Mergens v. Dreyfoos

• Decision Date: 03 February 1999
• Docket Number: No. 97-5412,97-5412
• Parties: 12 Fla. L. Weekly Fed. C 459 Ann A. MERGENS, individually, and as Trustee for the Ann A. Mergens Revocable Trust; et al., Plaintiffs-Appellants, Cross-Appellees, v. Alex W. DREYFOOS, Jr; Photo Electronics Corporation, a Florida corporation; et al., Defendants-Appellees, Cross-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1114

166 F.3d 1114

12 Fla. L. Weekly Fed. C 459

Ann A. MERGENS, individually, and as Trustee for the Ann A.

Mergens Revocable Trust; et al., Plaintiffs-Appellants, Cross-Appellees, v. Alex W. DREYFOOS, Jr; Photo Electronics Corporation, a

Florida corporation; et al.,

Defendants-Appellees, Cross-Appellants.

No. 97-5412.

United States Court of Appeals, Eleventh Circuit.

Feb. 3, 1999.

Gerald F. Richman, Gary Steven Betensky, Kenneth L. Dobkin, Richman, Greer, Weil, Brumbaugh, Mirabito & Christensen, West Palm Beach, FL, Michael Nachwalter, Harry Richard Schafer, Scott E. Perwin, Kevin J. Murray, Kenny, Nachwalter, Seymour, Arnold, Critchlow & Spector, Miami, FL, for Plaintiffs-Appellants, Cross-Appellees.

Robert M. Montgomery, Jr., Montgomery & Larmoyeux, James Wallace Beasley, Jr., David Leacock, Beasley, Leacock & Hauser, West Palm Beach, FL, for Defendants-Appellees, Cross-Appellants.

Appeal from the United States District Court for the Southern District of Florida.

Before ANDERSON and DUBINA, Circuit Judges, and FAY, Senior Circuit Judge.

FAY, Senior Circuit Judge:

Plaintiffs-Appellants Ann Mergens, individually, and as Trustee for the Ann M. Mergens Revocable Trust, Mary Mergens Loughran, and Paul Mergens ("Mergenses") appeal the district court's order granting the Defendants-Appellees Alex W. Dreyfoos, Jr., Photo Electronics Corporation, Carolyn B. Dreyfoos, D.E. Murray, Photo Electronics Company, L.P., and Freedom Communications, Inc. ("Dreyfoos") motion for judgment on the pleadings. Based on a thorough review of the pleadings, briefs and record, we conclude that the Mergens federal securities fraud and common law fraud claims are barred by the general release and merger clause. Similarly, the district court did not abuse its discretion in declining to exercise supplemental jurisdiction over Plaintiffs-Appellants' remaining common law breach of fiduciary duty claim and dismissing it without prejudice. Accordingly, we affirm.

FACTS

These claims arose out of the negotiation and execution of a Stock Repurchase Agreement ("Agreement") for the sale of the Mergenses' 38% minority equity interest in Photo Electronics Corporation ("PEC") to Dreyfoos, PEC's majority stockholder. On January 17, 1994, the parties entered into this Agreement whereby the Mergenses received $3 million in cash and a $11.5 million promissory note to be paid in eight years. The Agreement contained a merger clause and a general release applicable to all claims accrued as of the date of the Agreement. On September 28, 1995, the day after Dreyfoos paid the note in full, the Mergenses learned that PEC had sold its main asset, WPEC-TV, to Freedom Communications for $150-160 million. Believing that Dreyfoos had realized a windfall, the Mergenses sought to rescind the Agreement but Dreyfoos refused.

The Mergenses brought this action in the United States District Court for the Southern District of Florida in December, 1995, alleging in Counts I-III federal securities fraud in violation of both Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5, 17 C.F.R. § 240.10b-5; alleging in Count IV common law fraud in the inducement; and alleging in Count V common law breach of fiduciary duty. Specifically, the Mergenses alleged that Dreyfoos and PEC misrepresented the cash flow and other assets of PEC in order to induce them to sell at a price far below market value. The Mergenses further alleged Dreyfoos fraudulently represented in the Agreement itself that PEC did not contemplate the sale of its assets. On July 18, 1997, the court granted Defendants-Appellees motion for summary judgment on the pleadings with respect to the federal securities fraud and the common law fraud claims and dismissed the fiduciary duty claim without prejudice for want of federal subject matter jurisdiction. 28 U.S.C. § 1367(c)(3). The court held that the Agreement's merger clause and general release barred any securities fraud claim based on misrepresentations or omissions not preserved in the Agreement itself; that a misrepresentation contained in the Agreement only gave rise to a breach of contract claim; and that the rule of unjustifiable reliance barred the fraud in the inducement claim.

On appeal, the Mergenses argue that the merger clause and general release do not bar federal securities law and common law fraud claims where a misrepresentation is expressly set forth in the written agreement. Second, the Mergenses contend that neither the Agreement's terms nor the rule of unjustifiable reliance bar fraud claims based on representations made to third parties or omissions. Third, the Mergenses argue as Cross-Appellees that the court was not required to dismiss the fiduciary duty claim which it dismissed without prejudice.

In response, Dreyfoos argues that the general release and rule of justifiable reliance bar all claims. Dreyfoos also argues, as Defendants-Cross-Appellees, that the district court erred by failing to dismiss the breach of fiduciary duty claim with prejudice.

STANDARD OF REVIEW

This Court reviews judgments on the pleadings de novo. See Ortega v. Christian In contrast, review of the district court's dismissal of the state cause of action for want of subject matter jurisdiction is reviewed under the abuse of discretion standard. See L.A. Draper & Son v. Wheelabrator-Frye, Inc., 735 F.2d 414, 420 (11th Cir.1984).

                85 F.3d 1521, 1524-25 (11th Cir.1996).  Judgment on the pleadings is appropriate where no issue of material fact remains unresolved and the moving party is entitled to judgment as a matter of law.  Id. at 1524.   When reviewing judgment on the pleadings, we must take the facts alleged in the complaint as true and view them in the light most favorable to the nonmoving party.  Id. at 1524
                

DISCUSSION

The first issue is whether the release in the written Agreement bars the Mergenses' federal securities and common law fraud claims. As set forth in the Agreement, Plaintiffs-Appellants contracted to release Defendants-Appellees from any claim they "ever had, now have ... shall or may have ... from the beginning of the world to the date [of the Settlement Agreement]." The parties also stipulated, pursuant to Art. V.8 of the Agreement, that Florida law will govern in the event of a dispute ¹.

Under Florida law, "[t]he validity and effect of a settlement and release are governed by contract law." Travelers Insurance Co. v. Horton, 366 So.2d 1204 (Fla. 3rd DCA 1979). "A party is bound by, and a court is powerless to rewrite, the clear and unambiguous terms of a voluntary contract." Medical Center Health Plan v. Brick, 572 So.2d 548, 551 (Fla. 1st DCA 1990).

The Agreement contains four relevant provisions. First, the Mergenses warranted that they were sophisticated sellers and that they were provided with the full opportunity to investigate and evaluate the financial condition of PEC. Second, Dreyfoos warranted that he had no current intention or plan to sell PEC or PEC's assets. Third, the Mergenes agreed to release Dreyfoos from any and all causes of action from the beginning of time to the date the agreement was signed. Finally, the parties agreed that Agreement represented the entire understanding of the parties and that any prior representation was superseded by the current contract.

The district court was correct in holding that the general release unambiguously bars all actions premised on claims that arose before, and contemporaneous to, the execution of the Agreement. The only question remaining is whether the Mergenses can establish that the release was procured by fraud, thereby making it voidable.

The Mergenses contend that their fraud causes of action survive the release because Dreyfoos fraudulently misrepresented in the Agreement that he had no current intention to sell PEC or any of its assets. To prove fraud under Florida law, the plaintiff must show that "1)the defendant made a false representation of past or present fact, 2)the defendant knew the statement was false, 3)the statement was made for the purpose of inducing the plaintiff to rely on it, and 4)the plaintiff's reliance was reasonable." Finn v. Prudential-Bache Securities, Inc., 821 F.2d 581, 586 (11th Cir.1987)(citing Pettinelli v. Danzig, 722 F.2d 706, 709 (11th Cir.1984)).

The district court relied on Pettinelli, 722 F.2d at 706, in holding that the Mergenses were not justified in relying on any representation for purposes of establishing a fraud claim. In Pettinelli this Court addressed a claim brought by the plaintiff alleging the defendant fraudulently induced him to execute a contract concerning the sale of securities. This Court held that no fraud cause of action existed because the plaintiff was unable to show a material misrepresentation, and even assuming a material misrepresentation existed, reliance on that representation was unjustifiable as a matter of law. With respect to the rule of justifiable reliance, this Court said "[w]hen negotiating or attempting to compromise an existing controversy over fraud and dishonesty it is unreasonable to rely on representations made by the allegedly dishonest parties." Id. at 710.

Prior to the execution of the Agreement in the instant case, the Mergenses complained Dreyfoos was mismanaging PEC alleging "a shocking waste of corporate assets and personal profit at the expense of PEC shareholders by Dreyfoos." The attorney for the Mergenses sent a letter to Dreyfoos threatening litigation if Dreyfoos did not buy back the Mergens's share of PEC. The letter included a prepared, but not...