Applied Genetics Intern., Inc. v. First Affiliated Securities, Inc., 88-1879

• Decision Date: 29 August 1990
• Docket Number: No. 88-1879,88-1879
• Citation: 912 F.2d 1238
• Parties: APPLIED GENETICS INTERNATIONAL, INC., Plaintiff-Appellant, v. FIRST AFFILIATED SECURITIES, INC.; American First Corporation; Jack A. Alexander; Kenneth W. Elsberry; Richard P. Woltman; and William J. Patton, Defendants/Third- party- plaintiffs-Appellees, v. Norman Jay HAYES, Third-party-defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1238

912 F.2d 1238

APPLIED GENETICS INTERNATIONAL, INC., Plaintiff-Appellant, v. FIRST AFFILIATED SECURITIES, INC.; American First

Corporation; Jack A. Alexander; Kenneth W.

Elsberry; Richard P. Woltman; and

William J. Patton,

Defendants/Third-

party- plaintiffs-Appellees, v. Norman Jay HAYES, Third-party-defendant-Appellee.

No. 88-1879.

United States Court of Appeals Tenth Circuit.

Aug. 29, 1990.

Tom C. Toner, of Redles, Yonkee & Arney, Sheriden, Wyo., for plaintiff-appellant.

Craig R. Bockman, of Jones, Bell, Simpson & Abbott, Los Angeles, Cal. (Robert A. Graham, Jr., of Jones, Bell, Simpson & Abbott, Los Angeles, Cal., and Paul B. Godfrey, of Godfrey, Sundahl & Jorgenson, Cheyenne, Wyo., with him on the brief), for defendants-appellees.

Before McKAY and EBEL, Circuit Judges, and KANE, District Judge ^*.

EBEL, Circuit Judge.

Plaintiff, Applied Genetics International, Inc. (AGI), appeals from a summary judgment in favor of defendants. AGI's suit was brought in diversity and therefore Wyoming substantive law applies. AGI argues that the district court erred in holding that a settlement and release agreement entered into by the parties, after a failed attempt at a public offering of AGI's stock, was valid and barred all of AGI's claims against defendants. Specifically, AGI asserts that the release does not bar its claims because: (1) the release was procured by economic duress and fraud; (2) the release was materially breached by defendants; and (3) the release did not cover claims for torts and breach of contract which occurred after execution of the release. AGI also argues that the district court erred in precluding evidence of oral agreements to show breach of the written release agreement.

We hold that summary judgment for the defendant was inappropriate as to the issues of economic duress, material breach, and the scope of the release. However, summary judgment was appropriate for the defendant on the issue of fraud, and the district court correctly precluded evidence of oral agreements to show breach. Therefore, we affirm in part, reverse in part, and remand for further proceedings.

FACTS

AGI was formed by Norman Hayes as a cattle breeding partnership. AGI decided to make a public offering of its stock and discussed with First Affiliated Securities, Inc., (FAS), the possibility of FAS acting as underwriter of the offering. A letter of understanding was signed which tentatively stated that FAS would underwrite the offering on a firm commitment basis. ¹ The FAS arranged needed interim financing for AGI from El Camino Thrift and Loan (El Camino). El Camino had common directors with FAS and was a subsidiary of San Diego BanCorp which owned a portion of American First Corporation, the parent company of FAS.

offering was to yield gross proceeds of $3,000,000.

At the request of Hayes, one day before the financial statements needed for the public offering were to go stale, AGI and FAS met to discuss the underwriting agreement and FAS indicated to AGI, inter alia, that there was insufficient interest in the stock to warrant proceeding with the offering. FAS alleges that AGI promised that Tom Darnell, a potential investor in AGI, would purchase any shortfall in the stock sales and assured FAS that Darnell would not be a statutory underwriter in violation of federal securities laws. Although Hayes admits that he mentioned Mr. Darnell as a possible purchaser, he denies that AGI promised to provide a purchaser of any shortfall in the sale of AGI's stock.

The next day, on November 13, 1984, the parties signed the underwriting agreement and set a closing date of November 29, 1984. As the closing date approached, FAS contacted Mr. Darnell and informed him that there was going to be shortfall in the sale of stock and that Mr. Darnell would have to cover the shortfall by purchasing AGI stock. After Mr. Darnell refused to purchase the unsold stock, the closing date of the offering was extended to December 10, 1984.

AGI and FAS met several times to determine whether they should proceed with the underwriting. AGI alleges that during those meetings FAS stated that it had not sold the underwriting, that there was no interest in the underwriting, and that it was not going to complete the offering and "break [its] company in order to buy AGI's stock." AGI also alleges that FAS threatened to report AGI to the Securities Exchange Commission (SEC) and to seek a stop order on AGI's registration.

During the meetings, AGI explained to FAS that it could not afford further delay in the public offering. AGI was in serious financial difficulty because several creditors, including El Camino, were demanding payment of AGI's debts. Because of its financial difficulties, AGI alleged that it agreed to enter into a settlement agreement with FAS which would release FAS from the underwriting agreement in exchange for financial assistance. The final Settlement and Release Agreement was executed December 7, 1984.

The Settlement and Release Agreement states that FAS is released from the original underwriting agreement in exchange for loaning $300,000 to AGI and arranging refinancing or committing funds to pay certain other AGI debts. Although the written agreement does not reflect any additional promises, AGI alleged that FAS also orally agreed to prepare a business plan for AGI, to arrange a loan extension from El Camino, and to complete the public offering in the future.

The exact language of the Settlement and Release Agreement is that:

AGI hereby fully and forever remises, releases and discharges AFC and FAS ... from any and all claims, known or unknown, suspected or unsuspected, of whatever kind or nature, in law, equity or otherwise, which it has, had, may have had, or hereafter can, shall or may have against the FAS Releasees for or by reason of any fact, matter, contract, right, law, circumstance, cause or thing to and including the date hereof arising out of or pertaining in any way to the Underwriting Agreement and the Oral Agreement.

In addition, the agreement states that "unless each of the matters stipulated is resolved and satisfied to preserve AGI's or Because FAS was unable to obtain refinancing of AGI's obligations, it offered to loan AGI the additional funds AGI needed to cover its pressing debts. The necessary loan agreement documents were drafted which gave FAS a lien on all of AGI's assets, except a portion of AGI's land, and imposed restrictions on AGI's business activities. AGI protested to such an extensive lien because at that time the only AGI asset encumbered by liens was AGI's herd of cattle. However, AGI alleged that because of its drastic financial condition, it signed the loan agreement.

Hayes', as the case may be, present legal interest in the properties, this Settlement and Release shall be of no force or effect."

FAS did not write a business plan for AGI, obtain an extension of El Camino's loan, or complete the public offering of AGI's stock. Eventually, FAS demanded that AGI liquidate its herd of cattle to pay its obligation to FAS. FAS filed an action seeking recovery on the promissory note executed as part of the loan agreement with AGI. Because of demands for payment by FAS and other AGI creditors, AGI filed for Chapter 11 bankruptcy.

AGI filed suit against the defendants seeking damages for breach of the written underwriting agreement and breach of oral agreements, common law fraud, economic duress, RICO, securities violations, and inducing breach. AGI sought to set aside the Settlement and Release Agreement on grounds of economic duress, fraud, and material breach. AGI also sought to set aside the loan agreement on grounds of economic duress and fraud. The district court stayed discovery on all issues except the validity of the Settlement and Release Agreement. After discovery on that issue, the district court granted defendants' motion for summary judgment holding that the Settlement and Release Agreement was valid and barred all of AGI's claims. AGI appeals from the summary judgment.

DISCUSSION

STANDARD OF REVIEW

We review the grant or denial of summary judgment de novo. Barnson v. United States, 816 F.2d 549, 552 (10th Cir.), cert. denied, 484 U.S. 896, 108 S.Ct. 229, 98 L.Ed.2d 188 (1987). We apply the same legal standard used by the district court under Fed.R.Civ.P. 56(c) and examine the record to determine if any genuine issue of material fact was in dispute; if not, we determine if the substantive law was correctly applied. Osgood v. State Farm Mut. Auto. Ins. Co., 848 F.2d 141, 143 (10th Cir.1988). When applying this standard, we examine the factual record and reasonable inferences therefrom in the light most favorable to the party opposing summary judgment. Gray v. Phillips Petroleum Co., 858 F.2d 610, 613 (10th Cir.1988). However, the nonmoving party may not rest on its pleadings but must set forth specific facts showing that there is a genuine issue for trial as to those dispositive matters for which it carries the burden of proof. Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986).

ECONOMIC DURESS

AGI argues that summary judgment was improper because AGI entered into the Settlement and Release Agreement under economic duress and that therefore the agreement was invalid. The district court noted that "Wyoming has not recognized that subspecies of duress termed 'economic duress' or 'business compulsion,' " and held that AGI had failed to demonstrate duress. Although some deference will be given to the local district judge's interpretation of Wyoming law, we ultimately engage in de novo review of whether, under Wyoming law, AGI may claim economic duress. See Wilson v. Al McCord Inc., 858 F.2d 1469, 1473 (10th Cir.1988).

Under Wyoming law a contract may be cancelled because of duress. Goodson v. Smith, 69 Wyo. 439, 457-59, 243 P.2d 163, 171 (1952). "[D]uress exists whenever a person is induced, by the unlawful act of another, to...