Daisy Systems Corp., In re, 95-15267

Citation97 F.3d 1171
Decision Date24 September 1996
Docket NumberNo. 95-15267,95-15267
Parties96 Cal. Daily Op. Serv. 7123, 96 Daily Journal D.A.R. 11,695 In re DAISY SYSTEMS CORPORATION and Daisy/Cadnetix, Inc. BEAR STEARNS AND COMPANY, INC., a Delaware corporation; Bruce M. Holland; Burton J. McMurtry; Carl D. Carman; F. Gibson Meyers; Lutz P. Henckels, Creditors-Appellees, v. DAISY SYSTEMS CORP., Debtor, and Jack S. Kenney, in his capacity as Chapter 11 Trustee for Daisy Systems Corporation and Daisy/Cadnetix, Inc., Trustee-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Ronald Lovitt, J. Thomas Hannan, Lovitt & Hannan, Inc., San Francisco, California; Andrew D. Hurwitz, Robert L. Palmer, Osborn Maledon, Phoenix, Arizona; James C. Nielsen (argued and on the brief), Peter Mallon, Wright, Robinson, McCammon, Osthimer & Tatum, San Francisco, California; John J. Bartko, Christopher J. Hunt, Bartko, Zankel, Tarrant & Miller, San Francisco, California, for the trustee-appellant.

Robert E. Cooper (argued), Robert Forgnone, Daniel S. Floyed, Ginger G. Bauer, Gibson, Dunn & Crutcher, Los Angeles, California, for creditors-appellees Bear Stearns.

Appeal from the United States District Court for the Northern District of California, D. Lowell Jensen, District Judge, Presiding. D.C. No. CV-92-01845-DLJ.

Before: FERGUSON, D.W. NELSON and FERNANDEZ, Circuit Judges.

D.W. NELSON, Circuit Judge:

Appellant Jack Kenney, Chapter 11 Trustee for Daisy Systems Corporation and Daisy/Cadnetix, Inc. ("Daisy"), appeals the district court's grant of summary judgment for Appellee Bear Stearns & Co., Inc. ("Bear Stearns" or "the investment bank"), in Kenney's action for professional negligence and negligent misrepresentation. Kenney also appeals the district court's denial of his request for leave to amend his complaint to state a claim for breach of fiduciary duty. We affirm in part, reverse in part and remand.

FACTUAL AND PROCEDURAL BACKGROUND

In 1988, Daisy, a public corporation specializing in the development of computer-aided engineering systems, sought to acquire Cadnetix, a public company that developed computer-aided and manufacturing design systems. Daisy's president and Chief Executive Officer, Dr. Norman Friedmann, approached Michael Tennenbaum, a senior managing director at Bear Stearns, for his assistance in the acquisition. Friedmann, who had never before been involved in the acquisition of a public company, reportedly asked Tennenbaum if Bear Stearns could analyze the Daisy/Cadnetix merger and the On May 5, 1988, Bear Stearns sent Daisy a letter outlining the terms of its retention; in it, Bear Stearns agreed to "assist [Daisy] as its exclusive financial advisor in connection with any Transaction with Cadnetix Corporation." 1 Bear Stearns' services were to "include advice on valuation and structuring of the Transaction, and assisting [Daisy] in negotiations with Cadnetix." Daisy was obliged by the agreement to provide Bear Stearns with any information regarding either Daisy or Cadnetix that Bear Stearns "deem[ed] appropriate." The letter further stated that the bank would be using and relying upon this information "without independent verification ... by Bear Stearns," and that it was to assume no responsibility for the accuracy and completeness of any information provided by Daisy regarding Cadnetix. In addition to the $75,000 fee to which Bear Stearns was entitled, Daisy was to pay Bear Stearns 1% of the fair market value of the total consideration received by Cadnetix if the merger was consummated successfully.

benefits the deal would confer upon Daisy shareholders. Tennenbaum maintained that the investment bank had adequate resources to analyze the transaction, and told Friedmann that Bear Stearns would charge Daisy $75,000 for the bank's services.

Cadnetix, however, rejected Daisy's attempts to effect a friendly merger; consequently, Tennenbaum told Friedmann that Daisy should consider a hostile acquisition, and that it should "create[ ] more pressure" on Cadnetix by acquiring shares of the company.

On September 19, 1988, Tennenbaum advised the Daisy Board of Directors of Bear Stearns' analysis of the proposed acquisition of Cadnetix; this analysis included a discussion of acquisition strategies, price ranges for the acquisition, feasibility, financial analysis, and the availability of financing. At this meeting, the Daisy Board voted to engage in a hostile tender offer for Cadnetix. Friedmann stated that Tennenbaum told him that if Daisy could not otherwise fund the transaction, Bear Stearns would provide funding.

By letter dated September 22, 1988, Bear Stearns and Daisy amended the terms of Bear Stearns' retention; while this letter contained substantially the same provisions as those in the May 5 agreement, it further provided that "Bear Stearns will act as dealer manager in any tender offer or exchange offer for securities of Cadnetix ... and, subsequent to the approval of Bear Stearns' Commitment Committee, 2 will assist the Company in obtaining financing, if so required." (emphasis added) Daisy was to pay Bear Stearns a fee of $250,000 "[e]ither for acting as Dealer/Manager ... or upon any public report associating Bear Stearns with a hostile takeover of Cadnetix by Daisy," and was to give Bear Stearns the opportunity to be the "sole managing underwriter or exclusive agent" if Daisy chose to retain an investment banker or financial advisor for assistance in obtaining financing. The letter also stated that if Bear Stearns were to issue to Daisy any letters stating that the investment bank was "highly confident" that it could arrange the financing for the deal, Daisy would pay Bear Stearns 3/8% of the principal amount of the financing referred to in the letter, subject to a $100,000 minimum.

On September 30, 1988, Daisy announced its offer to purchase 51% of Cadnetix's shares at $8.00 per share; the offer was conditioned on Daisy's being able to obtain "sufficient financing on terms acceptable to [Daisy]." Bear Stearns then issued a letter stating that it was "highly confident" that $50 million of financing could be secured "under current market conditions." On October 12, 1988, the Cadnetix Board rejected the Daisy On October 31, 1988, Tennenbaum met with representatives of Daisy and Cadnetix and informed them that Bear Stearns intended to finance the transaction even if it was hostile. On November 6, however, Tennenbaum told the Commitment Committee that efforts to finance the transaction had been unsuccessful "due to the hostile nature of the transaction, the current turnaround of Daisy and general unwillingness to lend to high technology companies. Few banks actually reached the credit analysis stage."

                offer as inadequate.  On October 17, 1988, Daisy offered $8.00 per share for 100% of Cadnetix stock;  Bear Stearns issued yet another letter, stating that it was "highly confident" that $100 million of financing could be secured "under current market conditions."   On October 24, 1988, Daisy raised its offer to $8.375 per share
                

Bear Stearns argues that on November 10, it committed to loan Daisy $130 million in connection with the October 24 offer. Kenney contends, however, that Tennenbaum's offer to loan Daisy $130 million, a commitment for which Daisy paid $975,000, was not limited to the October 24 offer. Cadnetix subsequently agreed to a friendly merger, and on November 10, an agreement between the companies was reached. Pursuant to the agreement, Daisy was to acquire Cadnetix in a one-step merger for $9.50 per share, payable with $6.50 in cash and $3.00 in debentures convertible into Daisy common stock. Bear Stearns contends that it was to be involved only in "giving 'advice on the terms of the debentures,' specifically the price and timing of the conversion features."

The companies later amended the details of their agreement to provide for a two-step merger. In the first stage, Daisy was to purchase 50.1% of Cadnetix's shares at $9.50 cash per share, and in the second, the remaining Cadnetix shares would be acquired for $3.78 cash per share and convertible Daisy debentures. The merger was to become effective on November 23, 1988, and the second stage was to be completed within 6 months of the acquisition. Bear Stearns contends that it was not asked to prepare a report or opinion on any part of the transaction.

Bear Stearns also argues that Daisy did not ask it for assistance in financing the second step of the merger. The bank maintains that one of Daisy's SEC filings made pursuant to the offer, in which Daisy states that the "management of Daisy presently intends to arrange at least $50 million of bank indebtedness which will be a liability, and possibly secured by the assets of New Daisy," lends support to the bank's contention that Daisy intended to finance the deal independently. Nonetheless, Bear Stearns contends that "on the chance that it would be asked to seek financing," it informed Daisy in early December 1988 that Daisy would need to submit detailed financial projections regarding the future prospects of the business in order to secure financing; it also "informed Daisy that it was imperative that Bear Stearns begin to search for financing as soon as possible."

Kenney contends that when Tennenbaum learned that Daisy was making its own attempts to secure financing, he discontinued Bear Stearns' efforts to obtain financing for the deal. Indeed, Tennenbaum stated that he told the Commitment Committee that "[Daisy] had misled us for several months and had by themselves been seeking the financing in order not to pay us a fee." Kenney maintains, however, that Daisy did not know that Bear Stearns was not actively seeking financing until its Chief Financial Officer contacted Tennenbaum and was told no more work would be done until another engagement letter was executed. Daisy's counsel informed Friedmann that Bear Stearns' merger success fee suggested that Bear...

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