Hershey v. Donaldson, Lufkin & Jenrette Securities Corp.

United States Court of Appeals
For the First Circuit

No. 02-1316

BARRY J. HERSHEY,

Plaintiff, Appellant,

v.

DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION and DAVID H. GUNNING,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Rya W. Zobel, U.S. District Judge]

Before

Boudin, Chief Judge,

Torruella and Lipez, Circuit Judges.

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.

January 17, 2003
 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

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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

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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

1
At this meeting the CAF board authorized retention of DLJ as
financial advisor with respect to the sale; the board formally
retained it the next day.

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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 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

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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, 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, 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

2
Hershey's suit is not derivative in nature, and he must
therefore show Gunning and DLJ owed him a duty directly, rather
than in his role as a shareholder. See Adair v. Wozniak, 492
N.E.2d 426, 428 (Ohio 1986). A shareholder does not have a cause
of action if he only suffers the same harm as other shareholders.
Id. at 429. Asserting these claims independently, Hershey seeks to
personally recover the profits realized by Gunning and DLJ in the
merger.

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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, 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

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"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 addition, Hershey's records

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include a "Dave Gunning Evaluation" in which he wrote "Dave's

relationship to me has been disturbing," and a memo entitled "Some

of the Questionable Decisions Dave Has Made" in which he outlined

five points of concern. Hershey sometimes refused to follow

Gunning’s advice, including his advice not to pursue the sale of

CAF. Hershey sought out DLJ to pursue a sale of CAF, suggesting

that he did not believe Gunning was capable of the task. These

facts, even when viewed in the light most favorable to Hershey,

cannot support the assertion that Hershey reposed some special

trust in Gunning. Hershey cannot now claim that he and Gunning had

a close, confidential relationship sufficient to establish a

fiduciary relationship when the record reflects, at best, a

troubled relationship characterized by mistrust.

2. DLJ

Assuming, arguendo, that a fiduciary relationship was

established between Hershey as an individual and DLJ, Hershey has

shown insufficient causation to support his claim for breach of

that fiduciary duty. To recover for such a claim, one must show

the existence of a duty and a breach of that duty causing injury.

Strock v. Pressnell, 527 N.E.2d 1235, 1243 (Ohio 1988); 382 Capital

v. Corso, 1999 Ohio App. LEXIS 6488, at *7 (Ohio Ct. App. 1999)

(requiring plaintiffs to prove proximate causation for breach of

fiduciary duty claim). Here, Hershey claims that DLJ (1) failed to

disclose its true interests and role in the transaction, (2) failed

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to disclose the interrelation of the acquisitions of ATC and CAF by

Conseco, and (3) failed to timely distribute material information

to Hershey prior to Hershey's decision to vote for the merger.

However, Hershey was aware (1) that DLJ was representing CAF as

well as ATC, and that DLJ would profit from both representations,

and (2) of the financial interrelationship of the acquisitions of

ATC and CAF by Conseco. At the August 11 board meeting, Gormley

announced that Conseco was also considering acquiring another

company DLJ represented. The impact of this multiple acquisition

was analyzed in the due diligence material Hershey received before

the merger vote. And two days before the vote, Gormley revealed

the identity of ATC.

Hershey cannot identify any material information that was

withheld from him by DLJ; his claim for breach is therefore a

question of whether DLJ provided the information with sufficient

time for Hershey to make an informed decision. Hershey has not

shown how more time would have altered the outcome and, in light of

the fact that he was aware of all the material information, has not

identified any way in which his vote was influenced improperly.

When asked what he would have done differently had he known of

Conseco's acquisition plans, Hershey only stated, "this is somewhat

speculative, but in the context, I might have requested a higher

price, requested a collar on the stock, but that's a little bit

speculative . . . ." Such speculation is insufficient to support

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a claim for breach of fiduciary duty. See Shults v. Henderson, 625

F. Supp. 1419, 1426 (W.D.N.Y. 1986) ("if the plaintiff is not

materially harmed by the defendant's conduct . . . there may be no

recovery."). A claim of breach of fiduciary duty by an individual

shareholder will not lie if "the shareholder's objection is

essentially a complaint regarding the price which he received for

his shares." Stepak v. Schey, 553 N.E.2d 1072, 1075 (Ohio 1990).

When asked how he was monetarily damaged by the merger, Hershey

stated "I don't feel that it represented the full value of CAF;"

and that the merger "was not in the best interests of the

shareholders." The only damages identified are damages to the

shareholders as a whole, not to Hershey specifically.

Hershey is unable to show any material damage caused by

DLJ's late disclosure of information; instead, he seeks to disgorge

DLJ of all money earned in its representation of CAF. Hershey

claims that this case is analogous to fraud cases, where courts

sitting in equity have ordered such recissionary damages to an

innocent seller when a fraudulent buyer has profited. We find that

analogy misplaced. In the fraud context, a court may award profits

realized by the fraudulent buyer after the sale if it is shown that

the seller would have held the property, and thus realized the

profits himself, but for the fraud. Ohio Drill & Tool Co. v.

Johnson, 498 F.2d 186, 190-91, 193 (6th Cir. 1974) (holding that

defendant officers must disgorge to the corporation all profits

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made by them on a fraudulent sale but not allowing plaintiff to

seek disgorgement of profits resulting from material

misrepresentations in proxy statements); accord Capital Invest.,

Inc. v. Bank of Sturgeon Bay, 430 F. Supp. 534, 537 (E.D. Wisc.

1977). Hershey's claim is inapposite: he personally seeks

disgorgement of the fees related to the sale, not to any profits

gained by DLJ after the sale. Because Hershey has not demonstrated

any personal injury suffered, we reject his claim of breach of

fiduciary duty by DLJ.

C. Negligent Misrepresentation

Hershey's allegation of misrepresentation is premised on

the same facts as his breach of fiduciary duty claim: that DLJ

failed to fully explain the impact of the acquisition of CAF by

Conseco prior to Hershey's agreement to sell his stock.3 Like any

negligence claim, Hershey must prove proximate causation and

damages. Cleveland Clinic Foundation v. Commerce Group Benefits,

Inc., 2002 Ohio App. LEXIS 1401, at *15 (Ct. App. March 28, 2002).

Hershey must allege harm sustained by him personally; harm to the

corporation is insufficient. Adair v. Wozniak, 492 N.E.2d 426, 428

(Ohio 1986) ("It is well-settled that only a corporation and not

3
There is no cause of action for a negligent failure to disclose
information absent a duty to disclose. Interim Healthcare of
Northeast Ohio, Inc. v. Interim Servs. Inc., 12 F. Supp. 2d 703,
714 (N.D. Ohio 1998); accord Snyder v. Webb, No. 97APE09-1248, 1998
Ohio App. LEXIS 2776, at *17-*18 (Ohio Ct. App. 1998). We have
assumed, arguendo, that DLJ owed a fiduciary duty to Hershey.

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its shareholders can complain of an injury sustained by, or a wrong

done to, the corporation."). Hershey's claim fails for the same

reason his breach of fiduciary duty claim failed: insufficient

showing that the action caused him material harm. Hershey has not

shown any evidence that his decision to vote in favor of the merger

would have been altered had the alleged misrepresentation not taken

place, and has not shown how he, individually, was harmed.

D. Breach of Contract

Hershey alleges that DLJ breached a Confidentiality

Agreement dated November 2, 1995, in which DLJ agreed to hold all

CAF information confidential. We agree with the district court

that Hershey lacks standing to sue because he is not a party to the

contract.

By its terms, the Confidentiality Agreement is "governed

by the laws of the State of New York." Under New York law, only

parties to a contract have standing to sue for its breach. Truty

v. Fed. Bakers Supply Corp., 629 N.Y.S.2d 898, 899 (App. Div.

1995). If a contract is clear and complete, parol evidence will

not be introduced to alter its terms. W.W.W. Assocs., Inc. v.

Giancontieri, 566 N.E.2d 639, 642 (N.Y. 1990).

The Confidentiality Agreement was addressed to CAF, to

the attention of Hershey, and sent to CAF's office. It refers only

to the "Company" and DLJ; Hershey's name does not appear in the

text. The signature block reads:

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 Agreed and Accepted
CAPITOL AMERICAN FINANCIAL CORPORATION
By: /s/ Barry J. Hershey
Director /s/ BJH

Hershey drew a line through "Director," initialed the change, and

called Gormley to tell him of the change. Hershey did not strike

the name of the corporation.

We find that the face of the Confidentiality Agreement

supports only one conclusion: the parties were CAF and DLJ, not

Hershey. Gunning knew that Hershey was entering the contract,

presumably on CAF's behalf. Even though Gormley was aware that

Hershey was no longer the director, he was justified in thinking

that Hershey, as controlling shareholder, had the authority to bind

CAF to contractual obligations. See Trs. of the UIU Health &

Welfare Fund v. N.Y. Flame Proofing Co., 828 F.2d 79, 83 (2d Cir.

1987) ("The doctrine of apparent authority comes into play when a

party . . . reasonably believes that another party . . . has

delegated authority to enter into an agreement on its behalf to an

agent."). Merely striking the word "Director" is insufficient to

create a question of fact regarding the parties of the contract.

Because Hershey is not a party to the contract, he cannot assert a

claim for its breach.

E. Fraudulent Inducement

Hershey wanted the board to consider his financial

strategies before approving a merger, and claims that Gunning

intentionally misled him into thinking that the alternatives had

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been considered, thus fraudulently inducing Hershey's signature on

the Shareholder's Agreement. Specifically, following the August 11

board meeting, Gunning told Hershey that the board was proceeding

on a "dual track," considering both the financial strategies and a

sale of CAF to Conseco. At the August 25 board meeting, Hershey

inquired as to "what happened to the analysis of the financial

strategy," and, according to Hershey, Gunning replied "something to

the effect that [CAF] didn't want to put too many variables into

this study." Hershey claims that he believed that the financial

strategies would be discussed at that meeting after he was

dismissed, but before the board voted for the merger. Before he

left the meeting, Hershey told the board that he would support its

decision to sell the company or to remain independent. He claims

that he would not have signed the Shareholder Agreement had he

known the alternatives were not considered.

In Ohio, the elements of fraud are

(a) a representation or, where there is a duty
to disclose, concealment of a fact, (b) which
is material to the transaction at hand, (c)
made falsely, with knowledge of its falsity,
or with such utter disregard and recklessness
as to whether it is true or false that
knowledge may be inferred, (d) with the intent
of misleading another into relying upon it,
(e) justifiable reliance upon the
representation or concealment, and (f) a
resulting injury proximately caused by the
reliance.

Cohen v. Lamko, 462 N.E.2d 407, 409 (Ohio 1984) (quotation

omitted). Clear and convincing evidence is required to prove

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fraud. Seale v. Citizens Sav. & Loan Ass'n, 806 F.2d 99, 105 (6th

Cir. 1986) (applying Ohio law).

Assuming, arguendo, that Hershey has established that

Gunning made a knowing, material misrepresentation (or omission)

with the intent of misleading him into relying upon it, and that

Hershey was injured as a result, we find that any reliance on the

part of Hershey was not justified. Hershey must show not only that

he acted in reliance on a material misrepresentation, but that he

had a reasonable basis for doing so. See Columbia Gas Transmission

Corp. v. Ogle, 51 F. Supp. 2d 866, 875 (S.D. Ohio 1997). Whether

or not reliance is justified is a factual determination, taking

into account the relationship of the parties, the nature of the

transaction and representation, and the parties' intelligence,

experience and knowledge. Id.; Mussivand v. David, 544 N.E.2d 265,

273 (Ohio 1989); Lepera v. Fuson, 613 N.E.2d 1060, 1065 (Ohio Ct.

App. 1992).

As we have already stated, Hershey's background

demonstrates that he is a well-educated, intelligent man with

business experience.4 Hershey could not have trusted Gunning,

4
While age has been identified as a factor to consider when
determining whether reliance is justified, see Columbia Gas, 51 F.
Supp. 2d at 875, we believe that it is of little relevance, and
experience is a better measure of the parties’ understanding of
their relationship and one parties’ right to rely on the word of
the other. That said, we note that Hershey and Gunning are
approximately the same age, both graduating from the same high
school in 1960.

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considering the numerous times he questioned Gunning's competence

and judgment. Throughout the August 25 meeting, Hershey listened

to discussions of the merger and an alternative, although no

mention was made of his "financial strategies." He also received

all the documents the board received, none of which analyzed his

alternatives. He then asked Gunning about the absence of his

financial strategies, who replied that the strategy had "too many

variables" to be included. Hershey then dropped the subject, never

stating that his approval was contingent upon the board's

consideration of his proposal. Given this colloquy and the lack of

any express consideration of the financial strategies, we conclude

that Hershey could not have reasonably relied on what he now

inscrutably characterizes as Gunning's assurance that the board

would discuss the financial strategies after Hershey's exit. "Ohio

law requires a person to exercise proper vigilance in his dealings,

so that where he is put on notice as to the propriety of a

representation, he is under a duty to reasonably investigate before

reliance thereon." Columbia Gas, 51 F. Supp. 2d at 876; accord

Crown Prop. Dev. Co. v. Omega Oil Co., 681 N.E.2d 1343, 1349 (Ohio

Ct. App. 1996) ("Reliance is justified if the representation does

not appear unreasonable on its face and if, under the

circumstances, there is no apparent reason to doubt the veracity of

the representation"). Here, Gunning's ambiguous statement coupled

with the absence of the alternatives in the due diligence material

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served to put Hershey on notice that the alternatives had not been

considered. If the board's consideration of his financial

strategies was crucial to Hershey's approval, he should have

followed up with Gunning or the other Directors to ensure that the

board had considered the alternatives. A reasonable person would

not have assumed that the alternatives would be discussed based on

Gunning's cryptic statement that the strategies had "too many

variables" to be included in the study discussed at the meeting.

Hershey had received all due diligence reviewed by the board, and

had attended each board meeting in part, and was aware of the

extent to which the board had considered his alternatives.

Hershey's reliance upon any statement by Gunning that the board

would consider his financial strategies before voting on the merger

therefore is unreasonable, and his claim for fraudulent

misrepresentation fails.

F. Continuance

Finally, Hershey alleges error in the district court's

refusal to grant a continuance so he could conduct further

discovery before summary judgment was granted. See Fed. R. Civ. P.

56(f).5 We review the district court's denial of Hershey's motion

5
The Rule reads:

Should it appear from the affidavits of a party opposing
the motion [for summary judgment] that the party cannot
for reasons stated present by affidavit facts essential
to justify the party's opposition, the court may refuse
the application for judgment or may order a continuance

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only for abuse of discretion. Resolution Trust Corp. v. N. Bridge

Assocs., 22 F.3d 1198, 1203 (1st Cir. 1994).

At the summary judgment hearing, the court made clear

that if any of the sought-after evidence had the potential to alter

the outcome, the continuance would be granted. The district

court's decision does not mention the motion for a continuance,

presumably because it would not have affected the outcome. We

agree. Appellant claims that the discovery sought could bear on

DLJ and Gunning's breaches of fiduciary duties, DLJ's breach of the

Confidentiality Agreement, and Gunning's misrepresentation.

Hershey does not claim that anything in the desired evidence could

demonstrate that Gunning or DLJ were fiduciaries of Hershey, that

Hershey was a party to the Confidentiality Agreement, or that

Hershey's reliance upon Gunning's alleged misrepresentations was

justified. The district court therefore did not abuse its

discretion in refusing to grant the continuance.

IV. Conclusion

The district court properly granted summary judgment on

all counts. The opinion of the district court is affirmed. Costs

are granted to appellee.

Affirmed.

to permit affidavits to be obtained or depositions to be
taken or discovery to be had or may make such other order
as is just.

Fed. R. Civ. P. 56(f).

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