576 F.3d 336 (7th Cir. 2009), 08-2804, Smith v. Duffey

Docket Nº:08-2804.
Citation:576 F.3d 336
Opinion Judge:POSNER, Circuit Judge.
Party Name:Jack V. SMITH, Plaintiff-Appellant, v. John M. DUFFEY, et al., Defendants-Appellees.
Attorney:Norman J. Lerum, Attorney (argued), Chicago, IL, for Plaintiff-Appellant. Michael J. Silverman (argued), Duane Morris LLP, Chicago, IL, for Defendants-Appellees.
Judge Panel:Before CUDAHY, POSNER and KANNE, Circuit Judges.
Case Date:August 03, 2009
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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Page 336

576 F.3d 336 (7th Cir. 2009)

Jack V. SMITH, Plaintiff-Appellant,

v.

John M. DUFFEY, et al., Defendants-Appellees.

No. 08-2804.

United States Court of Appeals, Seventh Circuit

August 3, 2009

Argued May 11, 2009.

Norman J. Lerum, Attorney (argued), Chicago, IL, for Plaintiff-Appellant.

Michael J. Silverman (argued), Duane Morris LLP, Chicago, IL, for Defendants-Appellees.

Before CUDAHY, POSNER and KANNE, Circuit Judges.

POSNER, Circuit Judge.

Jack Smith appeals from the dismissal, for failure to state a claim, of his diversity suit for fraud. Fed.R.Civ.P. 12(b)(6). The parties disagree on whether Illinois or North Carolina law governs the substantive issues, but as nothing turns on the dispute, because there is no material difference between the relevant laws of the two states, we ignore it.

In 1999 Smith sold a controlling interest in his medical-testing company, together with patents and other intellectual property, to Dade Behring, Inc., a closely held corporation. As part of the consideration for the sale Smith received options, valid for ten years, to purchase 20,000 shares of Dade Behring's common stock at $60 a share. He also became an employee of the company. But the relationship soon soured and on May 3, 2002, he signed an agreement ending his employment. By the terms of the agreement he received $1.4 million in cash and retained his stock

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options with their $60 exercise price, although the appraised value of the stock was only $11.

Three months later the company declared bankruptcy under Chapter 11 of the Bankruptcy Code, and as part of the ensuing reorganization of the company Smith's stock options were extinguished. He sued three officers of Dade Behring (including its chief financial officer), who had negotiated the termination agreement with him and who he says knew that the company was planning to declare bankruptcy in a pre-packaged bankruptcy filing that would propose cancellation of the stock options. He contends that the defendants had a duty to disclose these facts to him. The reorganization was successful, and stock and stock options in the reorganized company were issued to the defendants, but of course not to Smith.

Smith argues that had they told him the company was planning to declare bankruptcy and that as a result his 20,000 stock options would be cancelled, he would have refused to sign the termination agreement unless he had been given more than $1.4 million to do so. He argues in the alternative that he should be entitled to the value of the shares in the reorganized company ($76 when he sued) that he would have owned had he been issued (and exercised) stock options in the company on the same terms as the options he had owned before the reorganization. This alternative theory of damages is preposterous. Smith does not claim that the Chapter 11 reorganization was fraudulent (though he contends that the defendants hoped to profit from it by obtaining stock and stock options in the reorganized company), or otherwise invalid and so should not be deemed to have extinguished existing stock and stock options. The company was broke, and the extinction of equity interests is the usual consequence of bankruptcy. Smith could not have enforced his options once bankruptcy was declared, and he had no right to receive stock and options in the reorganized company and would not have had the right even if he had continued as an employee. Even if it's true, as he argues, that if he had " had...

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