Hershey v. Donaldson, Lufkin & Jenrette Securities

• Decision Date: 17 January 2003
• Docket Number: No. 02-1316.,02-1316.
• Citation: 317 F.3d 16
• Parties: Barry J. HERSHEY, Plaintiff, Appellant, v. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION and David H. Gunning, Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 16

317 F.3d 16

Barry J. HERSHEY, Plaintiff, Appellant, v. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION and David H. Gunning, Defendants, Appellees.

No. 02-1316.

United States Court of Appeals, First Circuit.

Heard October 7, 2002.

Decided January 17, 2003.

COPYRIGHT MATERIAL OMITTED

John D. Hanify, with whom Kathleen E. Cross, David C. Kravitz, and Hanify & King, were on brief, for appellant.

John J. Curtin, Jr., with whom Timothy P. Burke, Alicia L. Downey, and Bingham McCutchen LLP, were on brief, for appellees.

Before BOUDIN, Chief Judge, TORRUELLA and LIPEZ, Circuit Judges.

TORRUELLA, Circuit Judge.

This case arises from the sale of a corporation in which plaintiff-appellant Barry J. Hershey was the controlling shareholder, defendant-appellee David H. Gunning was the Chief Executive Officer, Chairman and President, and defendant-appellee Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") was the investment banking firm assisting in the sale. Hershey alleges breach of fiduciary duties by Gunning and DLJ, misrepresentation and breach of contract by DLJ, and fraudulent inducement by Gunning. The district court granted summary judgment to the defendants on all counts. We affirm.

I. Background

After studying at the University of Pennsylvania's Wharton School and Harvard Law School, Hershey founded Capital American Financial Corporation ("CAF"), an Ohio-based insurance company, in 1970.

Hershey led CAF until 1993, when he recruited Gunning from the law firm of Jones, Day, Reavis & Pogue to take over. Gunning's salary included stock options and, beginning in 1996, a bonus structure that included a bonus if CAF was sold. This sale bonus started at 1% of the "aggregate consideration" paid for the company, and decreased by 0.1% each year CAF was not sold. With Gunning's assumption of control of CAF, Hershey relinquished all official positions with CAF, but continued to own 30% of the shares individually, and together with his wife controlled 44% of CAF's outstanding shares.

In October 1995, although he was no longer a member of the board, Hershey contacted Mark Gormley of DLJ to discuss options for CAF, including its sale. Hershey signed a Confidentiality Agreement and agreed to compensate DLJ personally if it was not retained by CAF. Until August 1996, DLJ worked exclusively for Hershey to identify a buyer for CAF, eventually identifying Conseco Corporation ("Conseco") as the most likely purchaser of CAF. Anticipating the sale of CAF, in April 1996, Hershey hired Edward Benjamin, a corporate lawyer from Ropes & Gray to provide legal advice to Hershey and his wife.

Hershey met with the Chief Executive Officer and Chief Financial Officer of Conseco in June 1996. At that meeting, he rejected Conseco's offer to purchase CAF for $35 in cash per share.

Hershey considered alternatives for CAF, including cost cutting, changing CAF's investment policy, repurchasing CAF shares, tax planning, and other "financial strategies." He discussed these ideas with Gunning and other CAF directors. Hershey believed these were alternatives to a merger and would be considered by the board before it approved a sale.

At a special meeting of the CAF board convened on August 11, 1996, Hershey outlined his financial strategies, and DLJ made a presentation regarding acquisition by Conseco.¹ Following this meeting, Gunning assured Hershey that the board was on a "dual track," considering both the financial strategies and a merger.

CAF's board met August 25, 1996, to finalize the decision to sell the company to Conseco for $30 in cash and $6.50 in Conseco stock per share. Hershey and his attorney had each received the terms of the deal the previous day, and neither requested additional time to review the materials. Both attended the board meeting by conference call. Hershey asked Gunning if his alternatives to a sale had been discussed, and Gunning replied that there were too many variables to include them in that particular sales study. Before exiting the meeting, Hershey stated that he would endorse the board's decision to sell or to pursue an alternative strategy.

The CAF board approved the sale to Conseco. Hershey signed a shareholder agreement agreeing to vote in favor of the sale and later voted in favor of the sale. The sale closed in March 1997; as a result of the merger, Hershey received more than 200 million dollars.

On August 24, 1999, Hershey filed suit against Gunning and DLJ in Massachusetts state court. Defendants removed the case to federal district court. In February 2001, each defendant filed a motion for summary judgment, which the court heard in April. In February 2002, the court granted summary judgment for both defendants. Hershey v. Donaldson, Lufkin & Jenrette Sec. Corp., No. 99-12469-RWZ, 2002 WL 924242, 2002 U.S. Dist. LEXIS 8164, at *13 (D.Mass. Feb.19, 2002). This timely appeal followed.

II. Standard of Review

We review the grant of summary judgment de novo, assessing the facts in the light most favorable to Hershey. See Triangle Trading Co. v. Robroy Indus., Inc., 200 F.3d 1, 2 (1st Cir.1999). Summary judgment is appropriate if there are no genuine issues of material fact, and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). A "genuine issue" is one "supported by such evidence that a reasonable jury, drawing favorable inferences, could resolve it in favor of the nonmoving party." Triangle Trading Co., 200 F.3d at 2. Hershey may not rely upon conclusory allegations, improbable inferences, or unsupported speculation to defeat summary judgment. Id. We are not bound to adopt the district court's reasoning, and may affirm the grant of summary judgment for any reason supported by the record. Frillz, Inc. v. Lader, 104 F.3d 515, 516 (1st Cir.1997).

III. Discussion

A. Choice of Law

Where parties have agreed to the choice of law, this court is free to "forego an independent analysis and accept the parties' agreement." Borden v. Paul Revere Life Ins. Co., 935 F.2d 370, 375 (1st Cir.1991). Here, the parties agreed that Ohio law would control the issues of fiduciary duty and misrepresentation, and that, per the contract, New York law would control the Confidentiality Agreement. The district court recognized this choice of law, and we follow suit. See id. (applying Rhode Island law because the parties and district court consistently used it).

B. Fiduciary Duty²

Under Ohio law, a fiduciary relationship is "one in which special confidence and trust is reposed in the integrity and fidelity of another and there is a resulting position of superiority or influence, acquired by virtue of this special trust." In re Termination of Employment of Pratt, 40 Ohio St.2d 107, 321 N.E.2d 603, 609 (Ohio 1974). Such a relationship may arise out of an informal relationship so long as both parties understand, or should understand, that the special confidence has been reposed. Umbaugh Pole Bldg. Co. v. Scott, 58 Ohio St.2d 282, 390 N.E.2d 320, 323 (Ohio 1979); Gen. Acquisition, Inc. v. Gencorp, Inc., 766 F.Supp. 1460, 1471 (S.D.Ohio 1990). This type of confidential relationship is "one in which one person comes to rely on and trust another in his important affairs and the relations there involved are not necessarily legal, but may be moral, social, domestic or merely personal." Id. at 1471 (quotation omitted). Hershey's claim is that he placed a special trust and confidence in Gunning and DLJ, who recognized their influential positions and had a duty to assert Hershey's best interests. Whether or not such fiduciary duties arose informally is a question of fact. We examine the relationships between the parties here, conscious of the fact that the mere giving of advice is not enough to establish a fiduciary relationship. Ed Schory & Sons, Inc. v. Francis, 75 Ohio St.3d 433, 662 N.E.2d 1074, 1082 (Ohio 1996).

1. Gunning

The only evidence cited by Hershey to create a fiduciary relationship with Gunning, apart from any duty that Gunning might have owed Hershey as a shareholder, is: (1) both Gunning and Hershey knew that Gunning had experience conducting mergers and acquisitions, while Hershey had none; (2) Gunning had a direct pecuniary interest in the transaction at issue; and (3) on numerous occasions, Gunning offered or Hershey requested advice. In essence, Hershey paints himself as a naive shareholder who relied on Gunning to consider Hershey's best interests above his duties to the corporation he headed. Hershey claims that Gunning, as "trusted advisor," should have known that Hershey was dependant on his valued advice and owed Hershey the duties of a fiduciary.

This argument fails for several reasons. First, Hershey's education in economics and law gave him the appearance of a sophisticated investor able to consider the terms of the merger of his company. Hershey also had his own experienced attorney reviewing the transaction and providing advice. Gunning therefore could have reasonably believed that Hershey was able to evaluate the options on his own. Hershey had to know that Gunning's central fiduciary duty ran to the company and not to Hershey personally; indeed, Hershey had himself negotiated a compensation package for Gunning that made clear that Gunning was encouraged to arrange for a sale of CAF.

Finally, even if Gunning offered advice, the evidence refutes Hershey's claim that he blindly relied upon Gunning's expertise. While Hershey stated that he recruited Gunning because of "his respect for [Gunning's] personal integrity and honesty," the evidence shows that these initial feelings of fondness quickly faded. Hershey was openly critical of Gunning from 1993 to 1996, questioning his business decisions and calling him a "brick wall of resistance." Hershey was much less charitable behind Gunning's back, accusing him of drinking heavily, having poor judgment, and creating problems and then "scurrying to kind of protect his ego and position and reputation." In...