Amtower v. Photon Dynamics, Inc.

• Decision Date: 17 January 2008
• Docket Number: No. H030477.,No. H030386,H030386,H030477.
• Citation: 71 Cal.Rptr.3d 361,158 Cal.App.4th 1582
• Court: California Court of Appeals Court of Appeals
• Parties: Richard AMTOWER, Plaintiff and Appellant, v. PHOTON DYNAMICS, INC., et al., Defendants and Respondents. Richard Amtower, Plaintiff and Appellant, v. Photon Dynamics, Inc., et al., Defendants and Appellants.

71 Cal.Rptr.3d 361

158 Cal.App.4th 1582

Richard AMTOWER, Plaintiff and Appellant, v. PHOTON DYNAMICS, INC., et al., Defendants and Respondents.

Richard Amtower, Plaintiff and Appellant, v. Photon Dynamics, Inc., et al., Defendants and Appellants.

No. H030386

No. H030477.

Court of Appeal, Sixth District.

January 17, 2008.

As Modified February 15, 2008.

The Elstead Law Firm, John Clifton Elstead, Pleasanton, Esner, Chang & Ellis, Andrew N. Chang, Oakland, Stuart B. Esner, Los Angeles, Gregory R. Ellis, for Plaintiff and Appellant.

Nossaman, Guthner, Knox & Elliott, Patrick J. Richard, San Francisco, for Defendants and Respondents.

PREMO, J.

This action arises out of the merger of defendant Photon Dynamics Inc. (Photon) with CR Technology, Inc. (CRT). Plaintiff Richard Amtower, formerly the president of CRT, alleged, among other things, that certain officers and directors of Photon violated section 11 of the federal Securities Act of 1933 (15 U.S.C. § 77k(a), hereafter section 11), breached their fiduciary duty, and misrepresented and concealed certain facts about the transferability of the stock Amtower acquired in connection with the merger. At the commencement of trial, the trial court granted an in limine motion to exclude all evidence pertaining to the section 11 claim on the ground that the claim was barred by the statute of limitations. The jury rejected plaintiffs remaining causes of action and plaintiff has appealed from the judgment.

Plaintiff maintains that the trial court's use of an in limine motion to adjudicate his section 11 claim deprived him of the right to a jury trial on the statute of limitations issue. Plaintiff's argument highlights a procedure that has become increasingly common among litigants in our trial courts, which is the use of in limine motions as substitutes for summary adjudication motions, motions for judgment on the pleadings, or other dispositive motions authorized by statute. We have certified this case for publication in order to express our concerns surrounding the proliferation of such short-cut procedures. The better practice in nearly every case is to afford the litigant the protections provided by trial or by the statutory processes. In the present case, however, although we would have preferred that the statute of limitations issue be decided by a proper summary adjudication motion or motion for nonsuit, the trial court's unorthodox procedure does not warrant reversal because plaintiff could not have prevailed under any circumstances. (Case No. H030386.)

In a separate case, plaintiff appeals from the trial court's postjudgment order awarding attorneys' fees to Photon. Photon has filed a cross-appeal in that case. (Case No. H030477.) We have ordered the two cases considered together for purposes of oral argument and decision and now affirm.

I. FACTS

In August 1999, the board of directors of CRT and the board of directors of Photon executed an Agreement and Plan of Merger and Reorganization (Merger Agreement). Under the Merger Agreement, which plaintiff negotiated and signed on behalf of CRT, Photon was to acquire CRT through a pooling of interests. Photon would trade 1.2033 shares of its stock for each share of CRT stock and CRT would become a wholly-owned subsidiary of Photon.

One condition of the Merger Agreement was that CRT shareholders sign an agreement (the Affiliate Agreement) promising not to sell the Photon stock they acquired through the merger for 30 days following the merger. Plaintiff signed an Affiliate Agreement on his own behalf at the same time he signed the Merger Agreement on behalf of CRT. On October 27, 1999, as part of the merger transaction, Photon filed a form S-4 registration statement under the Securities Act of 1933 (the S-4 Statement), representing that "[Photon] common stock issued in connection with the merger will be freely transferable, except that shares issued to a CRT affiliate ... are subject to certain restrictions on resale" as set forth in the Affiliate Agreement.

On November 19, 1999, plaintiff signed an employment agreement with Photon by which he agreed to continue as president of CRT for an annual salary of $180,000 and benefits, including 80,000 in Photon stock options. Plaintiff alleged that he was induced to enter into this agreement because of the salary, the stock options, and the expectation that he would be able to sell his Photon stock shortly after the merger. When the merger was complete on November 30, 1999, plaintiff received approximately 203,000 shares of Photon common stock, which were valued at approximately $25 per share at the time.

On December 13, 1999, plaintiff signed a "Lock-Up Agreement" by which he promised not to sell any of his Photon shares until 90 days after Photon filed a second registration statement with the Securities and Exchange Commission in mid-December 1999 in order to carry out a public offering of Photon stock.

Plaintiff claimed that by the time he signed the Lock-Up Agreement, his understanding was that the only restrictions upon the sale of his stock were the restrictions imposed by federal law and those contained in the Affiliate and Lock-Up agreements. The ability to sell the stock was important to plaintiff. He explained at trial that CRT had received an offer to purchase the company for cash but turned it down in favor of Photon's proposed transaction, based upon assurances that the CRT shareholders would be able to promptly and freely sell the Photon stock acquired in connection with the merger.

According to plaintiff, defendant Richard Dissly, Photon's chief financial officer, telephoned him after the merger was complete and told him, for the first time, that Photon had a policy that was designed to prevent officers and directors from selling Photon stock in violation of federal laws (Insider Trading Policy). Dissly explained that the policy created temporary quarterly blackout periods for selling stock and provided for a securities watch team, made up of Dissly and Photon's chief executive officer, defendant Vincent Sollitto. The securities watch team was charged with ensuring compliance with the policy. Insiders were to obtain permission from the securities watch team before selling any Photon stock. Dissly allegedly assured plaintiff that, notwithstanding the policy terms, which gave Dissly and Sollitto the power to prohibit a sale for "any reason," Amtower would be permitted to sell as much of his stock as he wanted as long as the sale did not take place during the specified black-out periods. Dissly said that plaintiffs employment by Photon was contingent upon his agreement to be bound by the policy. Allegedly relying upon Dissly's representations, plaintiff agreed.

In early May 2000, when the trading windows had opened under the Affiliate Agreement, the Lock-Up Agreement, and the Insider Trading Policy, and when the value of the stock had increased to over $70 per share, plaintiff claims that he asked the securities watch team for permission to sell all his stock but permission was denied. The securities watch team allowed him to sell a small portion of his holdings (approximately 40,000 shares) but no more. Plaintiff later decided that he would rather be free to sell his stock than be an officer of Photon and, therefore, resigned on April 30, 2001, by which time the stock had dropped in value to less than $20 per share.

II. PROCEDURAL BACKGROUND

Plaintiff sued Photon, Dissly and Sollitto, and Photon directors Francois Henley, Floyd Kvamme, Barry Cox, Michael Kim, and Malcolm Thompson, complaining that he had been misled about the transferability of Photon stock. He filed the initial complaint on April 30, 2001, alleging causes of action for breach of contract, breach of fiduciary duty, negligence, and several species of fraud. Plaintiffs first amended complaint filed on January 17, 2002, added a cause of action for violation of section 11. That cause of action alleged that the S-4 Statement contained omissions and misrepresentations in that it characterized the Photon stock as "freely transferable" and did not reveal the existence of the Insider Trading Policy that prohibited the sale of Photon stock during quarterly blackout periods and required prior approval from the securities watch team in order to sell at any other time.

On April 21, 2003, the superior court sustained a demurer, without leave to amend, to the causes of action for breach of contract and negligence. Remaining for trial were causes of action for breach of fiduciary duty, fraudulent inducement, fraudulent concealment, intentional misrepresentation, negligent misrepresentation, and the eighth cause of action for violation of section 11.

Trial commenced April 3, 2006. Defendants filed several motions in limine seeking to exclude or restrict plaintiffs evidence. One motion in limine requested an order excluding the testimony of plaintiffs expert witness, law professor Kenneth E. Scott, on the ground the testimony would consist solely of legal standards and conclusions. The trial court decided to limit Scott's opinion to whether Dissly had violated a duty of candor and good faith in his discussions with plaintiff.

Another motion in limine sought an order excluding evidence to support plaintiffs section 11 claim. In the alternative, defendants requested an Evidence Code section 402 hearing or a separate trial on their statute of limitations defense to the section 11 claim. The court chose to hold what it characterized as a "mini-trial." Evidence consisted of the pertinent documents and plaintiffs testimony concerning his discovery of the alleged omissions and misrepresentations in the S-4 Statement. Based upon the evidence presented, the court concluded that plaintiffs section 11 claim was barred by the statute of limitations, as a matter of law, because plaintiff actually knew of the omissions and misrepresentations in the S-4 Statement as early as December 1999.

At the close of...