Rissman v. Rissman

• Decision Date: 19 June 2000
• Docket Number: No. 99-2719,99-2719
• Parties: (7th Cir. 2000) Arnold R. Rissman, Plaintiff-Appellant, v. Owen Randall Rissman and Robert Dunn Glick, Defendants-Appellees
• Court: U.S. Court of Appeals — Seventh Circuit

Page 381

213 F.3d 381 (7th Cir. 2000)

Arnold R. Rissman, Plaintiff-Appellant, v. Owen Randall Rissman and Robert Dunn Glick, Defendants-Appellees.

No. 99-2719

In the United States Court of Appeals For the Seventh Circuit

Argued April 7, 2000

Decided May 23, 2000

Rehearing and Rehearing En Banc Denied June 19, 2000.

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 98 C 3656--Blanche M. Manning, Judge.

Before Bauer, Easterbrook, and Rovner, Circuit Judges.

Easterbrook, Circuit Judge.

Gerald Rissman formed Tiger Electronics to make toys and games. In 1979 Gerald gave his sons Arnold, Randall, and Samuel large blocks of stock in the firm: Gerald kept 400 shares and gave Randall 400, Arnold 100, and Samuel 100. In 1986 both Gerald and Samuel withdrew from the venture. Tiger bought Gerald's stock, and Arnold bought Samuel's, leaving Randall with 2/3 of the shares and Arnold with the rest. Randall managed the business while Arnold served as a salesman. Arnold did not elect himself to the board of directors, though Tiger employed cumulative voting, which would have enabled him to do so. When the brothers had a falling out, Arnold sold his shares to Randall for $17 million. Thirteen months later, Tiger sold its assets (including its name and trademarks) for $335 million to Hasbro, another toy maker, and was renamed Lion Holdings. Arnold contends in this suit under the federal securities laws (with state-law claims under the supplemental jurisdiction) that he would not have sold for as little as $17 million, and perhaps would not have sold at all, had Randall not deceived him into thinking that Randall would never take Tiger public or sell it to a third party. Arnold says that these statements convinced him that his stock would remain illiquid and not pay dividends, so he sold for whatever Randall was willing to pay. Arnold now wants the extra $95 million he would have received had he retained his stock until the sale to Hasbro.

Because the district judge granted summary judgment to the defendants, see 1999 U.S. Dist. Lexis 10611 (N.D. Ill.), we must assume that Randall told Arnold that he was determined to keep Tiger a family firm. Likewise we must assume that Randall secretly planned to sell after acquiring Arnold's shares. But we need not assume that Arnold relied on Randall's statements (equivalently, that the statements were material to and caused Arnold's decision), and without reliance Arnold has no claim under sec. 10(b) or Rule 10b-5. See 15 U.S.C. sec. 78j(b); 17 C.F.R. sec. 240.10b-5; Basic, Inc. v. Levinson, 485 U.S. 224, 243 (1988). Arnold asked Randall to put in writing, as part of the agreement, a representation that Randall would never sell Tiger. Randall refused to make such a representation. Instead he warranted (accurately) that he was not aware of any offers to purchase Tiger and was not engaged in negotiations for its sale. Contrast Jordan v. Duff & Phelps, Inc., 815 F.2d 429 (7th Cir. 1987). The parties also agreed that if Tiger were sold before Arnold had received all installments of the purchase price, then payment of the principal and interest would be accelerated. Having sought broader assurances, and having been refused, Arnold could not persuade a reasonable trier of fact that he relied on Randall's oral statements. See Karazanos v. Madison Two Associates, 147 F.3d 624, 628-31 (7th Cir. 1998). Having signed an agreement providing for acceleration as a consequence of sale, Arnold is in no position to contend that he relied on the impossibility of sale.

Indeed, Arnold represented as part of the transaction that he had not relied on any prior oral statement:

The parties further declare that they have not relied upon any representation of any party hereby released [Randall] or of their attorneys [Glick], agents, or other representatives concerning the nature or extent of their respective injuries or damages. That is pretty clear, but to foreclose quibbling Arnold made these warranties to Randall:

(a) no promise or inducement for this Agreement has been made to him except as set forth herein; (b) this Agreement is executed by [Arnold] freely and voluntarily, and without reliance upon any statement or representation by Purchaser, the Company, any of the Affiliates or O.R. Rissman or any of their attorneys or agents except as set forth herein; (c) he has read and fully understands this Agreement and the meaning of its provisions; (d) he is legally competent to enter into this Agreement and to accept full responsibility therefor; and (e) he has been advised to consult with counsel before entering into this Agreement and has had the opportunity to do so.

Arnold does not contend that any representation in the stock purchase agreement is untrue or misleading; his entire case rests on Randall's oral statements. Yet Arnold assured Randall that he had not relied on these statements. Securities law does not permit a party to a stock transaction to disavow such representations--to say, in effect, "I lied when I told you I wasn't relying on your prior statements" and then to seek damages for their contents. Stock transactions would be impossibly uncertain if federal law precluded parties from agreeing to rely on the written word alone. "Without such a principle, sellers would have no protection against plausible liars and gullible jurors." Carr v. CIGNA Securities, Inc., 95 F.3d 544, 547 (7th Cir. 1996).

Two courts of appeals have held that non-reliance clauses in written stock-purchase agreements preclude any possibility of damages under the federal securities laws for prior oral statements. Jackvony v. RIHT Financial Corp., 873 F.2d 411 (1st Cir. 1989) (Breyer, J.); One-O-One Enterprises, Inc. v. Caruso, 848 F.2d 1283 (D.C. Cir. 1988) (R.B. Ginsburg, J.). Several of this circuit's opinions intimate agreement with these decisions, though we have yet to encounter a situation squarely covered by them. See SEC v. Jakubowski, 150 F.3d 676, 681 (7th Cir. 1998); Pommer v. Medtest Corp., 961 F.2d 620, 625 (7th Cir. 1992); Astor Chauffeured Limousine Co. v. Runnfeldt Investment Corp., 910 F.2d 1540, 1545-46 (7th Cir. 1990). Jackvony and One-O-One fit Arnold's claim like a glove, and we now follow those cases by holding that a written anti-reliance clause precludes any claim of deceit by prior representations. The principle is functionally the same as a doctrine long accepted in this circuit: that a person who has received written disclosure of the truth may not claim to rely on contrary oral falsehoods. See Carr and, e.g., Associates In Adolescent Psychiatry, S.C. v. Home Life Insurance Co., 941 F.2d 561, 571 (7th Cir. 1991); Dexter Corp. v. Whittaker Corp., 926 F.2d 617, 620 (7th Cir. 1991); Teamsters Local 282 Pension Trust Fund v. Angelos, 762 F.2d 522, 530 (7th Cir. 1985). A non-reliance clause is not identical to a truthful disclosure, but it has a similar function: it ensures that both the transaction and any subsequent litigation proceed on the basis of the parties' writings, which are less subject to the vagaries of memory and the risks of fabrication.

Memory plays tricks. Acting in the best of faith, people may "remember" things that never occurred but now serve their interests. Or they may remember events with a change of emphasis or nuance that makes a substantial difference to meaning. Express or implied qualifications may be lost in the folds of time. A statement such as "I won't sell at current prices" may be recalled years later as "I won't sell." Prudent people protect themselves against the limitations of memory (and the temptation to shade the truth) by limiting their dealings to those memorialized in writing, and promoting the primacy of the written word is a principal function of the federal securities laws.

Failure to enforce agreements such as the one between Arnold and Randall could not make sellers of securities better off in the long run. Faced with an unavoidable risk of claims based on oral statements, persons transacting in securities would reduce the price they pay, setting aside the difference as a reserve for risk. If, as Arnold says, Randall was willing to pay $17 million and not a penny more, then a legal rule entitling Arnold to an extra $95 million if Tiger should be sold in the future would have scotched the deal (the option value of the deferred payment exceeds 1¢), leaving Arnold with no cash and the full risk of the venture. Arnold can't have both $17 million with certainty and a continuing right to 1/3 of any premium Randall negotiates for the firm, while bearing no risk of loss from the fickle toy business; that would make him better off than if he had held his shares throughout.

Negotiation could have avoided this litigation. Instead of taking the maximum Randall was willing to pay unconditionally, Arnold could have sought a lower guaranteed payment (say, $10 million) plus a kicker if Tiger were sold or taken public. Because random events (or Randall's efforts) would dominate Tiger's prosperity over the long run, the kicker would fall with time. Perhaps Arnold could have asked for 25% of any proceeds on a sale within a year, diminishing 1% every other month after that (so that Randall would keep all proceeds of a sale more than 62 months after the transaction with Arnold). Many variations on this formula were possible; all would have put Randall to the test, for if he really planned not to sell, the approach would have been attractive to him because it reduced his total payment. Likewise it would have been attractive to Arnold if he believed that Randall wanted to sell as soon as he could receive more than 2/3 of the gains. Yet Arnold never proposed a payment formula that would share the risk (and rewards) between the brothers, and the one he proposes after the fact in this litigation--$17 million with certainty and a perpetual right to 1/3 of any later premium--is just about the only formula ...