CM to maintain the same percentage of ownership in TRM by making a pro rata investment and that they could vote his shares in the event they decided to invest in TRM. Laifer Depo, pp. 31, 35, 124.
In late 1997, Laifer called Paulsell and arranged for a meeting between Paulsell and the Cohens. Id at 70. On December 4, 1997, the Cohens, Laifer, Paulsell, and Paulsell's wife, Susan Paulsell, met over dinner at a restaurant in New York. During the course of that meeting, plaintiffs allege that Paulsell and the Cohens agreed on two interrelated transactions. One of those transactions, dubbed by the parties as the "Paulsell family stock" transaction, involved the purchase of one million shares of TRM stock from the Paulsell family at $13 per share and a related relinquishment of control over TRM by Paulsell in favor of the Cohens. The other transaction, dubbed by the parties as the "TRM investment" transaction, involved a $20 million investment in TRM and a related taking of control of TRM by the Cohens. See Complaint, ¶ 11.
Paulsell and the Cohens have differing understandings as to whom the Cohens represented between the time of the December 4, 1997 dinner meeting and closing of the TRM/ReadyCash LP transaction. Edward Cohen testified that he met Paulsell "as the CEO of [RAI]" and that during that meeting, Paulsell suggested that "he might join with our group." E. Cohen Depo, Vol I, p. 7. He believed that his involvement in the TRM investment was purely on behalf of RAI. E. Cohen Depo, Vol I, pp. 54-56. Paulsell, on the other hand, testified that he believed that the Cohens intended to personally invest in TRM and purchase his stock and that he was surprised to learn prior to closing that a "new entity" (presumably ReadyCash LP) was involved. Paulsell Depo, p. 133. However, by January 23, 1998, it was clear that ReadyCash LP and its investors (rather than the Cohens individually or on behalf of RAI) were pursuing the TRM investment. Depo Ex 14 (draft term sheet describing the TRM investment transaction). Because resolution of this issue is not necessary to dispose of the present motions, this court will simply refer to the Cohens when discussing representations made by those parties on their own behalf or on behalf of RAI, ReadyCash LP or ReadyCash Corp.
According to Paulsell, the Paulsell family stock transaction was reached "on the spot," while the TRM investment transaction had at least one detail that was not yet finalized, namely the coupon rate on the convertible preferred stock that the Cohens would receive upon making their investment in TRM. The Cohens' plan was to use TRM's copy-center network to market non-bank ATM cash machines in retail stores. E. Cohen Depo, Vol I, p. 14.
The Cohens deny that they ever agreed to the Paulsell family stock transaction and maintain that the meeting on December 4, 1997, only involved discussions of possible transactions. However, because this fact relates to plaintiffs' claims, against which defendants seek summary judgment, this court construes this fact in plaintiffs' favor.
Paulsell and the Cohens did not reach any agreement with regard to the amount of the coupon (or dividend) rate that would be paid on any convertible preferred stock that TRM might sell to defendants as part of the $20 million investment in TRM. Although Paulsell and the Cohens may have discussed a coupon rate in the range of "8 to 8 1/2 percent," the coupon rate "was left with a little fog around it." Paulsell Depo, pp. 81-84.
Paulsell agreed to arrange for the Cohens to meet with TRM's board of directors to make a formal proposal with regard to the $20 million investment into TRM. Paulsell Depo, pp. 83-85. The Cohens refused to sign a confidentiality agreement until after they met with and made their presentation to TRM's board of directors. Depo Exs 11, 12.
Paulsell promptly informed TRM's counsel and TRM board members that he had agreed to sell one million shares of his family's TRM stock at $13 per share, and that the Cohens were anxious to visit Portland, Oregon, to make a presentation to TRM's board of directors. Paulsell Depo, pp. 143, 176-77, 179, 182-85.
On December 17, 1997, two weeks after meeting with the Cohens, Paulsell attended a meeting with Chuck Wilke of OCP and several TRM executives, including Stockton and Brown. Three days later, on December 20, 1997, Wilke sent a confidential memorandum (the "Project Blue Memorandum") to Paulsell, outlining his comments about the "operational issues" facing TRM. Depo Ex 40. As discussed in more detail below, the Project Blue Memorandum, and Paulsell's failure to provide a copy of it to the Cohens, form the basis of defendants' counterclaims against which Paulsell seeks summary judgment.
RAI ultimately decided not to invest in TRM because its underwriters determined that it would complicate RAI's business to its disadvantage. E. Cohen Depo, Vol I, p. 36. However, Laifer remained interested in going forward and, in January 1998, the Cohens formed the ReadyCash entities as a means of soliciting other investors to fund an investment in TRM. Id; Depo Ex 14. Daniel Cohen invested approximately $30,000 in ReadyCash Corp, the general partner formed to manage ReadyCash LP. D. Cohen Depo, Vol II, p. 7.
In January 1998, the Cohens traveled to Portland, met individually with members of, and made a presentation to, TRM's board of directors regarding the proposed investment. Following that presentation, TRM's board of directors set up a special committee to consider the proposed investment. Paulsell was excluded from participation on that special committee because of the potential conflict of interest posed by the Paulsell family stock transaction.
A couple of weeks after their presentation to TRM's board of directors, on February 6, 1998, ReadyCash LP signed a confidentiality agreement with TRM. The Cohens, assisted by several attorneys, accountants, and business associates, then commenced due diligence. The Cohens directed at least one written due diligence inquiry to Stockton, seeking "all material contracts," including "any contract not entered into in the ordinary course of business," and "other documents of a material nature." Zoll Dec, Ex 28, pp. 1, 2, 5.
Stockton and Brown, who the Cohens knew were both new to TRM, were responsible for responding to the Cohens' due diligence inquiries. Although the Cohens assert that Paulsell discussed TRM with them during their due diligence, Paulsell never disclosed the existence of the Project Blue Memorandum.
On March 29, 1998, TRM and ReadyCash LP entered into a Preferred Stock and Warrants Purchase Agreement ("TRM/ReadyCash Agreement") in which ReadyCash LP agreed to invest $20 million in TRM in exchange for 1,777,778 shares of newly issued Series A Preferred stock and warrants to purchase 500,000 shares of common stock. Depo Ex 123. The TRM/ReadyCash Agreement was expressly conditioned upon shareholder approval to the extent required by Nasdaq. Id at ¶ 2.5 It also provided that: (1) Edward Cohen would be the chairman of TRM's board of directors and Daniel Cohen would be on the executive committee (id at ¶ 7.6.4); and (2) closing was conditioned on (a) approval of directors selected by the Cohens (id at ¶ 7.6.3, Bauman Depo, p. 106) and (b) an agreement to vote shares to be signed by TRM's largest shareholders, including Paulsell (Depo Ex 123, ¶ 7.2 and Schedule 7.2; Depo Ex 29, pp. 11-15 (the "Voting Agreement")).
On April 3, 1998, Paulsell and three other TRM directors signed the Voting Agreement. As discussed in more detail below, Paulsell's act of signing the Voting Agreement is the basis for one of defendants' two arguments that Paulsell repudiated the Paulsell family stock transaction.
In a letter dated April 21, 1998, Paulsell notified the Cohens of his belief that the inclusion of the 500,000 warrants as part of the TRM/ReadyCash LP Agreement constituted "additional compensation" to the Cohens that "had never [been] discussed or negotiated at our initial meetings." Depo Ex 16, p. 1. Paulsell told the Cohens that he was "a man of my word and will deliver the agreed upon shares at $13/share," but with respect to the warrants, suggested that he "should be treated in the same manner as a copartner in putting together this transaction." Id. Two days later, in a followup memorandum, Paulsell suggested that he should receive 325,000 warrants which represented 65% of the 500,000 warrants the Cohens were to receive and was commensurate with his sale of $13 million in stock. Depo Ex 17. He again insisted that the "entire warrant situation is a new add-on to our original deal and both groups should be treated the same." Id.
On June 24, 1998, TRM's shareholders approved the TRM/ReadyCash Agreement and elected a new board of directors. Depo Ex 24. Shortly thereafter, Edward Cohen was appointed by the new board of directors as TRM's Chairman of the Board and Paulsell was appointed as the Vice Chairman. Daniel Cohen was selected to head the executive committee. Depo Ex 25. Paulsell was not placed on the executive committee. Id.
Paulsell was upset about his exclusion from the executive committee and promptly discussed the issue with Edward Cohen. Paulsell Depo, pp. 257-58, 275; D. Cohen Depo, Vol II, pp. 153-54. Edward Cohen suggested that he and Paulsell discuss their agreements in "a couple of weeks." Paulsell Depo, pp. 261, 277.
On July 7, 1998, Paulsell faxed the Cohens a memorandum dated July 6, 1998 stating that the Cohens had "negotiated an agreement with me, then significantly enhanced it" and that the Paulsell family "remained willing to sell the approximately one million shares of TRM to your group under one of [two] scenarios." Depo Ex 28, p. 3. Paulsell then reiterated that the "family remains prepared to sell you 65% of their holdings, but only on the original deal that was discussed." Id at 4. Finally, the July 6, 1998 memorandum states: "If you find neither of the two scenarios acceptable, I will remain on the board and my family will retain their equity positions." Paulsell received no response to the July 6, 1998 memorandum.
Defendants dispute whether Paulsell received a response to the July 6, 1998 memorandum. Edward Cohen testified that after receiving the July 6, 1998 memorandum, he called Palusell and told him that he "accepted his third proposal that he stay on because he wanted to be on the executive committee . . . and that was fine with us." E. Cohen Depo, Vol I, p. 78. However, because all facts relating to defendants' motion must be viewed in the light most favorable to plaintiffs, this court accepts Paulsell's version of these events for purposes of defendants' motion.
On August 26, 1998, Paulsell called Edward Cohen. During that conversation, Edward Cohen told Paulsell that TRM would appoint Paulsell to the executive committee of TRM's board of directors. Paulsell Depo, pp. 276-77. On August 27, 1998, Paulsell sent a memorandum to Edward Cohen stating that "reinstating [his] position on the executive committee was an important action" and that the Paulsell family "again reviewed the potential dilution regarding the 500,000 warrants" and had decided to "follow through on the sale." Depo Ex 30. On September 2, 1998, the Cohens sent Paulsell a memorandum stating that they "are unable to reconcile your new proposal with the arrangements worked out pursuant to your memorandum of July 6, 1998." Depo Ex 33. The September 2, 1998 memorandum also stated that: "We told you that our group did find neither of the two sales scenarios acceptable, but that we would be glad to have you remain on the board, and were pleased that your family would be retaining their equity positions. It was in this context that we agreed to support your addition to the executive committee." Id.
The Cohens never purchased the Paulsell family stock, and this lawsuit eventually followed.
ANALYSIS
I. Defendants' Motion for Summary Judgment
A. Applicable Law
Plaintiffs contend that Oregon law applies to all claims, while defendants rely on both Oregon and New York law. However, at oral argument on defendants' motion, defendants agreed that for purposes of their motion, the court may apply Oregon law.
B. Breach of Contract — Difference Between Pleadings and Deposition Testimony
Defendants first contend that they are entitled to summary judgment against plaintiffs' breach of contract claim based on the contradiction between plaintiffs' pleadings and Paulsell's deposition testimony. Specifically, defendants assert that the Complaint alleges a single agreement, whereas Paulsell testified that he wore "two hats" and discussed two agreements with the Cohens during their dinner meeting on December 4, 1997. Paulsell Depo, pp. 65-66, 115, 149-51.
While defendants insist that the Complaint alleges that Paulsell and the Cohens discussed only one agreement on December 4, 1997, it is not that narrowly pled. The Complaint alleges that Paulsell and the Cohens:
agreed upon the following particulars, subject to the Cohen defendants' due diligence of TRM:
(a) defendants would purchase one million shares (sixty-five percent) of the TRM shares owned by the Paulsell family, at a price of $13 per share, for a total of $13 million;
(b) defendants would invest $20 million in TRM;
(c) Paulsell would relinquish to Edward Cohen his position as chairman of TRM's board of directors;
(d) Paulsell would become vice chairman of TRM's board of directors and would be a member of the executive committee;
(e) Daniel Cohen would be elected as the chairman of the executive committee;
(f) Paulsell would be paid three-quarters of whatever salary was established for Daniel Cohen;
(g) A new board of directors would be established with three nominees from Edward Cohen, three current TRM board members, and three members to be chosen jointly by Edward Cohen and Paulsell;
(h) Fred Stockton would remain TRM's chief executive officer.
Complaint, ¶ 11(a) — (h).
Plaintiffs' claims are based upon an alleged agreement reached between Paulsell and the Cohens during the December 4, 1997 dinner meeting that defendants would purchase one million shares of their personal stock holdings. However, according to plaintiffs, that agreement was only one part of a broader overall agreement involving three basic concepts, namely: (1) the purchase of a substantial block of TRM stock from the Paulsell family (the "Paulsell family stock transaction"); (2) the investment of $20 million into TRM (the "TRM investment transaction"); and (3) a corresponding relinquishment of control over TRM in favor of the Cohens. In other words, the Paulsell family stock transaction (Complaint, ¶ 11(a)) was inextricably intertwined with and contingent upon the closing of a $20 million investment into TRM by defendants (id at ¶ 11(b)), as well as upon the change in control (id at ¶¶ 11(c) — (h)).
Plaintiffs have presented evidence that, although Paulsell and the Cohens initially intended all of these parts of the overall transaction to fall into place simultaneously, Paulsell was subsequently excluded from participating in the TRM investment transaction and the Paulsell family stock transaction was delayed in order to avoid a conflict of interest. Plaintiffs have also submitted evidence that the TRM investment transaction was negotiated on the assumption that the Paulsell family stock transaction was "a done deal" and would be executed on the heels of the TRM investment transaction simply to avoid a potential conflict of interest. See, e.g., Coe Depo, pp. 38-40, 69-90. Plaintiffs allege that they performed their end of the overall transaction by ceding control over TRM to defendants and facilitating the TRM investment transaction, but that defendants took advantage of the "separation" of the "two" transactions by refusing to purchase the Paulsell family stock. In other words, defendants have only partially performed their part of the overall transaction.
The Complaint adequately alleges this scenario. Thus, Paulsell's deposition testimony that the dinner meeting involved "two situations" but "one" overall transaction provides no basis to dismiss plaintiffs' breach of contract claim.
C. Defenses Applicable to All Claims
Defendants raise a number of defenses which apply across the board to plaintiffs' claims. However, defendants have indicated a willingness to dismiss certain defenses if the Fourth Cause of Action for promissory estoppel is dismissed. Relying on Hill v. Mayers, 104 Or. App. 629, 802 P.2d 694 (1990), rev denied, 311 Or. 187, 808 P.2d 91 (1991), defendants argue that plaintiffs are not entitled to enforce the Paulsell family stock transaction based on a theory of promissory estoppel, but are instead limited to a breach of contract claim. Plaintiffs counter that the promissory estoppel claim is a necessary alternative claim to breach of contract because defendants assert that the alleged contract to purchase the Paulsell family stock is unenforceable on a number of grounds. At the hearing on defendants' motions, defendants conceded that plaintiffs may be right on that point and offered to withdraw their argument that the contract is unenforceable if this court dismisses plaintiffs' promissory estoppel claim. The parties then engaged in a bartering session with plaintiffs tentatively agreeing to dismiss their promissory estoppel claim in exchange for defendants tentatively agreeing to dismiss certain affirmative defenses. However that tentative agreement ultimately broke down over a disagreement as to which affirmative defenses to the breach of contract claim should remain if the promissory estoppel claim was dismissed. See letters to the court from plaintiffs dated February 15, 2002 (docket #101), from defendants dated February 19, 2002 (docket #102), from plaintiffs dated February 22, 2002 (docket #103), and from defendants dated February 22, 2002 (docket #104).
See, e.g., Neiss v. Ehlers, 135 Or. App. 218, 899 P.2d 700 (1995) and Consolidated Servs., Inc. v. Keybank Nat'l Assoc., 29 F. Supp.2d 942, 945 (N.D. Ind 1998), aff'd 185 F.3d 817 (7th Cir 1991).
A decision on the legal sufficiency of defendants' affirmative defenses may well resolve the issue of what claims ultimately go forward in this case. Moreover, during the April 22, 2002 hearing on Paulsell's summary judgment motion against defendants' counterclaims, defendants suggested that this court first decide the issue of whether they are entitled to summary judgment on their affirmative defense of repudiation (Answer, ¶ 39(a)). If so, both the breach of contract and promissory estoppel claims fail. Consequently, this court will begin with that issue and then discuss the remaining affirmative defenses raised in defendants' motion.
1. Repudiation
Defendants argue that, even assuming that the Cohens agreed to purchase the Paulsell family stock on December 4, 1997, Paulsell thereafter twice repudiated his agreement to sell the Paulsell family stock, thereby excusing defendants from performance. Specifically, defendants assert that Paulsell repudiated any alleged contract to purchase the Paulsell family shares when: (1) he signed the Voting Agreement (Depo Ex 29 at TRM001008 — TRM001012); and (2) when he sent his July 6, 1998 memorandum (Depo Ex 28) to the Cohens.
a. Legal Standard
A party repudiates a contract when it indicates that it will breach the contract or commits some act which renders it unable to perform without committing a breach. RESTATEMENT 2d OF CONTRACTS, § 250 (1979). The party's language "must be sufficiently positive to be reasonably interpreted to mean that the party will not or cannot perform." Id at Comment b. Oregon case law clarifies that a repudiation requires a party to refuse "`positively, unconditionally, unequivocally, distinctly and absolutely'" to perform his or her contractual obligations. Jitner v. Gersch Devel. Co., 101 Or. App. 220, 224, 789 P.2d 704, 706 (1990), quoting Swick v. Mueller, 193 Or. 668, 676, 238 P.2d 717, 720 (1951); see also Wilson v. Western Alliance Corp., 78 Or. App. 197, 200, 715 P.2d 1344, 1346, rev denied, 301 Or. 446, 723 P.2d 325 (1986). Whether an unequivocal repudiation occurs is a question of fact for a jury. Standley v. Standley, 81 Or. App. 274, 280, 725 P.2d 397, 400 (1986); Lee v. Thunder Devel., Inc., 77 Or. App. 7, 12, 711 P.2d 978, 980 (1985).
b. The Voting Agreement
Closing of the TRM investment transaction, as delineated in the TRM/ReadyCash Agreement, was expressly conditioned upon execution of a voting agreement to be signed by TRM's largest shareholders, including Paulsell. Depo Ex 123, ¶ 7.2 and Schedule 7.2.
On April 3, 1998, Paulsell and three other TRM directors signed a Voting Agreement prepared by ReadyCash LP's attorneys. Brown Depo, pp. 93-94. The Voting Agreement ensured actual ownership and the right to vote TRM common stock and provided that the signatories would "vote all Subject Shares . . . in favor of the transactions contemplated by the [TRM/ReadyCash] Agreement," but expressly conferred no rights or remedies on any third parties. Voting Agreement, ¶¶ 1, 2, 5(c).
Paulsell was told that the purpose of the Voting Agreement was to obtain his commitment to vote his stock for the TRM/ReadyCash Agreement. Brown Depo, p. 94; Depo Ex. 56, p. 1. The Voting Agreement states:
The Subject Shares. The Stockholder [Paulsell] is the record and beneficial owner of, and has good and marketable title to, the Subject Shares set forth opposite his or its name on Schedule A attached hereto, free and clear of any Encumbrances. . . . The Stockholder has the sole right to vote, and the sole power of disposition with respect to, such Subject Shares, and none of such Subject Shares is subject to any voting trust or other agreement, arrangement or restriction with respect to the voting or disposition of such Subject Shares, except as contemplated by this Agreement.
Voting Agreement, ¶ 1(b) (emphasis added).
The signatories were not told that the purpose of the Voting Agreement was to ensure that Paulsell had no agreement with the Cohens, and the Voting Agreement expressly does not confer any rights or remedies on third parties. Id at ¶ 5(c); Brown Depo, pp. 94, 99; Coe Depo, p. 105-07; Stockton Depo, p. 137.
Defendants assert that Paulsell effectively repudiated any alleged agreement that he had to sell the Paulsell family shares to the Cohens when he certified in the Voting Agreement that his shares were not subject to "any voting trust or other agreement" concerning their disposition. This court disagrees and not only recommends that defendants' request for summary judgment on this issue be denied, but further recommends that this defense be dismissed.
Edward Cohen testified that defendants "had demanded" that Paulsell "specifically vouch that there w[as] no side arrangement of any sort" concerning his stock and that the Cohens "had insisted" that there be a representation by Paulsell that there was no private transaction. E. Cohen Depo, Vol I, pp. 44, 52-53. This evidence indicates that, at least in Edward Cohen's mind, the Voting Agreement was intended to protect the Cohens from requests for "special consideration" in connection with the TRM/ReadyCash transaction. Id at 52-53.
However, Edward Cohen's testimony is overcome by overwhelming evidence in the record showing that the Voting Agreement was not intended to restrict the ability of any of its signatories to dispose of their shares. Instead, the stated purpose of the Voting Agreement was to facilitate the TRM investment transaction outlined in the TRM/ReadyCash Agreement. Depo Ex 29 at TRM001008. Moreover, the parties to the Voting Agreement were TRM and four of its individual stockholders, including Paulsell, and the Voting Agreement expressly states that it "is not intended to confer upon any [third party] any rights or remedies." Id at TRM001008 and TRM001010, ¶ 5(c)(ii).
If the language of the Voting Agreement alone were not enough to dispose of this argument, the remaining evidence in the record buttresses the conclusion that the Voting Agreement was simply intended to ensure that its signatories actually owned their shares and would vote in favor of the proposed TRM/ReadyCash investment transaction.
TRM did not intend the Voting Agreement to restrict Paulsell from selling his TRM common stock to the Cohens. Brown Depo, p. 99. The Schedule 13D filed by TRM with the Securities Exchange Commission on April 3, 1998, indicates that Paulsell's power to "dispose or direct the disposition" of his shares "is not affected by the Voting Agreement." Depo Ex 56, Schedule 13D, ¶ 5 (TRM1004); Brown Depo, pp. 98-99. The Cohens and their counsel received a copy of this Schedule 13D. Brown Depo, p. 97; Abt Depo, pp. 112-13.
Sherman Coe, who signed the Voting Agreement, did not believe that it was intended to have any affect on the Paulsell-Cohen agreement, since the Schedule 13D showed no such restrictions. Coe Depo, pp. 60-61, 103-07.
Even the Cohens' transactional lawyer, Richard Abt, agrees that Paulsell could have sold his stock to the Cohens anytime after April 3, 1998. Abt Depo, p. 119. Edward Cohen also testified that the Voting Agreement did not prohibit the Paulsell-Cohen agreement from being completed following the close of the ReadyCash/TRM transaction. E. Cohen Depo, Vol I, p. 117.
Moreover, even assuming Paulsell's signature on the Voting Agreement is sufficient evidence of a repudiation of the Paulsell family stock transaction, Paulsell reaffirmed his intention to go through with the transaction with the Cohens a short while later on April 20, 1998, before the Cohens relied on the alleged repudiation. See Depo Exs 16 and 17; Paulsell Depo, p. 246; S. Paulsell Depo, pp. 35-36.
Edward Cohen's testimony is not sufficient to create a genuine issue of material fact such that plaintiffs are entitled to summary judgment on the repudiation defense based on the Voting Agreement. Thus, defendants are not entitled to summary judgment that the Voting Agreement was a repudiation of the Paulsell family stock transaction and plaintiffs should sua sponte be granted summary judgment against this defense.
c. The July 6, 1998 Memorandum
Defendants also assert that Paulsell repudiated the alleged Paulsell family stock transaction when he sent the Cohens a July 6, 1998 memorandum. In that memorandum, Paulsell accuses the Cohens of "negotiating an agreement with [him], then significantly enhanc[ing] it" by ousting him from the executive committee and negotiating 500,000 warrants for ReadyCash in the TRM/ReadyCash investment transaction. Depo Ex 28, pp. 2-3. The July 6, 1998 memorandum also states:
I have discussed the ReadyCash situation with most of my family. We are willing to sell the approximately one million shares of TRM to your group under one of the following scenarios:
#1 a) I would resign from the board;
b) I would be awarded 325,000 warrants under the same terms as you received 500,000 warrants. These warrants would be issued as severance and for my years of service; and
c) the Paulsell family would sell Edward/Daniel Cohen 65% of their TRM stock at $13 per share.
#2 a) I would serve on TRM's Executive and Nominating Committes;
b) I would continue as vice chairman, with compensation equal to 3/4 of that paid to Daniel Cohen;
c) ReadyCash would either turn back their warrants or TRM would issue warrants to me for 325,000 shares on the same terms for my positive role in effectively sponsoring and negotiating the major terms of the ReadyCash transaction; and
d) The Paulsell family would sell Edward/Daniel Cohen 65% of their TRM stock at $13 per share.
Scenario #2 is the same basic deal we initially agreed upon, without the addition of the warrants. . . . My family remains prepared to sell you 65% of their holdings, but only on the original deal that was discussed. We are reluctant to lose one and a half million dollars in the value of our holding while you have negotiated a sweetner of 500,000 warrants for ReadyCash.
If you find neither of the two scenarios acceptable, I will remain on the board and my family members will retain their equity positions.
Id at 3-4.
According to Paulsell, the purpose of this memorandum was to "diffuse" and "settle" the disagreements over ReadyCash LP's receipt of 500,000 warrants in addition to convertible preferred stock when it invested in TRM and Paulsell's exclusion from the executive committee by the new ReadyCash-controlled board of directors. Paulsell Depo, pp. 267-68, 286. Paulsell testified that on June 25, 1998, just after the first meeting of the new board of directors, he spoke with Edward Cohen about these two issues. Id at 258-61, 275-76; E. Cohen Depo, Vol I, p. 73. Paulsell's position was that these two changes had materially altered the nature of the overall transaction that he and the Cohens discussed on December 4, 1997, which specifically required that Paulsell would be a member of the executive committee and the new board of directors. Complaint, ¶ 11(d). The addition of the warrants effectively diluted the value of TRM's common stock, while his exclusion from the executive committee reduced the amount of his control. However, Cohen "put [Paulsell] off" and asked him to get back to him in a couple of weeks. Paulsell Depo, p. 261.
In response to that conversation, Paulsell sent the Cohens the July 6, 1998 memorandum outlining what he describes as a "settlement proposal." Id at 286. Because he received no response, he finally called the Cohens on August 26, 1998. During that conversation, Edward Cohen told him that TRM would appoint Paulsell to the executive committee. Id at 276-77. Paulsell then "backed off from the warrant situation . . . and just said `Let's — let's finish this up.'" Id at 287.
Paulsell denies that the Cohens ever stated or implied that their commitment to place him back on the executive committee was somehow connected to his agreement to forego the Paulsell family stock transaction. Id at 291. Placing him on the executive committee simply resolved one dispute, leaving only a dispute on the issue over the warrants that Paulsell claims were never part of the December 4, 1997 discussions. Paulsell's memorandum to the Cohens the following day is consistent with Paulsell's testimony. While he states that "reinstating his position on the executive committee was an important action," just three paragraphs later he reaffirms the commitment by the Paulsell family to "follow through on the sale" because his "reinstatement on the executive committee made a difference to them, in that [he] would continue to have input, both to the company and to them." Depo Ex 30.
Defendants argue that the July 6, 1998 memorandum stated Paulsell's intent not to perform unless the Cohens accepted new terms, either Scenario #1 or #2. "[L]anguage that under a fair reading `amounts to a statement of intention not to perform except on conditions which go beyond the contract' constitutes a repudiation." RESTATEMENT 2d OF CONTRACTS, § 250 (1979), quoting UCC § 2-610, Comment 2. However, Paulsell has presented evidence to counter defendants' assertion that his July 6, 1998 memorandum meets this standard. Rather than a repudiation, a fact finder could conclude that the July 6, 1998 memorandum was Paulsell's effort to enforce the terms of the overall agreement reached on December 4, 1997.
The Cohens and Paulsell never discussed warrants on December 4, 1997, leading to the reasonable inference that neither party anticipated the addition of warrants. The addition of warrants would dilute the stock interest owned by the Paulsell family. In Paulsell's mind, defendants breached the implied/unspoken term of not diluting the Paulsell family ownership interest by persuading the special committee to agree to the 500,000 warrants.
Defendants point out that Paulsell was present and participated in the special board meetings in March 1998 that resulted in a unanimous vote approving the transaction with the warrants. By voting in favor, defendants argue that Paulsell is estopped from raising the warrants as a material change in the alleged agreement to sell his shares. However, defendants' argument overlooks the fact that as a director, Paulsell was obligated to vote in TRM's best interest, not in his own best interest. Although the warrants may have benefitted TRM, they did not benefit the Paulsell family.
Moreover, even assuming that the July 6, 1998 memorandum could be read as a refusal to perform, Paulsell's August 27, 1998 memorandum could just as easily be read as a retraction of the July 6, 1998 memorandum. Paulsell testified that he discussed his exclusion from the executive committee with Edward Cohen on June 25, 1998, the day after the TRM/ReadyCash LP transaction solidified, and that at that time, Edward Cohen agreed to support Paulsell's appointment to the executive committee. Paulsell Depo, p. 276. However, Paulsell was not actually put back on the executive committee until some time thereafter at the next meeting of the TRM board of directors, which appears to have taken place on October 26, 1998. See Paulsell Depo, p. 276; Depo Ex 25. In other words, according to Paulsell, Edward Cohen agreed to put Paulsell back on the executive committee long before the supposed "repudiation" contained in the July 6, 1998 memorandum. Alternatively, the Cohens could not have relied on any "repudiation" in the July 6, 1998 memorandum because Paulsell was not in fact put back on the executive committee until after Paulsell retracted his repudiation on August 27, 1998. Depo Ex 30.
Thus, defendants are not entitled to summary judgment on the basis of repudiation due to the July 6, 1998 memorandum. Instead, whether the July 6, 1998 memorandum constituted a repudiation is a question of fact which must be resolved by a jury.
2. Status of Other Defenses and Plaintiffs' Promissory Estoppel Claim
Because defendants are not entitled to summary judgment based on repudiation, plaintiffs' breach of contract and promissory estoppel claims remain. The next issue is whether promissory estoppel is a necessary alternative to the breach of contract claim. As noted above, plaintiffs are unwilling to voluntarily dismiss the promissory estoppel claim if the alleged contract is unenforceable for some reason. In that event, they need the alternative promissory estoppel theory. Thus, whether the promissory estoppel claim is needed depends upon why the contractual remedy is unavailable.
As plaintiffs have acknowledged, the promissory estoppel claim is necessary only if it is not subject to the same defenses as the breach of contract claim. If defendants prevail on any defense that applies to both the breach of contract and promissory estoppel claim, then plaintiffs lose on both claims. On the other hand, if a defense applies only to the breach of contract claim, then plaintiffs need the alternative theory of promissory estoppel which is not subject to that defense. A defense that applies only to a breach of contract claim, but not to a promissory estoppel claim, is one that renders the alleged contract unenforceable.
As a result of this analysis, defendants agreed to voluntarily dismiss several of their affirmative defenses if plaintiffs dismissed the promissory estoppel claim. One of their affirmative defenses alleges that the Paulsell family stock transaction is void as against public policy. Answer, ¶ 39(d). Specifically, defendants argue that the alleged Paulsell family stock transaction is not enforceable because it violates the public policy against the sale of a corporate office. However, in their reply memorandum to their summary judgment motion on this issue, defendants indicated that they would withdraw this affirmative defense if the court dismissed plaintiffs' claim for promissory estoppel.
The same offer was made with respect to several other affirmative defenses during the bartering session at the hearing on defendants' motion and in the series of letters from both sides following that hearing. During argument on their motion, defendants also agreed to dismiss all of their affirmative defenses, with the exception of those alleged in paragraph 39(a), (b), and (c) of the Answer. Those defenses allege: (1) repudiation or renunciation (¶ 39(a)); (2) discharge or rescission by a subsequent mutual agreement (¶ 39(b)); and (3) any contract was induced by plaintiffs' fraud, including plaintiffs' half-truths and failure to disclose material information (¶ 39(c)). Each of those affirmative defenses serves to bar recovery based on a theory of promissory estoppel to the same extent they bar recovery based upon an enforceable contract. The way these the first three affirmative defenses are pled implicitly recognizes this fact. See Answer, ¶¶ 39(a)-(c) ("Plaintiffs' claims are based upon an alleged contract that, if it existed at all (which defendants deny) was [repudiated, renounced, discharged, rescinded, or induced by plaintiffs' fraud].") (emphasis added).
During the hearing, defendants did not mention their affirmative defense of failure to mitigate (Answer, ¶ 39(j)), but apparently pointed out this omission to plaintiffs' counsel shortly after the hearing. See Transcript of Hearing dated February 8, 2002 (attached to letter from plaintiffs' counsel dated February 15, 2002 (docket #101)) and letter from defendants' counsel dated February 19, 2002 (docket #102), p. 3. However, that omission is of no moment in this context. That defense simply allows defendants to argue that plaintiffs' damages should be reduced because plaintiffs could have reduced their own damages but failed to do so without justification. Bixler v. First Nat'l Bank, 49 Or. App. 195, 203, 619 P.2d 895, 901 (1980). Thus, it affects all of plaintiffs' claims in the same way, namely by providing a basis to argue to the jury that the amount of any damages awarded should be reduced.
Therefore, the affirmative defenses which defendants have not agreed to withdraw (Answer, ¶¶ 39(a), (b), (c), and (j)) apply to both the breach of contract and promissory estoppel claims, rendering the promissory estoppel claim unnecessary as an alternative claim.
The primary issue with respect to the need for the promissory estoppel claims arose in the letters submitted following the hearing on defendants' motions. In their first letter to the court, defendants stated:
Defendants will not give up their right to argue to the jury that the parties were just discussing possibilities and did not reach any agreement in New York on December 4, 1997. If plaintiffs argue to the jury that Paulsell believes that he and defendants entered into the agreement that plaintiffs allege in paragraph 11 of their Fourth Amended Complaint, then in all fairness defendants must be permitted to show the jury: (1) that a number of key terms that Paulsell alleges were "agreed upon" were, in fact left unresolved and subject to further negotiations; (2) that Paulsell did not have the authority to enter into any agreement; and (3) that Paulsell was present, as he testified to during his deposition, "basically to start off the negotiations."
Letter dated February 19, 2002 (docket #102), p. 3.
This paragraph makes it crystal clear that defendants intend to argue that the Paulsell family stock transaction is unenforceable on the basis that the terms of the TRM investment transaction were too indefinite to be enforced, that Paulsell lacked the authority to finalize the TRM investment transaction, or that Paulsell was simply starting off the negotiations concerning the TRM investment transaction. In other words, defendants intend to attempt to escape liability with regard to plaintiffs' claims concerning the Paulsell family stock transaction on the ground that, on December 4, 1997, the TRM investment transaction was not yet set in stone. Based on this stated intent, plaintiffs are justifiably concerned about voluntarily dismissing their promissory estoppel claim. After all, if the contract is not sufficiently definite to be enforceable, then plaintiffs want the opportunity to prove the alternative theory of an oral promise upon which they detrimentally relied. See Bixler, 49 Or App. at 199 n4, 619 P.2d at 895 n4.
However, there are several problems with defendants' approach. First, defendants have never alleged any such affirmative defenses. Defendants do not allege that the Paulsell family stock transaction (or the TRM investment transaction for that matter) was too indefinite, ambiguous, or vague. Moreover, at the hearing on defendants' motion, counsel for defendants specifically disclaimed any reliance on two of those defenses. See Transcript of Hearing of February 8, 2002, p. 6. Instead, defendants specified that, in the event there was no promissory estoppel claim, the only defenses they would raise at trial were the factual defenses that: (1) the Cohens "never uttered any agreement" (Transcript, p. 7); (2) if they did make an agreement, it was later repudiated (id); and (3) any agreement reached had been induced by fraud (id at 13). For this reason alone, defendants are precluded from making the arguments they now contend that in fairness they should be allowed to make.
Second, and more importantly, even were such defenses alleged in the pleadings, they would not be appropriate in this case. As the extensive briefing in this case has revealed, plaintiffs' breach of contract claim turns on a single, straightforward question, namely whether on December 4, 1997, the Cohens agreed to purchase one million shares in TRM for $13 million from the Paulsell family. Complaint, ¶ 11(a). There is nothing vague, ambiguous, or indefinite about those terms or that question. Either the Cohens agreed to purchase the Paulsell family stock, or they did not.
With respect to the TRM investment transaction, there is no dispute that defendants and TRM conducted due diligence, agreed on a coupon rate, and closed that transaction, with ReadyCash LP investing $20 million in TRM. Nevertheless, defendants seek to argue that the Paulsell family stock transaction is unenforceable because on December 4, 1997, some details of the TRM investment transaction still had to negotiated, including the coupon rate on the convertible preferred stock. In other words, defendants want to reach back to December 4, 1997, and invalidate the Paulsell family stock transaction despite the fact that the TRM investment transaction, upon which the Paulsell family stock transaction hinged, actually closed. Defendants should not be permitted to make this argument. If the TRM investment transaction closed and the change in control occurred as agreed on December 4, 1997, then defendants were obligated to complete the agreement by purchasing the Paulsell family stock.
Based on the above, this court recommends that: (1) all affirmative defenses except those pled in ¶¶ 39(a), (b), (c), and (j) of the Answer be deemed withdrawn and/or dismissed; and, in exchange, (2) plaintiffs' Fourth Cause of Action (Breach of Contract — Promissory Estoppel Remedy) be dismissed.
As discussed below, this court also recommends granting plaintiffs' motion for summary judgment against defendants' counterclaims, one of which deals with Paulsell's alleged half-truths and failure to disclose material information. As a result, the affirmative defense pled in the Answer, ¶ 39(c), should also be dismissed, albeit because it is legally insufficient, not because defendants have waived that defense.
II. Fraud Claims
1. Count One — Promise With No Intent to Perform
Count One of plaintiffs' fraud claim alleges that defendants promised to purchase the Paulsell family stock with no intention of ever doing so. As discussed above, defendants are not entitled to summary judgment against Count One of the fraud claim on the basis that Paulsell repudiated the alleged Paulsell family stock transaction or that it violated public policy (an affirmative defense that should be deemed withdrawn/dismissed). Alternatively, defendants argue that plaintiffs have failed to submit sufficient evidence that the alleged promise was in fact false when it was made.
A fraud claim can be premised upon a promise made with no intent to perform, or with reckless disregard as to whether the promisor can or cannot perform. Weiss v. Northwest Acceptance Corp., 274 Or. 343, 346, 546 P.2d 1065, 1068 (1976). However, a failure to perform is not, in an of itself, sufficient evidence of fraud. Id, citing Conzelmann v. Northwest Poultry Dairy Prods. Co., 190 Or. 332, 352, 225 P.2d 757, 765-66 (1950). Instead, `[o]ther circumstances of a substantial character must be shown in addition to nonperformance before such inference of wrongful intent may be drawn." Conzelmann, 190 Or at 352, 225 P.2d at 765.
Defendants assert that the only evidence presented by plaintiffs concerning Count One of their fraud claim is that during a June 20, 2000 lunch meeting, Edward Cohen allegedly responded to a question by Paulsell's former wife (Marcia Zech) about the Paulsell family stock transaction by stating that "there was no agreement" and never had been any agreement. Paulsell Depo, pp. 301-02; K. Zech Depo, pp. 19-20; M. Zech Depo, pp. 36, 66. Similarly, the Cohens testified that there never was any agreement of any kind concerning the Paulsell family stock transaction. D. Cohen Depo, Vol I, pp. 50-51; E. Cohen Depo, Vol I, pp. 5, 9. In addition, in response to the question of whether he or his father "ever had any intent to purchase stock held by the Paulsell family," Daniel Cohen responded: "I think the answer is no." D. Cohen Depo, Vol I, p. 18.
Defendants argue that this testimony is not evidence of their intent not to perform, but simply reflects the Cohens' belief that they never in fact entered into any agreement to purchase the Paulsell family stock. However, a thorough review of the record reveals several highly suspicious circumstances which, taken together, would allow a fact finder to conclude that the Cohens promised to purchase the Paulsell family stock with no intent to keep that promise.
First, there is evidence that Paulsell was chosen to go to the December 4, 1997 meeting partly due to the fact that he was a substantial shareholder in TRM and because Laifer indicated that the potential investor wanted both control and to purchase a large block of shares. Paulsell Depo, pp. 67, 109-11. Paulsell consulted both his attorney and TRM's attorney and was told to be careful to "wear two hats" during the discussion. Id at 65-66, 115. According to Paulsell, the deal regarding his family's stock was concluded "on the spot" and was so straightforward as to require no written follow up, i.e. one million shares at $13 each for a total of $13 million. Id at 81-83, 150-51. This testimony is supported by evidence that TRM later set up a special committee excluding Paulsell to consider the TRM investment (Brown Depo, p. 24), as well as the testimony of TRM board members and others who were under the impression that the Paulsell family stock transaction was a done deal. Coe Depo, pp. 40, 70, 78-79, 94; Pym Depo, pp. 47-48; Simon Depo, p. 51. Paulsell also willingly forfeited his position as Chairman of TRM's board of directors to someone with no real interest in TRM. Coe Depo, p. 86. This evidence alone supports the inference that the Cohens had in fact agreed to purchase the Paulsell family stock.
Moreover, the Cohens' silence in the face of later developments strongly supports the inference that they had agreed to purchase the Paulsell family stock simply to get Paulsell's support in their bid to get control of TRM without any intention of carrying through on that promise. On April 20, 1998, Paulsell and his wife, Susan Paulsell, had dinner with the Cohens in Portland. By that time, TRM stock was trading at approximately $14.50 per share. Nevertheless, Paulsell told the Cohens he was a man of his word and would sell the Paulsell family stock at $13 per share. Paulsell Depo, p. 246; S. Paulsell Depo, pp. 35-36. The opening paragraph of Paulsell's April 21, 1998 letter to the Cohens states: "I am a man of my word and will deliver the agreed upon shares at $13.00/share. I believe I can also deliver Marcia Zech's shares." Depo Ex 16, p. 1. The followup memorandum two days later could not be more clear that Paulsell believed he was selling the Cohens a million shares of stock and that agreement was driving the TRM investment transaction:
Selling you approximately 1 million shares allowed the TRM / ReadyCash transaction to proceed and gave you the opportunity to acquire the additional 500,000 warrants. . . . At $13, my family is selling approximately $13 in stock. . . . I feel it appropriate, because it is the sale of my stock that initiated this transaction, that at the time of closing I begin receiving interest from TRM until we close our own transaction.
Depo Ex 17, p. 1.
Despite this evidence of an agreement by the Cohens to purchase the Paulsell family stock, and despite the April 1998 letter and memorandum to the Cohens confirming that agreement, the Cohens never denied the existence of this agreement until well after the TRM investment transaction had closed and the Cohens and ReadyCash LP effectively took over TRM. According to Paulsell, the Cohens did not respond to his July 6, 1998 memorandum either. That memorandum references the April 23, 1998 memorandum and then describes two sales scenarios, both of which include a sale of stock to the Cohens and one of which is described as "the same basic deal we initially agreed upon." Depo Ex 28, p. 3.
There is also evidence in the record that the Cohens are sophisticated businessmen. A fact finder could reasonably conclude that in this context, with at least $13 million at stake, that the Cohens' agreement to purchase the Paulsell family stock, and their silence in the face of the April 1998 letter and memorandum, was designed to keep the wool pulled firmly over Paulsell's eyes just long enough to get control of TRM. Similarly, a fact finder could infer that their silence in the face of the July 6, 1998 memorandum reflected an unwillingness to acknowledge the Paulsell family stock transaction because defendants never intended to carry through with it. The exchange of correspondence in late August and early September 1998 could also be interpreted this way. The only response to Paulsell's August 27, 1998 memorandum (again reaffirming the Paulsell family stock transaction) is a carefully-worded letter purporting to tie the agreement to place Paulsell on the executive committee to a discharge of the Cohens' obligation to purchase the Paulsell family stock.
Defendants seek to have this court ignore the Cohens' silence and instead find the fraud claim deficient on the ground that it is supported by nothing more than the fact that the Paulsell family stock transaction never closed. However, the Cohens' silence in the face of Paulsell's repeated written references to the Paulsell family stock transaction is irreconcilable with their insistence that no agreement was ever reached. A reasonable fact finder could infer from this silence, and from evidence of the Cohen's delay in responding to Paulsell's concerns, that the Cohens were simply stalling Paulsell until the TRM/ReadyCash LP transaction closed and TRM (with Paulsell's acquiescence) was under the control of ReadyCash LP.
Furthermore, the record reveals a factual dispute over whether in December 1997, the Cohens had the financial wherewithal to complete the Paulsell family stock transaction. The record is silent as to whether RAI could have made a $13 million stock purchase on top of the $20 million investment required to finalize the TRM investment transaction. As for ReadyCash Corp and ReadyCash LP, those entities did not exist in December 1997 and the record does not reveal what investors may have been waiting in the wings to participate in whatever deals the Cohens put together. With respect to the Cohens, Edward Cohen testified that he did not have $13 million of "free cash" lying around in December 1997, and would have had to sell assets in order to purchase the Paulsell family stock. E. Cohen Depo, Vol I, p. 62-63. Daniel Cohen "could only invest a small amount in [ReadyCash]" (D. Cohen Depo, Vol I, p. 18), and given that he invested only a total of approximately $30,000.00, it is unlikely that he had access to $13 million in order to purchase the Paulsell family stock. Later, when the TRM stock price dropped down to anywhere from $1 to $7 per share, Daniel, Edward, and another Cohen sibling purchased substantial numbers of shares of TRM stock from Wellington Capital Management, but had to borrow money from a bank even at the reduced prices for the stock. D. Cohen Depo, Vol II, pp. 17-19, 138-39. If the defendants did not have the ability to pay $13 million for the Paulsell family stock, then it may be inferred that they had no intent to do so.
In short, the record presents a sufficient factual dispute on the issue of the Cohens' intent to perform on the Paulsell family stock transaction to make summary judgment on this claim inappropriate.
2. Count Two — Representations of ATM Managerial Experience and Business Plan
Defendants also seek summary judgment against Count Two of plaintiffs' fraud claim, which alleges that defendants falsely or recklessly represented that they had "substantial ATM managerial experience and a business plan which . . . would cause TRM's earnings to soar and therefore increase the value of plaintiffs' remaining shares of TRM stock." Complaint, ¶ 29.
This claim is based upon the Cohens' allegedly false statements that: (1) they were "just around the corner" from entering into the ATM marketplace and that they had the technology and experience to succeed quickly (Coe Depo, pp. 33-34); and (2) their statements in their business plan that TRM would become a "dominant player with substantial market share and br[an]d recognition, a `category killer'" and would deploy over 17,000 ATM machines in the United States by December 2001 (D. Cohen Depo, Vol II, pp. 71, 137-38; Depo Ex 79, pp. 2-3).
Plaintiffs assert that these representations were false because the Cohens did not have any technology in place and did not have experience and leadership to implement this ambitious ATM strategy. According to plaintiffs, the Cohens were not prepared to roll out ATM machines nearly at the pace they represented (Brown Depo, pp. 178-79) and that the job of implementing ATM sales at TRM was handed off to Dan Tierney at TRM, who testified that the Cohens did not even play an active role in the ATM business (Tierney Depo, pp. 26-28). Plaintiffs assert that, as a result, defendants were late to the domestic market in the ATM business, and the cash drain on TRM from the ATM business has caused the value of its stock to plummet. Coe Depo, pp. 117-18.
Plaintiffs have provided sufficient evidence to create a factual question over Daniel Cohen's experience in the ATM industry (D. Cohen Depo, Vol II, pp. 6-10), but not necessarily with respect to Edward Cohen. Nevertheless, this claim suffers from a fundamental and fatal flaw. Each of the alleged representations clearly constitutes an opinion about future events. The Cohens' alleged misrepresentations concern their managerial experience and business plan to succeed. The statements in the business plan are under the headings of "Goal" and "Strategy" and are stated in the future tense. Depo Ex 79, pp. 2-3. Similarly, plaintiffs' interrogatory answer accuses Edward Cohen of representing to Paulsell that defendants' expertise and business plan "would cause the value of TRM stock to increase to approximately $190 per share within a few years" and of representing to TRM's board of directors that the same experience "would cause TRM's stock to increase dramatically with this business combination." Simon Dec, Ex 6, pp. 2-3 (emphasis added). Such predictions of future events simply will not support a fraud claim. Frank v. Fitz Enters., Inc., 106 Or. App. 183, 806 P.2d 720 (1991).
As a result, this court recommends granting defendants' motion for summary judgment against Count Two of plaintiffs' fraud claim.
II. Paulsell's Motion for Summary Judgment Against Defendants' Counterclaims
The First and Second Counterclaims allege common law fraud and securities fraud in violation of ORS 59.115 and 59.135(1)-(3) because Paulsell: (1) represented (at the December 4, 1997 dinner meeting in New York) that TRM was worth significantly more than the then-current market value of its stock; and (2) failed to disclose that TRM was experiencing top account attrition and market erosion, had numerous improperly deployed machines, that there were serious questions about whether TRM had the sales talent and depth to penetrate sophisticated key account markets; and (3) intended to use TRM's success in international markets to hide its domestic problems. Answer, ¶¶ 40-63. Paulsell seeks summary judgment against both of these counterclaims.
A. First Counterclaim — Common Law Fraud
1. Lack of Damages
Paulsell argues that defendants' First Counterclaim fails because defendants have presented insufficient evidence of damages. "An essential element of a fraud claim is damages." Adams v. Knoth, 102 Or. App. 238, 243, 794 P.2d 796, 799, rev denied, 310 Or. 422, 799 P.2d 151 (1990). "[T]here can be no actionable fraud unless the other party has acted to his detriment by reason of the same." In re Rosenberg's Estate, 196 Or. 219, 247, 246 P.2d 858, 870 (1952).
Paulsell contends that neither Edward Cohen, RAI, nor ReadyCash Corp. actually invested money in TRM. Defendants counter that they materially relied on Paulsell's alleged fraud to their detriment in ways other than making a direct investment in TRM. Specifically, defendants assert that the Cohens relied on Paulsell's fraudulent omissions by forming the ReadyCash entities and persuading multiple investors to invest almost $20 million into TRM. ReadyCash Corp. was the vehicle through which the Cohens and others promoted investment in ReadyCash LP and ultimately managed the ReadyCash LP investment in TRM. Defendants argue that forming the ReadyCash entities and persuading other investors to invest almost $20 million into TRM constitute actionable reliance on Paulsell's fraudulent omissions because TRM's failure to perform as expected has caused those investors who put in substantial amounts of money into the TRM transaction to be unwilling to go forward on other transactions. Zoll Dec, Ex. 3, p. 4.
The First Counterclaim alleges that ReadyCash LP made a $20 million investment in TRM. Answer, ¶ 46. Defendants do not specify the nature or amount of their damages, but seek punitive damages and allege that they were "damaged in an amount to be proven at trial." Id at ¶¶ 53-54. When asked in an interrogatory to "describe in detail each and every item of damages you are seeking against [Paulsell] in defendants' First Counterclaim," defendants responded that
As damages directly caused by Paulsell's fraudulent failure to disclose the significant problems described in defendants' First Counterclaim, defendants seek to recover the difference between ReadyCash's $20 million investment in TRM Corporation and the actual fair market value of that investment.
Shepherd 2nd Dec, Ex J.
Plaintiffs argue that this interrogatory answer limits defendants' damages on their First Counterclaim to the loss in value of the shares purchased by ReadyCash LP. This court agrees. While defendants may argue that the interrogatory answer limits itself to "damages directly caused by Paulsell's" alleged fraud, the answer was given in response to an interrogatory directing defendants to identify "each and every item of damages" sought with respect to the First Counterclaim. Id (emphasis added). If, with respect to their First Counterclaim, defendants were seeking damages "indirectly" caused by Paulsell's alleged fraud, as they now appear to argue, then they were required to so specify in their interrogatory answer, or be bound by the answer they did give. Calhoun v. United States, 591 F.2d 1243, 1246 (9th Cir 1978). Thus, on this basis, Paulsell is entitled to summary judgment against the First Counterclaim as against all defendants except ReadyCash LP.
Moreover, even assuming defendants were not limited by their interrogatory answer, the record reveals that, with the exception of ReadyCash LP, defendants made no direct investment in TRM and have failed to present any evidence concerning these newly alleged damages sufficient to survive summary judgment with respect to the First Counterclaim. Defendants concede that RAI made no investment in TRM and have elected not to pursue a counterclaim on behalf of RAI. D. Cohen Depo, Vol I, p. 14; D. Cohen Depo, Vol II, p. 6. Edward Cohen testified that he never "intended to be an investor" in TRM or ReadyCash LP (E. Cohen Depo, Vol II, p. 105) and Daniel Cohen confirmed that Edward Cohen had no "direct investment" "in TRM or ReadyCash." D. Cohen Depo, Vol II, pp. 7-8. Simlarly, Daniel Cohen had no direct investment in TRM. Daniel Cohen did make "a nominal investment just to start up" ReadyCash Corp, the general partnership formed to promote investment in ReadyCash LP, the limited partnership which did invest in TRM. However, ReadyCash Corp. did not in turn invest in ReadyCash LP, and there is no evidence that Daniel Cohen made any direct investment in TRM. Abt Depo, p. 147; Hirsh Depo, pp. 68-69.
Despite the lack of direct investment in TRM, defendants argue that as a result of Paulsell's fraud, Daniel Cohen has been harmed by the failure of TRM to perform as expected because those investors who invested in the TRM/ReadyCash LP transaction are not as interested in going forward with other transactions. D. Cohen Depo, Vol II, p. 10. However, other than this single vague deposition answer, defendants have offered nothing to support their assertion of such indirect damages.
Thus, due to a lack of damages, summary judgment should be granted in favor of Paulsell on the First Counterclaim against all defendants except ReadyCash LP.
2. No Intent to Communicate Representations to the ReadyCash Entities
Paulsell argues that he is also entitled to summary judgment against ReadyCash LP on the First Counterclaim because any alleged misrepresentation he made was not intended to be communicated to and acted on by ReadyCash LP. ReadyCash LP did not exist at the time of the December 4, 1997 dinner meeting in New York which Paulsell believed that the Cohens attended only on behalf of RAI.
The issue here is whether Paulsell intended "that his `indirect' representation . . . be communicated to [ReadyCash LP]." Sponseller v. Meltebeke, 280 Or. 361, 364, 570 P.2d 974, 975 (1977) (en banc), citing Menefee v. Blitz, 181 Or. 100, 124-25, 179 P.2d 550, 560 (1947); see also Metal Tech Corp. v. Metal Teckniques Co., 74 Or. App. 297, 307, 703 P.2d 237, 245 (1985). Defendants have submitted some testimony that the dinner meeting in New York included a discussion of investment in TRM by other investors or corporate entities. E. Cohen Depo, Vol I, pp. 13-20. While Paulsell testified that he believed the Cohens were making the investment in TRM individually, and Edward Cohen testified that he attended the dinner meeting in New York solely on behalf of RAI, this testimony is not dispositive. Instead, based on defendants' evidence, Paulsell knew (or should have known) that the Cohens did not plan to make an individual investment in TRM, and instead intended that RAI or some other as yet unidentified group of investors would invest in TRM. Thus, Paulsell is not entitled to summary judgment on the ground that he never intended his alleged misrepresentations to be "communicated to and acted on" by ReadyCash LP. Metal Tech, 74 Or App. at 307, 703 P.2d at 245. ReadyCash LP was simply an alternative investment vehicle for RAI and the Cohens.
3. Sufficiency of the Alleged Statements and Failure to Disclose
Next, Paulsell argues that he is entitled to summary judgment against the First Counterclaim because his alleged statements and failure to disclose are not actionable. Defendants base their First Counterclaim both on a theory of "active concealment" and "fraudulent nondisclosure" as described in the RESTATEMENT 2d OF TORTS, §§ 550 and 551 (1979). See Paul v. Kelley, 42 Or. App. 61, 65, 599 P.2d 1236, 1238 (1979).
Section 550 describes liability for fraudulent concealment as follows:
One party to a transaction who by concealment or other action intentionally prevents the other from acquiring material information is subject to the same liability to the other, for pecuniary loss as though he had stated the nonexistence of the matter that the other was thus prevented from discovering.
The relevant portion of Section 551 describes liability for nondisclosure as follows:
(2) One party to a business transaction is under a duty to exercise reasonable care to disclose to the other before the transaction is consummated, . . . (b) matters known to him that he knows to be necessary to prevent his partial or ambiguous statement of the facts from being misleading; and (c) subsequently acquired information that he knows will make untrue or misleading a previous representation that when made was true or believed to be so; and (d) the falsity of a representation not made with the expectation that it would be acted upon, if he subsequently learns that the other is about to act in reliance upon it in a transaction with him; and (e) facts basic to the transaction, if he knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade or other objective circumstances, would reasonably expect a disclosure of those facts.
As described below, the pleadings and the factual record in this case do not support defendants' First Counterclaim for fraud under either of these theories.
a. Alleged Statements
The First Counterclaim alleges that during the dinner meeting on December 4, 1997, Paulsell "represented that TRM was worth significantly more than the then-current market value of its stock." Answer, ¶ 41. Similarly, defendants' response to plaintiffs' Interrogatories (No. 6 to ReadyCash LP and No. 7 to the Cohens) asserts that Paulsell "represented that TRM was worth significantly more than the then-current market value of its stock." Shepherd Dec, Ex B, p. 4. In response to Paulsell's summary judgment motion, defendants also assert for the first time that, during the December 4, 1997 dinner meeting in New York, Paulsell made a "number of very positive statements about TRM" (D. Cohen Depo, Vol I, p. 36) and "was extremely positive about the value of [TRM] and its — and the smoothness of its operations, the fact that it had a particular niche, that things were very very good" (E Cohen Depo, Vol II, pp. 28-29). Paulsell's "positive statements" included representations that TRM: (1) was "essentially problem-free;" (2) was a "good platform" to grow; and (3) had "tremendous possibilities" for expanding, both domestically and abroad. This court finds that Paulsell's alleged statements are not actionable for several reasons.
b. Failure to Allege
With the exception of the alleged representation of "value," Paulsell's statements now asserted by defendants are neither alleged in defendants' First Counterclaim nor contained in defendants' interrogatory answers. See Answer, ¶¶ 40-54; Shepherd Dec, Ex B, pp. 4-5. Although both the Answer and the response to the interrogatories are qualified by the language that Paulsell's representation about value was "[a]mong other things," the interrogatory asks defendants to identify "each alleged material misrepresentation, half-truth or omission" made by Paulsell. Shepherd Dec, Ex B, p. 2. Thus, the newly asserted "misrepresentations" or "half-truths" should have been disclosed if they form the basis for defendants' First Counterclaim. However, even were this omission excused, the alleged statements and nondisclosure fail for the other reasons described below.
c. Opinion Statements Not Independently Actionable
None of the statements allegedly made by Paulsell are independently actionable because they consist of opinion statements upon which defendants were not entitled to rely. It is well-established that
general commendations of property which are the subjects of a sale, sometimes called "trade talk," "dealers' talk," "sellers' statements" or "puffing" do not attain the status of fraudulent representations where the parties deal at arm's length, as here. Such statements are regarded as mere expressions of opinion upon which a purchaser cannot safely rely.
Miller v. Protrka, 193 Or. 585, 596-97, 238 P.2d 753, 758 (1951) (internal citations omitted). Thus, "expressions by a vendor commendatory of the thing which he is trying to sell are not actionable even though false." Holland v. Lentz, 239 Or. 332, 344-45, 397 P.2d 787, 793 (1964); see also Castleman v. Stryker, 107 Or. 48, 58, 213 P.2d 436, 39 (1923) ("vague commendations of [a party's] wares which manifestly are open to difference of opinion" are not actionable unless they "imply untrue assertions concerning matters of direct observation."); Frank v. Fitz Enters., Inc., 106 Or. App. 183, 186, 806 P.2d 720, 721 (1991) ("Expressions of opinion are not misrepresentations of fact, unless the parties are on unequal footing and do not have equal knowledge or means of knowledge."); Coy v. Starling, 53 Or. App. 76, 81-82, 630 P.2d 1323, 1326, rev denied, 291 Or. 662, 639 P.2d 1280 (1981) (citing Miller v. Protrka with approval); Paracor Fin., Inc. v. General Elec. Capital Corp., 96 F.3d 1151, 1158 (9th Cir 1996) (expressions of "faith in the deal and optimism about [the businesses] prospects" insufficient).
Defendants have not identified a single statement made by Paulsell that goes beyond the type of extravagant language expected from sellers concerning the property sought to be sold. The testimony cited by defendants to support their claim that Paulsell represented that "TRM was worth significantly more that the then-current value of its stock" (Answer, ¶ 41) is that: (1) there had been a previous attempt to sell TRM for $13 per share and Paulsell believed it was worth that amount (Paulsell Depo, pp. 38-43); and (2) during the December 4, 1997 dinner meeting, Paulsell stated that he "would be willing to sell a substantial amount of my stock at $13 a share" (Paulsell Depo, p. 82) and that if he sold his shares, he would expect a "big premium," to which Edward Cohen responded that "generally if [investors] sell a block of stock [they] expect to sell at a discount." (E. Cohen Depo, Vol I, p. 110). There is nothing actionable about Paulsell trying to sell his shares for more than their present trading price or at a premium.
The facts in this case are quite unlike the situation in Patterson v. Western Loan Bldg. Co., 155 Or. 140, 142, 62 P.2d 946, 947 (1936), where the defendant represented that the valueless stock of an insolvent company was "a sound, safe, conservative and valuable investment," or the situation in Jeska v. Mulhall, 71 Or. App. 819, 821, 693 P.2d 1335, 1337 (1985), where the defendant, an attorney who knew that his clients had no transferrable interest in real property, represented that the "property was a lot of property for the money." TRM was not completely valueless at the time that Paulsell allegedly made glowing representations about the value of TRM's stock. To the contrary, it is undisputed that in early 1998, TRM's stock traded publicly for about $9 per share, that "both before and after the June 24, 1998 shareholder meeting to approve the TRM/ReadyCash LP transaction, the price of TRM's stock was rising," and that on July 7, 1998, TRM's stock price closed at $15 per share. Defendants' Concise Statement of Material Facts in Support of Motion for Summary Judgment (docket #72), ¶ 21, admitted by Plaintiffs' Response to Defendants' Concise Statement of Material Facts (docket #82), ¶ 21. TRM's stock continues to trade publicly between $1 and $2 per share. See ttp://finance.yahoo.-com/q?s=TRMMd=t. Paulsell (like any other seller) is entitled to have an opinion about the value of his shares and entitled to ask whatever price he chooses without thereby being subjected to a claim for fraud.
Paulsell's other alleged statements even more clearly constitute the kind of opinion statements that will not support a fraud claim. An exhaustive review of the record reveals that the other statements upon which defendants rely are that Paulsell stated that TRM would be "a good platform . . . to grow" (D. Cohen Depo, Vol I, p. 36), that "there were tremendous possibilities for [TRM] in the United States and abroad" (id at 84), that TRM's ticker symbol, TRMM, stood for "the real money machine" (id at 85), and that TRM was "a fantastically good business," (E.Cohen Depo, Vol II, p. 31) and an "excellent company" (id at 29). These statements are exactly the kind of "sellers' talk" and "puffery" that are insufficient to support a fraud claim.
The only allegation which even arguably constitutes a factual representation is the allegation that Paulsell represented that TRM was "essentially problem free." In light of defendants' allegation that Paulsell failed to disclose the problems identified in the Project Blue Memorandum, this allegation appears troublesome at first blush. However, there is no evidence that Paulsell's "essentially problem free" comment related to TRM's overall business health. To the contrary, the full quote of this testimony indicates that the statement related instead to the "problem free" nature of the business concept (i.e. putting otherwise unused copy machines into use and generating income from selling copies) and copy business (as a general class of business):
[Paulsell] said that the company's biggest problem he thought was that they hadn't been able to develop a second product, that the copy business was a fantastically good business, essentially problem free because of the way they set it up, that it had been a brilliant insight on the part of the people who originally, I think he said stumbled on the concept. And it was just a wonderful thing for him to be involved with, but that the company's full success would have been dependent, in his opinion, upon developing a second product. They had never been able to develop that second product, and that's where he said the ATM business was so exciting to him.
E. Cohen Depo, Vol II, p. 31 (emphasis added).
When read in context, this statement also clearly falls squarely within the non-actionable "opinion" category.
d. Failure to Disclose
Defendants also assert that Paulsell's statements were "half-truths" which gave rise to a duty to disclose the contents of the Project Blue Memorandum and the full scope and magnitude of the operational problems identified in that memorandum. However, based on the undisputed facts in this case, this theory fails.
"[A] representation in the nature of a `half-truth,' plus concealment of the remaining truth, may constitute fraud." Ruegsegger v. McCarley, 262 Or. 157, 169 n2, 496 P.2d 214, 219 n2 (1972) (citations omitted). Defendants' argument would have merit if Paulsell made specific misstatements about matters of direct observation, such as telling defendants that TRM had very low or no account attrition, was not suffering market erosion, had very few or no improperly deployed machines in North America, or had a sophisticated sales team with sufficient talent and depth to penetrate the key account markets. Such statements would be akin to the following cases involving half-truths based on making numerous specific statements about the future growth of a certain company division with knowledge that the division was slated for closure (Meade v. Cedarapids, Inc., 164 F.3d 1218, 1221-22 (9th Cir 1999)), failing to disclose that a mobile home park was being sold and that the homes would have to be moved to a purchaser who specifically asked to purchase a home in a park where he could continue to live (Caldwell v. Pop's Homes, Inc., 54 Or. App. 104, 111-12, 634 P.2d 471, 476 (1981)), "covering the drainage ditch and [failing to disclose] its prior existence or the fact that it had to be reopened or replaced by storm sewers," (Paul, 42 Or App. at 66-67, 599 P.2d at 1239), or "floating a ship to conceal the defects in her bottom" (id at 66, 599 P.2d at 1238-39, quoting Prosser, Law of Torts, § 106, at 695 (4th Ed. 1971)). However, as discussed above, the statements upon which defendants rely are simply statements of opinion, not actionable fact statements which can be construed as "half-truths" giving rise to a duty to disclose.
"For non-disclosure to form the basis of a fraud claim, defendant must be under a duty to disclose." Gebrayel v. Transamerica Title Ins. Co., 132 Or. App. 271, 281, 888 P.2d 83, 89, rev denied, 321 Or. 47, 892 P.2d 1024 (1995) (citations omitted). However, "parties to an impersonal market transaction owe no duty of disclosure to one another absent a fiduciary or agency relationship, prior dealings, or circumstances such that one party has placed trust and confidence in the other." Paracor, 96 F.3d at 1157. At the time Paulsell attended the dinner meeting with the Cohens on December 4, 1997, and at the time he received the Project Blue Memorandum, he was not under an affirmative duty to disclose information about TRM. Instead, he was under an affirmative duty not to disclose information about TRM.
It is undisputed that defendants did not sign a confidentiality agreement protecting TRM's proprietary information until at least February 6, 1998, nearly three weeks after the Cohens' presentation before TRM's board of directors. Depo Ex 12; Shepherd Dec, Ex E. Until that point, each member of TRM's board of directors, including Paulsell, had a fiduciary duty to protect TRM's non-public information. This was specifically addressed in a memorandum by Stockton to TRM's board of directors and Vice Presidents on January 16, 1998, cautioning that due to the lack of a confidentiality agreement, "all of the directors and officers need to be careful not to disclose to the Cohens any confidential or non-public information regarding TRM, its business, plans and prospects." Depo Ex 12.
It is also undisputed that by the time Daniel Cohen executed the confidentiality agreement, Paulsell had been excluded from the special committee that was negotiating the TRM investment transaction and that the Cohens were aware of that fact. D. Cohen Depo, Vol I, pp. 53-54; E. Cohen Depo, Vol I, p. 31 ("they made it specific that [Paulsell] had been excluded from the discussions."); Shepherd Dec, Ex C, p. 8. Furthermore, defendants have admitted that "Edward Cohen was aware that Fred Paulsell was not actively participating in the due diligence that ReadyCash LP and TRM Corporation conducted prior to June 24, 1998." Shepherd Dec, Ex C, p. 8. Instead, Stockton and Brown, to whom defendants sent their written due diligence inquiries, were handling TRM's responses to defendants' due diligence inquiries.
Viewed in this context, defendants are precluded from arguing that the vague commendations Paulsell allegedly made on December 4, 1997, gave rise to a duty to disclose to them the contents of the Project Blue Memorandum two months later when they signed the confidentiality agreement. Prior to the execution of the confidentiality agreement, defendants had no right to expect anyone at TRM, including Paulsell, to disclose anything to them at all. And by the time the confidentiality agreement was in place, defendants had no right to rely on Paulsell for answers to their due diligence inquiries.
e. No Active Concealment
Alternatively, defendants argue that Paulsell is liable for "fraudulent concealment." A claim based on this theory must be premised upon proof that the defendant "intentionally prevent[ed] the other from acquiring material information." RESTATEMENT 2d OF TORTS, § 550 (1976). Such a claim does not require a duty to disclose. Paul, 42 Or App. at 65, 599 P.2d at 1238. However, this theory fails because there simply is no evidence to support the conclusion that Paulsell prevented defendants from acquiring the information they contend was withheld.
Arguably, Paulsell cannot be held liable based on a theory of concealment simply because he was not a party to the TRM/ReadyCash LP transaction. A fraud claim based on a theory of concealment requires that the defendant be a "party" to the transaction at issue. RESTATEMENT 2d OF TORTS, § 550 (1976); United States Nat'l Bank of Oregon v. Fought, 291 Or. 201, 219 n15, 630 P.2d 337, 348 n15 (1981) (in an action for fraud by lender against the accountants of the borrower, noting that "§ 550 is concerned with the relationship between the parties to a transaction. Defendants were not a `party' to the transaction with plaintiff. We doubt the applicability of § 550."). In defendants' First Counterclaim, the "transaction" at issue is ReadyCash LP's investment in TRM of $20 million by purchasing newly issued convertible preferred stock and warrants for additional TRM stock. Paulsell was not a party to the sale of TRM convertible preferred stock and warrants, and as a result, there arguably can be no claim against him premised upon § 550. However, Paulsell was a party to the agreement requiring defendants to purchase the Paulsell family stock. Since the TRM sale triggered the obligation of defendants to buy Paulsell family stock, Paulsell is a party to the overall transaction. However, this vexing question is largely academic since defendants' First Counterclaim fails for other reasons.
Defendants assert that Paulsell knew about the serious problems with TRM's operations identified in the Project Blue Memorandum (Answer, ¶¶ 42-43), but failed to disclose the scope and magnitude of those problems to them at any time prior to their $20 million investment in TRM by ReadyCash LP. The parties have generated approximately a foot of paper in the court file identifying the documents TRM disclosed prior to the closing of the TRM investment transaction and the uses that defendants made of those documents. Nevertheless, defendants insist that prior to discovery in this lawsuit, they were unaware of the Project Blue Memorandum, three specific facts about TRM's business identified in that memorandum, and Paulsell's intent (revealed in his handwriting on his copy of the Project Blue Memorandum) to "hide" TRM's domestic business problems with its success in international markets. Id. The specific problems about which defendants allege they were ignorant include: (1) the significant "top account attrition" and "ongoing market erosion" that TRM was experiencing; (2) TRM's numerous (10,000) improperly deployed machines in North America; and (3) serious questions about whether TRM had the "sales talent and depth to penetrate the relatively sophisticated key account markets." Id at ¶ 42.
As discussed above, defendants had no right to any of TRM's non-public information until ReadyCash LP executed the confidentiality agreement on February 6, 1998. By that time, Paulsell had been excluded from the special committee negotiating the TRM investment transaction and Stockton and Brown were handling due diligence inquiries. Defendants candidly admit that Stockton and Brown were forthcoming in responding to the due diligence inquiries, but insist that they had only limited knowledge because they were new and had been with TRM for less than a year. D. Cohen Depo, Vol II, pp. 34-35. From this undisputed fact, defendants postulate that Paulsell deliberately eliminated any upper managers that had historical knowledge about TRM and then used that to his advantage in his effort to "hide" TRM's operational problems from defendants. There are several problems with this reasoning as it relates to defendants' Second Counterclaim.
First, a searching review of the reams of papers presently in the record reveals a dearth of evidence that any material information was "hidden" from defendants about TRM's business operations. Although it is undisputed that defendants were not provided with a copy of the Project Blue Memorandum, it contains no information unknown to defendants or that defendants could not have discovered in the course of their due diligence. The operational issues identified in the Project Blue Memorandum came directly out of a meeting which Stockton and Brown attended. While Stockton and Brown were not provided a copy of the Project Blue Memorandum (which apparently only went to Paulsell), they were at the meeting that resulted in that memorandum. This fact wholly undermines defendants' suggestion that they were prevented from finding out about the operational problems identified in the Project Blue Memorandum by virtue of the fact that Stockton and Brown were "new" to TRM. Furthermore, defendants knew TRM was in trouble with weak management and "nobody really thought that there was any reason to invest money in it." Hirsh Depo, pp. 240-41.
Other than the Project Blue Memorandum, defendants have identified only one specific document that they claim should have been provided, namely the investment banking agreement TRM entered into with OCP to sell TRM. Zoll Dec, Exs 23, 24. The agreement between OCP and TRM arguably was encompassed in defendants' request for "any contract not entered into in the ordinary course of business." Zoll Dec, Ex 28, p. 2. However, defendants have failed to show that Paulsell sought to hide that document from defendants. To the contrary, defendants were "under the impression" that Paulsell had refused to entertain the thought of a sale because of conversations they had with Laifer (E. Cohen Depo, Vol II, pp. 11, 77; D. Cohen Depo, Vol II, p. 53) and did not ask anyone at TRM whether they had previously looked for buyers (D. Cohen Depo, Vol II, pp. 52-53).
Moreover, the contract with OCP to market TRM was immaterial. The agreement with OCP terminated between July and August 1997, several months before the Cohens spoke with Paulsell. There is no evidence or even a suggestion in the record that OCP's services had any impact whatsoever on TRM's financial condition. Instead, defendants' position seems to be that had they known of the failed effort to sell TRM, they may have decided not to invest in TRM or would have at least investigated further. E. Cohen Depo, Vol II, pp. 10-11, 94-95; D. Cohen Depo, Vol II, pp. 59-60; Hirsh Depo, pp. 253-55. The crux of the information defendants claim was withheld was the fact that other investors had considered and rejected a purchase of TRM. However, defendants do not identify any information that other investors were provided that they were not provided. This part of their claim really boils down to the notion that they were entitled to rely on the due diligence inquiries made by other potential investors and the conclusions those potential investors reached with regard to investing in TRM. This argument is not persuasive given that defendants performed their own extensive due diligence over a period of about seven weeks.
Additionally, while it is undisputed that Paulsell made a notation on his copy of the memorandum stating that "[s]uccess intl could hide problems U.S.," there is no evidence whatsoever that Paulsell participated in, much less interfered with, the due diligence process with respect to the TRM investment transaction. It would also be a different case if Paulsell had expressly denied any knowledge of these issues one way or the other knowing full well about the problems identified in the Project Blue Memorandum. However, defendants have presented no evidence that they specifically asked Paulsell about the issues they now claim he hid or that he actively tried to hide anything from them.
Defendants insist that they were entitled to know that Paulsell thought that TRM might be able to "hide" its domestic problems with its international success, as reflected in his notes on his copy of the Project Blue Memorandum. According to defendants, if they had known that they were dealing with someone who might try to "hide" something, they would not have considered dealing with him at all. E. Cohen Depo, Vol II, p. 93; D. Cohen Depo, Vol II, p. 126. While this argument has some moral appeal, it rings hollow in this case because defendants have not provided any evidence that anything was in fact hidden from them. Instead, the record reveals that they had unfettered access to TRM's documents, officers, board members, executives, and lawyers, and that those resources provided them with all the material information which defendants claim was revealed to them for the first time in the Project Blue Memorandum. Their access to these resources during their nearly two months of due diligence and the complete lack of any evidence that Paulsell attempted, much less succeeded, in keeping any material information from defendants bars any claim based on his alleged nondisclosure. See Paracor, 96 F.3d at 1157-58; Grumman Allied Industries v. Rohr Industries, Inc., 748 F.2d 728, 737-39 (2nd Cir 1984); Miller, 193 Or at 599, 238 P.2d at 760; Frank, 106 Or App. at 186-87, 806 P.2d at 721-22; Johnson v. Jeppe, 73 Or. App. 430, 435-36, 698 P.2d 1020, 1023-24 (1985). Furthermore, defendants intended to change TRM's business focus toward ATMs, which further undercuts their claim of reliance on TRM's past profitabitlity. See Miller v. Noel, 51 Or. App. 243, 248, 624 P.2d 1105, 1107, rev denied, 291 Or. 117, 631 P.2d 341 (1981) ("It seems unlikely, too, that one intending to change the nature of a business would place great emphasis on the business' prior profitability.").
For these reasons, Paulsell's motion for summary judgment against defendants' First Counterclaim for common law fraud should be granted.
For the same reasons, the affirmative defense alleged in defendants' Answer, ¶ 39(c), which alleges that the Paulsell family stock transaction was induced by "fraud, including plaintiffs' half-truths and failure to disclose material information," should also be dismissed.
B. Second Counterclaim — Securities Fraud Under ORS Chapter 59
Paulsell also seeks summary judgment against ReadyCash LP's Second Counterclaim which alleges that Paulsell violated ORS 59.115(1) and 59.135(1)-(3).
However, ORS 59.115 requires ReadyCash LP to plead and prove liability against TRM, the seller, under ORS 59.115(1) before asserting a securities fraud claim against Paulsell as an officer, director, or material participant under ORS 59.115(3). Newman v. Comprehensive Care Corp., 794 F. Supp. 1513, 1525-26 (D Or 1992); Metal Tech, 74 Or App. at 308, 703 P.2d at 245.
ReadyCash LP seeks to cure this problem by amending its Answer to assert a new counterclaim against Paulsell as a "seller" under ORS 59.115(1) with respect to the alleged sale of his own shares of TRM stock to defendants, rather than with respect to defendants' purchase of TRM's stock. However, this court previously denied Paulsell the opportunity to pursue a securities fraud claim against defendants on the basis of a sale that was never finalized. Amended Findings and Recommendations (docket #18), adopted by Order of District Court Judge Ancer L. Haggerty on December 12, 2000 (docket #20). That same failed sale is the basis for the proposed amendment.
While it is not clear who is the goose and who is the gander, this court will not allow ReadyCash LP to pursue the same claim against Paulsell that defendants so strenuously (and successfully) argued that Paulsell could not pursue against them. Besides, if Paulsell does not prevail on his claims, this counterclaim is unnecessary. If Paulsell does prevail, then defendants argue that a sale of securities has occurred which defendants have the right to rescind based on Paulsell's material misrepresentation. However, as discussed above, defendants have no viable misrepresentation claim against Paulsell. Thus, defendants' bid to replead should be rejected, and Paulsell's request for summary judgment against the Second Counterclaim for Oregon Securities Fraud should be granted.
RECOMMENDATIONS
For the reasons stated above:
(1) Defendants' Motion for Summary Judgment (docket #71) should be GRANTED as to the promissory estoppel claim on condition that all affirmative defenses to the breach of contract claim are dismissed except as alleged in ¶¶ 39(a), (b), and (j) of the Answer, and otherwise DENIED; and
(2) Paulsell's Motion for Summary Judgment Against Defendants' Counterclaims (docket #93) should be GRANTED as to the First Counterclaim for Fraud and the Second Counterclaim for Oregon Securities Fraud.
SCHEDULING ORDER
Objections to these Amended Findings and Recommendation, if any, are due June 7, 2002. If no objections are filed, then the Amended Findings and Recommendation will be referred to a district court judge and go under advisement on that date.
If objections are filed, the response is due no later than June 24, 2002. When the response is due or filed, whichever date is earlier, the Findings and Recommendation will be referred to a district court judge and go under advisement.