Greenfield v. Fritz Companies, Inc.

• Citation: 82 Cal.App.4th 741,98 Cal.Rptr.2d 530
• Decision Date: 28 July 2000
• Docket Number: No. A086982.,A086982.
• Court: California Court of Appeals Court of Appeals
• Parties: Harvey GREENFIELD, Plaintiff and Appellant, v. FRITZ COMPANIES, INC., et al. Defendants and Respondents.

98 Cal.Rptr.2d 530

82 Cal.App.4th 741

Harvey GREENFIELD, Plaintiff and Appellant, v. FRITZ COMPANIES, INC., et al. Defendants and Respondents.

No. A086982.

Court of Appeal, First District, Division 4.

July 28, 2000.

As Modified August 3, 2000.

Review Granted November 21, 2000.

Stull, Stull & Brody, Michael Braun and Marc L. Godino, Jules Brody, Mark Levine, of counsel, Los Angeles, for Plaintiff and Appellant.

William F. Alderman, Orrick, Herrington & Sutcliffe, San Francisco, for Defendant and Respondent.

POCHÉ, J.

This appeal from a judgment of dismissal entered after the trial court sustained a general demurrer without leave to amend presents two questions. The first is whether the plaintiff here has pleaded the allegations of actual reliance required by Mirkin v. Wasserman (1993) 5 Cal.4th 1082, 23 Cal.Rptr.2d 101, 858 P.2d 568 and Lazar v. Superior Court (1996) 12 Cal.4th 631, 49 Cal.Rptr.2d 377, 909 P.2d 981 for causes of action for fraud and negligent misrepresentation. Our answer to this question is Yes. The second question is whether those causes of action may be based on the decision of corporate shareholders not to sell their shares after they have received material and misleading statements from the corporation; in order words, can damages for fraud be recovered when misrepresentations induce forbearance? Although this issue arises in a novel context for California, it requires only the application of familiar principles. Our answer to the second question is also Yes.

BACKGROUND

The pleading at issue is the second amended complaint filed by plaintiff Harvey Greenfield. Our function on review is to accept all its factual allegations as true, and to give it a reasonable construction as a whole and all of its parts in their context. (E.g., Garcia v. Superior Court (1990) 50 Cal.3d 728, 732, 268 Cal.Rptr. 779, 789 P.2d 960.) That task is eased considerably because only one element common to two causes of action is disputed.

Plaintiff filed the complaint "on behalf of himself and all others similarly situated," specifically, "a class of all persons who owned and held Fritz common stock" during the period from April 2, 1996, through July 24, 1996 (which the complaint terms the "Relevant Period"). The defendants are Fritz Companies, Inc., (the corporation) and three of its directors and officers. The "Relevant Period" commenced when defendants omitted material information about the financial prospects of the corporation (whose shares were publicly traded) from a document provided to the corporation's shareholders, including plaintiff. The period ended when the corporation dramatically revised downward its revenues and earnings reported in the April 2 document, thereby causing the value of common shares to plummet "more than 55% in one day." Plaintiff seeks to recover compensatory damages for the difference in value of the shares on April 2 and July 24, approximately $15.25 per share, together with punitive damages.

The relevant causes of action are for fraud and negligent misrepresentation, both of which require a plaintiff to prove actual reliance on a misrepresentation or an omission. (Mirkin v. Wasserman, supra, 5 Cal.4th 1082, 1088-1089 & fn. 2, 1091-1093, 23 Cal.Rptr.2d 101, 858 P.2d 568.)¹ The pertinent allegations made in plaintiff's second amended complaint concerning the issue of reliance are as follows:

"On or shortly after April 2, 1996, plaintiff Harvey Greenfield and all Class members received a statement sent by Fritz to its shareholders reporting, among other things, Fritz' revenue, net income and earnings per share, recorded by Fritz for the third quarter ending February 29, 1996. Plaintiff Harvey Greenfield and all Class members read this statement, including the information related to the reported revenue, net income and earnings per share, and relied on this information in deciding to hold Fritz stock throughout the Relevant Period."² These allegations were made twice in the complaint. They were incorporated by reference in each of the causes of action at issue here.

The cause of action for negligent misrepresentation also has these allegations: "Defendants owed to plaintiff and the other Class members a duty ... to act with reasonable care in preparing the information ... disseminated to plaintiff and the Class, which plaintiff and the Class relied upon in deciding to hold their shares of Fritz stock.... [¶] Plaintiffs and the Class read or were otherwise made aware of Fritz' misstatements regarding the Company's third fiscal quarter 1996 revenue, net income and earnings per share, and relied upon the same in electing to hold their Fritz stock through the Relevant Period."

The fraud cause of action also has these allegations: "Plaintiff and the Class, without knowledge of the falsity of the material misstatements, misrepresentations and omissions by defendants, and believing such misrepresentations and misstatements reflected in the positive representations and positive reports of earnings to be true and complete, and in reasonable and justifiable reliance upon the truth and completeness of the misrepresentations and misstatements made by defendants and their agents, held shares of defendant Fritz. Plaintiff and the Class would not have held their shares but for their reliance upon the truth and completeness of the misstatements and misrepresentations defendants made regarding Fritz and its business."

Defendants interposed a general demurrer based upon two grounds. The first was that each of the complaint's causes of action "fails to state facts sufficient to constitute a cause of action because the Second Amended Complaint does not `plead with the requisite specificity the facts alleged to constitute actual reliance by any person on whose behalf plaintiff seeks to assert such claims.'" The second ground was that "California law does not recognize any such claim on behalf of shareholders who neither bought nor sold shares based upon any alleged misstatement or omission." The trial court sustained the demurrer on the first ground without granting leave to amend; the court found it unnecessary to address the second ground of the demurrer, i.e., "the viability of plaintiffs underlying theory of liability." Plaintiff filed a timely notice of appeal.³

REVIEW

I

A number of preliminary issues concerning the scope of this appeal must be made in response to the parties' briefs and contentions presented at oral argument. Plaintiff has two headings in his opening brief, that "the complaint pleads actual reliance," and that it "satisfies the Mirkin standard for pleading reliance." A major theme of plaintiffs argument is that, in accordance with Vasquez v. Superior Court (1971) 4 Cal.3d 800, 94 Cal.Rptr. 796, 484 P.2d 964 and Occidental Land, Inc. v. Superior Court (1976) 18 Cal.3d 355, 134 Cal.Rptr. 388, 556 P.2d 750, this is an appropriate case for drawing an inference of reliance as to the entire putative class. Defendants' brief also has two headings. The first is that "Plaintiff cannot state a classwide fraud claim based on the conclusory allegations of reliance rejected by the Supreme Court in Mirkin." During the course of developing this argument defendants dispute the propriety of a class-wide inference of reliance. In addition to arguing that plaintiff did not satisfy the pleading requirement for reliance, defendants also claim that the complaint is inadequate on the issue of causation. Commencing with a footnote in their brief and as more fully developed at oral argument, defendants also submit that the trial court's ruling can and should be construed as a determination of the viability of a class action. The second heading of defendants' brief is that "No California court has ever embraced plaintiffs theory of securities fraud liability to investors who neither bought nor sold securities." Noting that plaintiff failed to raise this issue—the ground for their demurrer which the trial court did not address—in his opening brief, defendants assert that this omission "precludes plaintiff from belatedly arguing the point in his reply [brief]." While developing their second point, defendants break away from it to suggest that plaintiffs complaint should (and on a class-wide basis must) have been brought as a shareholder derivative action. In his reply brief plaintiff argues in effect that the second ground for the demurrer is not an issue because it was not addressed by the trial court. He insists that defendants "have thrown everything into their Opposition but the kitchen sink" and that, apart from whether reliance was adequately pleaded, all of defendants' other arguments are "outside the scope of this appeal."

Neither side has been exemplary in appreciating the scope of arguments which are legitimate for this appeal nor overly scrupulous in presenting them. Plaintiff appears not to have realized that if he prevailed on the reliance issue, we would nevertheless be required to consider the other ground of defendants' demurrer pursuant to the rule of appellate view that "[a] judgment of dismissal after a demurrer has been sustained without leave to amend will be affirmed if proper on any grounds stated in the demurrer, whether or not the [trial] court acted on that ground." (Carman v. Alvord (1982) 31 Cal.3d 318, 324, 182 Cal.Rptr. 506, 644 P.2d 192.) This rule appears to be based on the familiar principle that an appellate court reviews the validity of a lower court's action, not the reasoning behind that action. (See E.L. White, Inc. v. City of Huntington Beach (1978) 21 Cal.3d 497, 504 & fn. 2, 146 Cal.Rptr. 614, 579 P.2d 505.) On the other hand, the issues of causation and whether plaintiff should proceed by a shareholder derivative action were never mentioned in defendants' demurrer or supporting papers, contrary to Code of Civil Procedure section 430.60 and rules 313(b) and 325(a) of the California Rules of Court. And while defendants are correct that the propriety...