Fisher v. Pennsylvania Life Co.

• Decision Date: 03 May 1977
• Court: California Court of Appeals Court of Appeals
• Parties: Michael J. FISHER, Plaintiff and Appellant, v. PENNSYLVANIA LIFE COMPANY et al., Defendants and Respondents. Civ. 48132.

Page 181

138 Cal.Rptr. 181

69 Cal.App.3d 506

Michael J. FISHER, Plaintiff and Appellant, v. PENNSYLVANIA LIFE COMPANY et al., Defendants and Respondents.

Civ. 48132.

Court of Appeal, Second District, Division 4, California.

May 3, 1977.

Roger Jon Diamond, Wayne G. Hawley and Hecht & Diamond, Pacific Palisades, for plaintiff and appellant.

Gibson, Dunn & Crutcher, Theodore B. Olson, Aulana L. Peters, Wyman, Bautzer, Rothman & Kuchel, Terry Christensen and Andrew M. White, Los Angeles, for defendants and respondents.

KINGSLEY, Associate Justice.

Plaintiff appeals from an order dismissing his Second Amended Complaint, after an order sustaining, without leave to amend, a demurrer to that complaint.

For the reasons set forth below, we reverse the order.

I

The case involves the rights of plaintiff and defendants with reference to an agreement entered into between them 'as of November 29, 1971.' Although a copy of that agreement was incorporated (as Exhibit A) in the original complaint it is not so incorporated in the Second Amended Complaint. Nevertheless, since the latest pleading does not attempt to avoid the original allegation, the trial court, and the parties here, have treated the case as one in which the interpretation and validity of that agreement was in issue.

II

Accepting, as we must in the procedural status of the case, the truth of the factual allegations of the Second Amended Complaint, the case presents the following picture.

In 1968, plaintiff (and his assignor Shrotman) sold two businesses to defendant Pennsylvania Life Company (Penn Life). As consideration, they received 3,000 'restricted' ¹ shares of Penn Life stock and were to receive, at a later date, out of an escrow, an additional 15,000 shares of such 'restricted' stock. By reason of subsequent stock splits, the 15,000 shares in escrow increased to approximately 50,000 shares. In violation of the 1968 agreement, Penn Life failed to secure the release of the 3,000 shares from their 'restricted' status and failed to distribute the escrow shares in accordance with the term of the 1968 agreement. After plaintiff had threatened suit and after negotiations in which plaintiff was represented by counsel, the parties entered into the 1971 agreement. Under it, the first 3,000 shares (by then 20,000 shares as a result of the stock splits) were released from restriction and plaintiff received an additional 3,300 shares free of restriction. In consideration of receiving the 23,300 shares of Penn Life stock, plaintiff released his claims under the 1968 agreement. ²

Pertinent to the present action are two paragraphs of the 1971 agreement, reading as follows:

'6. Except for the covenants contained in paragraph 4 above, for valuable consideration, receipt of which is hereby acknowledged, Fisher and Shrotman, and each of them, hereby release and discharge the Pennsylvania Companies, and each of them, and their parents, affiliates, subsidiaries, officers, directors, stockholders, employees, agents, representatives, heirs, executors, administrators, successors and assigns from any and all liabilities, claims, demands, obligations, cause or causes of action whatsoever including, but not limited to, any matters in any way connected or related to said written Exchange Agreement and Plan of Reorganization or any writing or oral agreements or representations made in connection therewith, and arising out of or related to any other matters, happenings or events occurring prior to the execution of this Agreement, whether or not said claims are now known or unknown (Fisher and Shrotman, and each of them, are expressly contracting as to unknown claims), and Fisher and Shrotman, and each of them, hereby waive the provisions of Section 1542 of the California Civil Code, and any other similar law of any jurisdiction other than California, which Section provides as follows:

"A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing a release, which if known by him must have materially affected his settlement with the debtor.'

'13. Fisher and Shrotman, and each of them, hereby acknowledge that neither Fisher nor Shrotman, nor either of them, has made and entered into this Agreement in reliance upon any warranty or representation by any person or entity whatever except for warranties or representations specifically set forth herein. No supplement modification, waiver or termination of this Agreement shall be binding unless executed in writing by the party to be bound. No waiver of any provision of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether similar in nature or not), nor shall such waiver constitute a continuing waiver unless otherwise specifically expressed in writing by the party deemed to have made such waiver.'

In support of his claim that the 1971 agreement was entered into because of fraud on the part of Penn Life and of the individual defendants who were officers of Penn Life, ³ plaintiff relies on certain allegedly false statements made during the negotiations leading up to the execution of the 1971 agreement and on an allegedly fraudulent concealment of a material fact.

II

The allegedly false representations were in essence: (a) that the individual defendants were engaged in purchasing, for their own account, substantial amounts of Penn Life stock, whereas, in fact, they were selling substantial amounts of that stock; and (b) representations by the individual defendants, based on their 'insider' knowledge, that Penn Life stock would increase in market value in the future, whereas those defendants knew that the stock would decrease in market value in the future.

Plaintiff alleges that, although the stock received by him under the 1971 agreement had, as of the date of that agreement, a market value of approximately $800,000, in fact, by 1973, as a result of matters then known to defendants, the stock had decreased in value to approximately $62,000.

Plaintiff here relies on cases that hold that, where an agreement is obtained by fraud, it may be rescinded in spite of provisions therein purporting to waive fraud. But those cases are inapposite to this case. Here, plaintiff had agreed that he (and Shrotman) had entered into the 1971 agreement in reliance Only on the representations set forth in that agreement. Such an agreement amounts to a statement, now binding on plaintiff, that any other representations previously made to him were not material inducements to his execution of the 1971 agreement. Since he thus, in 1971, agreed that he had not relied on the representations on which he now seeks recovery, he cannot now claim otherwise. (Casey v. Proctor (1963) 59 Cal.2d 97, 28 Cal.Rptr. 307, 378 P.2d 579, Kronsberg v. Milton J. Wershow Co. (1965) 238 Cal.App.2d 170, 47 Cal.Rptr. 592.)

III

It follows that, if plaintiff has stated any cause of action against defendants, it is his allegation that the 1971 agreement was the result of a fraudulent concealment of facts, known to defendants and unknown to plaintiff. The fact so concealed is alleged to be that, for some time prior to the 1971 agreement, defendants had been parties to fraudulent transactions with another company, known as Equity Funding Corporation of America, the result of which had been artificially to increase the market value of Penn Life stock far beyond its actual value. Plaintiff alleges that, in 1973, the so-called 'EFCA/PLC' fraud became known to the investing public, resulting in the substantial decrease in the market value of Penn Life stock above referred to. ⁴

Plaintiff argues that he has alleged facts which give rise to a 'limited fiduciary duty' owed by defen...