In re Resorts International Inc.
| Decision Date | 30 June 1999 |
| Docket Number | No. 98-6037,98-6037 |
| Citation | 181 F.3d 505 |
| Parties | (3rd Cir. 1999) IN RE: RESORTS INTERNATIONAL, INC., RESORTS INTERNATIONAL FINANCING INC., GRIFFIN RESORTS INC., AND GRIFFIN RESORTS HOLD, INC., DEBTORS FRED LOWENSCHUSS, INDIVIDUALLY AND AS TRUSTEE OF FRED LOWENSCHUSS, I.R.A., LAURANCE LOWENSCHUSS, I.R.A., AND FRED LOWENSCHUSS ASSOCIATES PENSION PLAN v. RESORTS INTERNATIONAL, INC. SUN INTERNATIONAL NORTH AMERICA, INC., WHICH WAS FORMERLY KNOWN AS GRIFFIN GAMING & ENTERTAINMENT, INC., WHICH WAS FORMERLY KNOWN AS RESORTS INTERNATIONAL, INC., APPELLANT |
| Court | U.S. Court of Appeals — Third Circuit |
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. No. 97-cv-04710), District Judge: The Honorable Nicholas H. Politan
[Copyrighted Material Omitted]
Mitchell A. Karlan, Esq. (Argued) Gibson, Dunn & Crutcher 200 Park Avenue, 47th Floor New York, NY 10166-0193 Attorney for Appellant
Michael R. Griffinger, Esq. (Argued) Gibbons, Del Deo, Dolan, Griffinger & Vecchione One Riverfront Plaza Newark, NJ 07102-5497 Attorney for Appellee
Before: Nygaard, Alito, and Lewis, Circuit Judges.
Resorts International, Inc., now Sun International North America, Inc., ("Resorts") appeals a District Court order reversing a Bankruptcy Court order that awarded Resorts full restitution for losses resulting from a stock transaction. The Bankruptcy Court found for Resorts on the alternative grounds of mistake and fraud. We will affirm the District Court's reversal.
The relevant facts are generally undisputed and we need only summarize. Fred Lowenschuss was a shareholder of Resorts stock.1 In 1988, Griffco Acquisition Corporation (owned by Merv Griffin) purchased Resorts in a leveraged buyout for $36 per share. Resorts sent a proxy statement to all its shareholders that explained the terms of the merger and stated that the shareholders had the right to receive $36 per share or to seek appraisal rights in the Delaware courts.
Ultimately, the merger was approved by the Delaware Chancery Court and consummated. Resorts then sent a and a "Transmittal Letter" to shareholders, explaining that they could either tender their shares and receive $36 per share or obtain an appraisal under section 262 of the Delaware Corporation Law. Lowenschuss sent Resorts a letter demanding an appraisal.
He then filed an appraisal action in the Eastern District of Pennsylvania. One week later, Resorts petitioned for appraisal in Delaware Chancery Court, identifying Lowenschuss as a shareholder seeking appraisal. The federal District Court dismissed Lowenschuss's claim without prejudice, deferring to the proceedings in Delaware. See Lowenschuss v. Resorts Int'l, Inc., No. Civ.A.89-1071 (E.D. Pa. June 29, 1989).
The Delaware Chancery Court issued a "Notice of Entitlement to Appraisal," explaining that shareholders seeking appraisal must "deliver [their] stock . . . certificates to the Register in Chancery within sixty (60) days of this notice [or risk] dismissal of the appraisal proceedings as to [the] shares." In re Appraisal of Resorts International, Inc., No. Civ.A.10626 (Del. Ch. May 31, 1989). Lowenschuss never delivered his shares. Instead, he filed an amended complaint in the Eastern District of Pennsylvania against Resorts and others, moving for reconsideration of his request for an appraisal of the shares under his control. The District Court dismissed this action without prejudice, again because of the Delaware Chancery Court proceedings.
This dispute involves the next moves by Lowenschuss. First, he filed (again in the Eastern District of Pennsylvania) a "Petition Requiring Resorts . . . to Pay $36.00 Merger Price to Plaintiffs Immediately for 105,900 Shares of Resorts Class A Stock Owned by Plaintiffs and Which Are Hereby Being Tendered and to Complete the Record." In the Petition, he stated: "Plaintiffs are hereby tendering all of their Resorts International, Inc. Class A shares totaling One hundred and Five thousand Nine hundred (105,900) shares for immediate payment of the merger price of Thirty-six Dollars ($36.00) per share plus the interest which plaintiffs may be entitled to."
Then, four days later, Lowenschuss tendered his shares, which were clearly marked as his, to Merrill Lynch, his broker, who in turn tendered them to Chase Manhattan Bank, Resort's Transfer Agent for the merger. As it regularly did, Chase forwarded a list of the tendering shareholders to Resorts and asked Resorts to wire funds to the payment account. Approximately two weeks after the tender, Resort's treasurer authorized the transfer of funds to Chase. Chase then delivered a check to Merrill Lynch for $3,805,200.00 which was paid over to Lowenschuss. Subsequently, the District Court denied Lowenschuss's Petition. See Lowenschuss v. Resorts Int'l, Inc., No. Civ.A.89-1071 (E.D. Pa. Aug. 3, 1989).
When Resorts realized that it had paid Lowenschuss the merger price, it filed this suit seeking to recover the payment. Following the initiation of Resort's Chapter 11 reorganization in New Jersey, this case was removed from the Eastern District of Pennsylvania to the Bankruptcy Court for the District of New Jersey. Resorts sought restitution of the transferred funds, claiming that the payment was (1) the result of a mistake by a Resorts employee, (2) a product of fraud, (3) contrary to Delaware corporate law, and (4) an avoidable transfer by a bankrupt entity under federal and New Jersey law. The Bankruptcy Court awarded Resorts full restitution on the alternative grounds of mistake and fraud, and appeared also to rely on the doctrine of illegal contracts and in pari delicto. See In re: Resorts International, Nos. 89-10119; 89-10120; 89-10461; 89-10462; Adv. No. 90-1005 (Bankr. D.N.J. Apr. 22, 1997) (slip opinion, hereinafter "Resorts I").
On appeal, the District Court reversed the Bankruptcy Court's ruling, concluding, inter alia, that there was no mistake of fact and that Resorts did not reasonably rely upon any misrepresentation. See In re: Resorts Int'l, Inc., No. Civ.A.97-4710 (D.N.J. Mar. 26, 1998) (unpublished letter opinion, hereinafter "Resorts II"). Resorts now appeals the District Court's decision, alleging that the court erred by overturning the Bankruptcy Court's holdings that: (1) Lowenschuss committed fraud; (2) Resorts made a mistake of fact; and (3) an illegal contract existed and the parties were not in pari delicto. Resorts also reasserts that the transaction is avoidable as a fraudulent conveyance under federal and state law. Finally, Lowenschuss contends that the Bankruptcy Court lacked jurisdiction.
We exercise plenary review over the decision of a district court sitting as an appellate court in a bankruptcy proceeding. See In re Swedeland Dev. Group, Inc ., 16 F.3d 552, 559 (3d Cir. 1994) (en banc). As a result, our review is essentially a direct review of the ruling of the Bankruptcy Court. See Allegheny Int'l Inc. v. Snyder (In re Allegheny Int'l Inc.), 954 F.2d 167, 172 (3d Cir. 1992). We review the Bankruptcy Court's findings of fact for clear error and its Conclusions of law de novo. See In re Sharon Steel Corp., 871 F.2d 1217, 1222-23 (3d Cir. 1989).
Resorts now asserts that it should have prevailed at trial on three common law theories -- fraud, mistake, and illegal contract.
The Bankruptcy Court concluded that Lowenschuss defrauded Resorts of the payment for his shares. To establish a prima facie case for fraud under New Jersey law,2 Resorts was required to prove: (1) that Lowenschuss made a material misrepresentation of a presently existing or past fact, (2) which he knew or believed to be false, (3) upon which he intended Resorts to rely, (4) and upon which Resorts reasonably did rely, (5) with resulting damages. See Jewish Ctr. v. Whale, 432 A.2d 521, 524 (N.J. 1981). Moreover, it had to prove each element by clear and convincing evidence. See Stochastic Decisions, Inc. v. DiDomenico, 565 A.2d 1133, 1137 (N.J. Super Ct. App. Div. 1989).
We review the trial court's factual findings related to the fraud claim for clear error, keeping in mind the heightened "clear and convincing" standard. See, e.g. , United States v. Bertoli, 40 F.3d 1384, 1411 (3d Cir. 1994) (); see also E.E.O.C. v. Local 638, 81 F.3d 1162, 1174 (2d Cir. 1996) ().
The District Court reversed the Bankruptcy Court, holding that it had misconstrued the significance of the various legal filings in question in finding a material misrepresentation, the facts did not support a finding of reliance, and, even if Resorts did rely on a misrepresentation, reliance was not reasonable. We agree because the evidence simply does not provide "clear and convincing" proof of reasonable reliance.3
A finding of reliance is subject to review for clear error, see, e.g., Hong Kong Deposit & Guar. Co. v. Shaheen, 111 B.R. 48, 52 (S.D.N.Y. 1990), and a trial court may infer reliance from the various facts and circumstances of a case. See Knop v. McMahan, 872 F.2d 1132, 1142 (3d Cir. 1989). Again, this element required proof by clear and convincing evidence.
The Bankruptcy Court considered the testimony of Resorts' former General Counsel, who stated that he understood at the time of Lowenschuss's tender that Lowenschuss had declined the merger price and was seeking a remedy in court. The General Counsel testified that it "[n]ever occurred to [him] that anyone would invoke the appraisal rights and seek to be paid." Based solely upon this testimony, the...
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