05-5129-cv
Merrill Lynch v. Allegheny Energy
1 UNITED STATES COURT OF APPEALS
2 FOR THE SECOND CIRCUIT
3
4 _______________
5
6 August Term, 2006
7
8 (Argued October 30, 2006 Decided August 31, 2007)
9
10 Docket No. 05-5129-cv
11
12 _______________
13
14 Merrill Lynch & Co. Inc., Merrill Lynch & Capital Services, Inc.,
15 ML IBK Positions, Inc.,
16
17 Plaintiffs-Counter-Defendants-Appellees,
18
19 v.
20
21 Allegheny Energy, Inc., Allegheny Energy Supply Company, LLC,
22
23 Defendants-Counterclaimant-Appellants.
24
25 _______________
26
27 Before:
28 CARDAMONE, WALKER, and RAGGI,
29 Circuit Judges.
30
31 _______________
32
33 Allegheny Energy, Inc. and Allegheny Energy Supply Company,
34 LLC appeal the judgment entered August 26, 2005 in the United
35 States District Court for the Southern District of New York
36 (Baer, J.) awarding Merrill Lynch & Co. Inc., Merrill Lynch &
37 Capital Services, Inc., and ML IBK Positions, Inc. $158 million
38 on its contract claim and dismissing appellant's counterclaims.
39
40 Affirmed in part, reversed in part, and remanded.
41
42 _______________
1 _______________
2
3 KATHLEEN M. SULLIVAN, Redwood Shores, California (Daniel H.
4 Bromberg, Daniel A. Zaheer, Quinn Emanuel Urquhart Oliver &
5 Hedges, LLP, Redwood Shores, California; Peter E. Calamari,
6 Sanford I. Weisburst, William B. Adams, Quinn Emanuel
7 Urquhart Oliver & Hedges, LLP, New York, New York, of
8 counsel), for Defendants-Counterclaimants-Appellants.
9
10 STUART J. BASKIN, New York, New York (Jeremy G. Epstein, John
11 Gueli, Shearman & Sterling LLP, New York, New York, of
12 counsel), for Plaintiffs-Counter-Defendants-Appellees.
13
14 _______________
1 CARDAMONE, Circuit Judge:
2 Allegheny Energy, Inc. (Allegheny, defendant or appellant)
3 and its wholly-owned subsidiary Allegheny Energy Supply Company,
4 LLC (Supply) appeal from a judgment of the United States District
5 Court for the Southern District of New York (Baer, J.) entered
6 August 26, 2005 awarding Merrill Lynch & Co. Inc., Merrill Lynch
7 & Capital Services, Inc., and ML IBK Positions, Inc.
8 (collectively Merrill Lynch or plaintiff) $158 million on its
9 contract claim against Allegheny and dismissing Allegheny's
10 counterclaims.
11 The case arises out of Allegheny's acquisition of Global
12 Energy Markets (GEM), an energy commodities trading business
13 owned by Merrill Lynch, for the sum of $490 million plus a two
14 percent interest in Supply. Market conditions spiraled downwards
15 after the fall of Enron in 2001. In 2002 when Allegheny failed
16 to perform its contractual commitment to contribute certain
17 assets to Supply, Merrill Lynch exercised its right to sell back
18 its interest in Supply at an agreed price of $115 million.
19 Litigation ensued when Allegheny questioned the accuracy of
20 Merrill Lynch's representations to it with respect to GEM, and
21 refused to honor Merrill Lynch's right to sell its interest in
22 Supply back to Allegheny.
23 Some facts critical to the sale of GEM were peculiarly
24 within the knowledge of Merrill Lynch and not disclosed by it to
25 Allegheny. The lack of that information may have played a part
26 in defendant's decision to purchase GEM. But, not knowing the
2
1 undisclosed facts means Allegheny could not accurately assess its
2 decision. As Alexander Pope succinctly said "What can we reason,
3 but from what we know?" Alexander Pope, An Essay on Man:
4 Epistle I -- Of the Nature and State of Man with Respect to the
5 Universe, in 40 The Harvard Classics, 418 (Charles W. Eliot ed.,
6 1910). For that reason this judgment must be reversed in part.
7 BACKGROUND and FACTS
8 This litigation involves two business entities that have a
9 significant presence in the American economy. Allegheny is a
10 Pennsylvania-based energy company with more than 5,000 employees.
11 Merrill Lynch is a leading financial management company with
12 offices in 36 countries. Allegheny sought in 2000 to expand
13 Supply, its wholly-owned subsidiary, through the acquisition of
14 an energy commodities trading company. Merrill Lynch, which had
15 until that time acted as Allegheny's financial advisor, offered
16 Allegheny one of its trading desks, Global Energy Markets.
17 Serious negotiations concerning the acquisition of GEM by
18 Allegheny began in September 2000. When Merrill Lynch withdrew
19 as Allegheny's financial advisor, Allegheny retained a new team
20 of sophisticated advisors.
21 A. Financial Data on GEM
22 Merrill Lynch prepared and delivered to Allegheny financial
23 data on GEM's performance and profitability. These financial
24 summaries covered September, October 2000, and January 2001, and
25 included profit and loss calculations on GEM's largest trading
26 asset, the Williams contract. The September and October
3
1 financial summaries were flawed in two notable respects: The
2 data reflected substantially higher revenues and net income for
3 GEM than was reflected on Merrill Lynch's books and records, and
4 the reports were not prepared by Merrill Lynch's finance
5 department as required by its own internal regulations.
6 GEM had a contract with Williams Energy Marketing & Trading,
7 a Southern California energy provider, giving GEM options to buy
8 electricity over a period of years. The October financials
9 recognized additional revenues of $32 million attributed to the
10 Williams contract. When defendant discovered an earlier estimate
11 of David Chung, an expert hired by Merrill Lynch to value the
12 Williams contract, that reflected a $10.5 million loss on the
13 contract, defendant challenged the integrity of the process by
14 which Merrill Lynch arrived at the $32 million figure.
15 Nonetheless, the district court credited Merrill Lynch's
16 explanation that Chung's lower valuation was rejected because his
17 methodology was improper under generally accepted accounting
18 principles.
19 In early January 2001, within days of the scheduled signing,
20 Merrill Lynch realized that the September and October summaries
21 contained significantly different numbers than those reflected on
22 Merrill Lynch's own books. On January 5, 2001 plaintiff
23 corrected at least some of the inaccuracies in the earlier
24 reports, but overstated earnings generated by operations other
25 than the Williams contract. It appears that the non-Williams
26 component of GEM was only of peripheral concern to the parties.
4
1 The January financials did not reflect $28 million in losses
2 incurred on the Williams contract. Merrill Lynch explained the
3 omission by reference to a company policy under which such losses
4 are reflected at the management level so that traders will not be
5 penalized for unpredictable fluctuations in assets like the
6 Williams contract. The district court found these losses were
7 disclosed to Allegheny in valuation spreadsheets prepared by
8 Chung. When plaintiff's negotiating team delivered the January
9 data it informed Allegheny that the updated report should be
10 substituted for the September and October summaries. Merrill
11 Lynch's partial explanation for the different figures was that
12 the January version reflected certain overhead costs that were
13 disregarded earlier. Allegheny asserts it rejected the new
14 financials and insisted that the deal proceed on the basis of the
15 September and October reports.
16 It is a significant factor in this litigation that Dan
17 Gordon, GEM's chief executive officer, played a large role in
18 Merrill Lynch's alleged fraud. Gordon has since admitted to
19 knowingly providing Allegheny with inaccurate information in the
20 September and October financials. After the closing of the GEM
21 deal it was learned that Gordon had embezzled $43 million dollars
22 from Merrill Lynch by rigging a fraudulent contract for outage
23 insurance on the Williams contract with a sham company he owned
24 called Falcon Energy Holdings (Falcon). He was later convicted
25 and jailed for his criminal conduct.
5
1 Although there is no direct evidence that other officers at
2 Merrill Lynch knew of Gordon's embezzlement prior to the closing,
3 the record reveals some of plaintiff's officials were aware
4 Gordon had evaded its internal credit controls to set up the
5 Falcon deal and had lied about the evasion. Plaintiff also knew
6 that Gordon had prepared the flawed September and October
7 financials, but seems to have believed that the inaccuracies were
8 the product of disapproved accounting methods, rather than
9 dishonesty. Merrill Lynch failed to disclose any of these facts
10 to Allegheny.
11 B. The Purchase Agreement
12 After four months of due diligence the parties signed an
13 Asset Contribution and Purchase Agreement (Purchase Agreement or
14 Agreement) on January 8, 2001. Under the Agreement Allegheny
15 acquired GEM paying Merrill Lynch $490 million in cash and giving
16 it a two percent membership interest in Supply. Section 5.15 of
17 the Purchase Agreement provided that if Allegheny failed to
18 contribute certain assets to Supply by September 16, 2002 Merrill
19 Lynch could require Allegheny to repurchase its interest in
20 Supply for $115 million.
21 Merrill Lynch agreed to several warranties in the Agreement
22 relating to the quality and nature of the information it had
23 provided Allegheny. Section 3.12(b) stated that the Business
24 Selected Data has been prepared in good faith by the management
25 of the business based upon the financial records of the business.
26 The district court found the provision referenced the January
6
1 financial data exclusively. In § 3.12(c), which the district
2 court found applicable to all of the disputed financial data,
3 Merrill Lynch represented the "books of account and other
4 financial records of [GEM] (i) are in all material respects true,
5 complete and correct, and do not contain or reflect any material
6 inaccuracies or discrepancies and (ii) have been maintained in
7 accordance with [plaintiff's] business and accounting practices."
8 Plaintiff agreed in § 3.16 that the information it provided to
9 Allegheny "in the aggregate, includes all information known to
10 the Sellers which, in their reasonable judgment exercised in good
11 faith, is appropriate for the Purchasers to evaluate [GEM's]
12 trading positions and trading operations." The parties waived
13 "any and all right to trial by jury in any legal proceeding
14 arising out of or related to" the Purchase Agreement.
15 C. Prior Proceedings
16 In early September 2002 Allegheny reported that it would be
17 unable to contribute to Supply the assets contemplated in the
18 Agreement and Merrill Lynch gave prompt notice of its intention
19 to exercise its put right pursuant to § 5.15. On September 24,
20 2002 Merrill Lynch filed the instant action against Allegheny in
21 district court, contending Allegheny breached the Agreement by
22 failing to honor Merrill Lynch's put right.
23 Defendant brought an action against plaintiff in state court
24 the following day and moved to stay the federal proceedings
25 plaintiff had instituted arguing that Supply's presence in the
26 federal litigation would defeat complete diversity as both Supply
7
1 and Merrill Lynch were Delaware citizens. On May 30, 2003 the
2 district court denied Allegheny's motion for a stay and ordered
3 that Supply, as a necessary party whose absence produced a risk
4 that the parties would be subject to inconsistent obligations, be
5 joined to the action pursuant to Federal Rule of Civil Procedure
6 19(a). Merrill Lynch & Co. v. Allegheny Energy, Inc., 02 Civ.
7 7689, 2003 WL 21254420 (S.D.N.Y. May 30, 2003). After
8 classifying Supply as a defendant for jurisdictional purposes,
9 the court concluded that 28 U.S.C. § 1367 authorized its exercise
10 of supplemental jurisdiction over Supply's "downsloping" claims
11 against Merrill Lynch. Id. at *4-5.
12 Allegheny asserted counterclaims against Merrill Lynch for,
13 inter alia, fraudulent inducement and breach of contract, and
14 requested a jury trial to resolve its fraud counterclaim.
15 Plaintiff moved to dismiss defendant's counterclaims and strike
16 its jury demand. On November 24, 2003 the district court ruled
17 Allegheny had stated viable claims for breach of contract and
18 fraudulent inducement, but found Allegheny's contractual waiver
19 of its right to a jury trial effective vis-à-vis its fraud claim.
20 Merrill Lynch & Co. v. Allegheny Energy, Inc., 382 F. Supp. 2d
21 411 (S.D.N.Y. 2003).
22 Both parties moved for summary judgment, with Merrill Lynch
23 arguing that Allegheny breached the Agreement, and Allegheny
24 contending that it had no duty to perform because Merrill Lynch
25 had materially breached its obligations. Reasoning that Merrill
26 Lynch had substantially performed its side of the Agreement, the
8
1 district court rejected Allegheny's defense and awarded summary
2 judgment to Merrill Lynch on its contractual claim. Merrill
3 Lynch & Co. v. Allegheny Energy, Inc., 02 Civ. 7689, 2005 WL
4 832050, at *3 (S.D.N.Y. Apr. 12, 2005).
5 Following a 13-day bench trial in May 2005, the trial court
6 dismissed Allegheny's breach of warranty and fraud counterclaims
7 and awarded Merrill Lynch $115 million plus interest on its
8 breach of contract claim. Merrill Lynch & Co. v. Allegheny
9 Energy, Inc., 02 Civ. 7689, 2005 WL 1663265 (S.D.N.Y. Jul. 18,
10 2005). Final judgment was entered on August 26, 2005. This
11 appeal followed.
12 DISCUSSION
13 Appellant raises a number of issues on this appeal that
14 warrant discussion. We analyze, first, a threshold issue
15 challenging the subject matter jurisdiction of the district
16 court; second, dismissal of Allegheny's fraudulent inducement
17 counterclaim; third, dismissal of defendant's breach of warranty
18 counterclaim; fourth, the grant of summary judgment to plaintiff
19 Merrill Lynch; and fifth, the denial of Allegheny's demand for a
20 jury trial. Before we begin analysis of these five issues, we
21 touch briefly on the standard of our review.
22 We review de novo the district court's disposition of a
23 motion for summary judgment under the same standard applied by
24 the district court. Tocker v. Philip Morris Cos., 470 F.3d 481,
25 486-87 (2d Cir. 2006). Following a bench trial, we review the
26 trial court's factual findings for clear error, Concourse Rehab.
9
1 & Nursing Ctr., Inc. v. DeBuono, 179 F.3d 38, 43 (2d Cir. 1999),
2 while its resolution of legal questions, including jurisdiction
3 and the right to a jury trial, are subject to de novo review.
4 See id.; Brown v. Sandimo Materials, 250 F.3d 120, 125 (2d Cir.
5 2001).
6 I Subject Matter Jurisdiction
7 Allegheny challenges first the subject matter jurisdiction
8 of the district court because it contends the joinder of Supply,
9 a Delaware citizen as is Merrill Lynch, destroyed complete
10 diversity. Citing Viacom Int'l, Inc. v. Kearney, 212 F.3d 721
11 (2d Cir. 2000), the district court exercised supplemental
12 jurisdiction under 28 U.S.C. § 1367 over the claims Supply
13 asserted against Merrill Lynch, and aligned Supply as a defendant
14 with Allegheny for jurisdictional purposes.
15 A. The Effect of Exxon on the District Court's Ruling
16 Appellant does not argue the district court reached the
17 wrong result under Viacom, but insists Exxon Mobil Corp. v.
18 Allapattah Servs., Inc., 545 U.S. 546 (2005), bars jurisdiction
19 when citizens from the same state are found on opposite sides of
20 an action. Exxon addressed the question whether 28 U.S.C. § 1367
21 authorizes the exercise of jurisdiction over actions that do not
22 meet the amount-in-controversy requirement in a case where at
23 least one plaintiff's claim satisfies the requirement. Id. at
24 558.
25 The Supreme Court ruled in Exxon that the assertion by a
26 single diverse plaintiff of a claim that satisfies the
10
1 jurisdictional requirements of 28 U.S.C. § 1332 is a civil action
2 over which a district court may take original jurisdiction. Id.
3 at 559. Once jurisdiction is anchored, § 1367(a) permits the
4 exercise of supplemental jurisdiction over claims asserted by
5 additional diverse plaintiffs, whether or not such claims meet
6 the amount-in-controversy requirement, unless jurisdiction is
7 barred by § 1367(b). Id. at 558-59.
8 Exxon makes clear that its expansive interpretation of
9 § 1367 does not extend to additional parties whose presence
10 defeats diversity. Id. at 562, 564, 566; see also 13 Charles A.
11 Wright et al., Federal Practice & Procedure § 3523, at 99 n.42.1,
12 103 (2d ed. 1984 & Supp. 2007). The reason for the different
13 treatment of these two § 1332 requirements is found in their
14 differing purposes. The purpose of the amount-in-controversy
15 requirement, on one hand, is fulfilled by a single claim of
16 sufficient importance to warrant a federal forum and is not
17 negated by additional, smaller claims. A failure of diversity,
18 on the other hand, contaminates the action, so to speak, and
19 takes away any justification for providing a federal forum. See
20 Exxon, 545 U.S. at 562.
21 It follows that a defect of the latter sort eliminates every
22 claim in the action, including any jurisdictionally proper action
23 that might otherwise have anchored original jurisdiction, and
24 removes the civil action from the purview of § 1367 altogether.
25 Id. at 564 ("[T]he presence in the action of a single plaintiff
26 from the same State as a single defendant deprives the district
11
1 court of original jurisdiction over the entire action." (emphasis
2 added)). Further, it is clear that a diversity-destroying party
3 joined after the action is underway may catalyze loss of
4 jurisdiction. Id. at 565 ("A nondiverse plaintiff might be
5 omitted intentionally from the original action, but joined later
6 under Rule 19 as a necessary party. The contamination theory
7 described above, if applicable, means this ruse would fail, but
8 Congress may have wanted to make assurance double sure.").
9 We cannot fault the district court for not anticipating in
10 2003 the Supreme Court's 2005 opinion in Exxon. Nonetheless, in
11 light of Exxon, the district court's reliance on our assumption
12 in Viacom that original jurisdiction is anchored in the diversity
13 between the original parties and so any subsequent joinder that
14 is not prohibited by § 1367(b) comes within the court's
15 supplemental jurisdiction, see 212 F.3d at 726, was misplaced.
16 It is now apparent that the contamination theory furnishes
17 limitations on joinder in certain circumstances that may well
18 extend beyond the restrictions listed in § 1367(b). Viacom,
19 which came down before Exxon, did not explore these limitations.
20 The Supreme Court does not define the reach of the
21 contamination theory and does not purport to announce a new
22 standard for assessing diversity defects but instead relies on
23 the Court's consistent construction of the complete diversity
24 rule. Exxon, 545 U.S. at 553, 556, 564. However, even if we
25 read Exxon as preserving certain well-established exceptions to
26 the complete diversity rule, see, e.g., Owen Equip. & Erection
12
1 Co. v. Kroger, 437 U.S. 365, 377 (1978); see also, e.g.,
2 Caterpillar Inc. v. Lewis, 519 U.S. 61, 66 n.1 (1996); In re
3 Olympic Mills Corp., 477 F.3d 1, 11-12 (1st Cir. 2007), Supply's
4 joinder does not fall within any such exception. A leading
5 practice treatise says "parties that are joined under Rules 19
6 and 20 . . . must independently satisfy the jurisdictional
7 requirements." 13B Wright et al., supra, § 3608, at 454; see
8 also Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S.
9 102, 108 (1968) (noting that joinder of non-diverse defendant
10 under Rule 19(a) destroys jurisdiction); Haas v. Jefferson Nat'l
11 Bank of Miami Beach, 442 F.2d 394, 396 (5th Cir. 1971) (same).
12 B. Rule 19 Determination; Dismissal of Supply
13 Under Rule 19 Supply's status as a necessary party -- which
14 neither party disputes -- and our holding that its joinder is not
15 feasible require us to determine whether Supply is in fact
16 indispensable. Fed. R. Civ. P. 19; Viacom, 212 F.3d at 725. We
17 are influenced by the procedural posture in which this case comes
18 to us and obliged to make full use of hindsight in assessing the
19 four factors set out in Rule 19(b). Provident, 390 U.S. at 109-
20 12. At this stage of litigation, Merrill Lynch's interest in
21 preserving a fully litigated judgment may be overborne only by
22 greater contrary considerations than those that would be required
23 at an earlier stage of the litigation. See id. at 112.
24 Allegheny has not pointed to adequate opposing considerations,
25 but simply stated conclusorily in its brief on appeal that
26 Supply, as a party to the Purchase Agreement, was a paradigmatic
13
1 indispensable party. Further, Allegheny may be deemed to have
2 consented to Supply's characterization as a dispensable party by
3 virtue of its failure to argue before the district court, in
4 connection with its motion to stay federal proceedings, that
5 Supply was indispensable, and its subsequent failure to raise the
6 point sufficiently in its brief on this appeal. See Cuoco v.
7 Moritsugu, 222 F.3d 99, 112 n.4 (2d Cir. 2000).
8 Moreover, we are persuaded by Merrill Lynch's point that the
9 retroactive absence of Supply -- defendant's wholly-owned
10 subsidiary -- is not prejudicial to Supply, defendant or
11 plaintiff. See Fed. R. Civ. P. 19(b) (factors one & two); Extra
12 Equipamentos e Exportação Ltda. v. Case Corp., 361 F.3d 359, 364
13 (7th Cir. 2004) ("[W]e have great difficulty seeing how a 100
14 percent subsidiary could ever be an indispensable
15 party . . . ."). Given our emphasis on considerations of
16 finality, efficiency, and economy on review of a fully tried
17 case, SCS Commc'ns, Inc. v. Herrick Co., 360 F.3d 329, 337 (2d
18 Cir. 2004), we also think Supply's (retroactive) absence does not
19 render its judgment inadequate. See Fed. R. Civ. P. 19(b)
20 (factor three); Provident, 390 U.S. at 110-11. We have already
21 commented on plaintiff's interest in preserving the judgment.
22 See Fed. R. Civ. P. 19(b) (factor four).
23 C. Dismissal of Supply
24 We exercise our authority under Federal Rule of Civil
25 Procedure 21 to cure, ex post, the above-noted jurisdictional
26 defect by dismissing Supply, a dispensable jurisdictional
14
1 spoiler. See SCS Commc'ns, 360 F.3d at 335; see also Newman-
2 Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 832-38 (1989).
3 Allegheny's sole objection to Supply's dismissal, that Merrill
4 Lynch sought a tactical advantage by filing in federal court
5 without joining Supply, is meritless. Newman-Green did alert us
6 to the possibility that the presence of the party subject to
7 dismissal may have produced a tactical advantage to another
8 party, id. at 838, but defendant seems to argue something else
9 entirely, to wit, that Merrill Lynch sought to benefit from
10 Supply's absence from the action.
11 II Appellant's Fraudulent Inducement Counterclaim
12 Allegheny's fraud claim is based on Merrill Lynch's
13 misrepresentations concerning GEM's finances and its failure to
14 disclose the circumstances surrounding the preparation of the
15 flawed September and October financials and Gordon's evasion of
16 Merrill Lynch's credit controls. The district court dismissed
17 the claim on the grounds that defendant: (A) failed to show it
18 justifiably relied on plaintiff's misrepresentations; and (B)
19 failed to prove that its injury was proximately caused by them.
20 Merrill Lynch asserts on appeal that Allegheny should not be
21 permitted to pursue its fraudulent inducement claim because (C)
22 it is duplicative of defendant's breach of warranty claim.
23 We analyze these grounds in a moment. First we discuss
24 proof of fraud in New York. In New York a plaintiff alleging
25 fraud must show by clear and convincing evidence that the
26 defendant knowingly or recklessly misrepresented a material fact,
15
1 intending to induce the plaintiff's reliance, and that the
2 plaintiff relied on the misrepresentation and suffered damages as
3 a result. See, e.g., Crigger v. Fahnestock & Co., 443 F.3d 230,
4 234 (2d Cir. 2006); Jo Ann Homes at Bellmore, Inc. v. Dworetz, 25
5 NY2d 112, 119 (1969). Where a defendant, as here, seeks to show
6 fraud by omission, it must prove additionally that the plaintiff
7 had a duty to disclose the concealed fact. Congress Fin. Corp.
8 v. John Morrell & Co., 790 F. Supp. 459, 472 (S.D.N.Y. 1992).
9 A. Justifiable Reliance and Due Diligence
10 New York courts are generally skeptical of claims of
11 reliance asserted by "sophisticated businessmen engaged in major
12 transactions [who] enjoy access to critical information but fail
13 to take advantage of that access." Grumman Allied Indus., Inc.
14 v. Rohr Indus., Inc., 748 F.2d 729, 737 (2d Cir. 1984). Both
15 parties before us are sophisticated business entities that are
16 held to a high standard of conduct in the events leading up to
17 the sale and purchase of GEM.
18 The district court found that because Allegheny could have
19 discovered the truths that Merrill Lynch obscured or omitted had
20 it pursued its due diligence "with a little more pizzazz," its
21 fraud counterclaim failed to satisfy the justifiable reliance
22 prong. It charged Allegheny with the means and responsibility to
23 discover, for example, Gordon's embezzlement, notwithstanding
24 Merrill Lynch's claim that its own officials were unaware of the
25 embezzlement until after the sale of GEM.
16
1 In assessing whether defendant met its burden in showing
2 justifiable reliance, we look to a number of factors including
3 the content of its agreement with plaintiff. See Emergent
4 Capital Inv. Mgmt. v. Stonepath Group, Inc., 343 F.3d 189, 195-96
5 (2d Cir. 2003); Lazard Freres & Co. v. Protective Life Ins. Co.,
6 108 F.3d 1531, 1543 (2d Cir. 1997) (noting significance of
7 protective language in contract). The warranties contained in
8 §§ 3.12(b), 3.12(c) and 3.16 imposed a duty on Merrill Lynch to
9 provide accurate and adequate facts and entitled Allegheny to
10 rely on them without further investigation or sleuthing. See
11 Metropolitan Coal Co. v. Howard, 155 F.2d 780, 784 (2d Cir. 1946)
12 (L. Hand, J.) ("A warranty . . . . is intended precisely to
13 relieve the promisee of any duty to ascertain the fact for
14 himself."). Further, as Judge Friendly instructs, New York
15 authority follows a two-tier standard in assessing the duty of
16 the party claiming fraud, according to whether the
17 misrepresentations relate to matters peculiarly within the other
18 party's knowledge. If so, the wronged party may rely on them
19 without further investigation. See Mallis v. Bankers Trust Co.,
20 615 F.2d 68, 80-81 (2d Cir. 1980). Merrill Lynch's warranties in
21 effect represent contractual stipulations that the facts covered
22 by them be treated as information exclusively within Merrill
23 Lynch's knowledge.
24 While the district court wrongly held defendant to too
25 stringent a standard of reliance, Allegheny may not satisfy its
26 burden simply by pointing to the warranties because, for purposes
17
1 of showing fraud, a party cannot demonstrate justifiable reliance
2 on representations it knew were false, see Banque Franco-
3 Hellenique de Commerce v. Christophides, 106 F.3d 22, 27 (2d Cir.
4 1997) (noting that plaintiff cannot show it justifiably relied on
5 statements it had reason to know were false). Thus, on remand
6 Allegheny must offer proof that its reliance on the alleged
7 misrepresentations was not so utterly unreasonable, foolish or
8 knowingly blind as to compel the conclusion that whatever injury
9 it suffered was its own responsibility. See W. Page Keeton et
10 al., Prosser & Keeton on the Law of Torts § 108, at 750 (5th ed.
11 1984); see also Christophides, 106 F.3d at 26-27.
12 Appellant's asserted reliance on the September and October
13 financials despite its receipt of a different financial report
14 appears at first blush to evince the sort of recklessness or
15 knowing blindness that raises doubt about its reliance. But the
16 apparent malleability of GEM's financial figures to accommodate
17 reserve calculations and sundry accounting concepts tempers any
18 initial skepticism. We note, for example, that the district
19 court did not find any foul play in Merrill Lynch's exposition of
20 the Williams profit and loss estimates notwithstanding
21 defendant's evidence that the final figure was $40 million (or
22 four times) higher than an early estimate produced by a valuation
23 expert at Merrill Lynch. It may be that Allegheny was not
24 reckless in believing the earlier figures -- qualified by
25 whatever accounting choices underlay them -- were defensible.
26 Such an argument could find support in defendant's assertion that
18
1 plaintiff, by concealing the circumstances surrounding the
2 preparation and delivery of the earlier financial summaries,
3 failed in its duty candidly to alert defendant to the risk that
4 the earlier financials were flat-out wrong.
5 We recognize that Dan Gordon, the author of those inflated
6 financials, committed crimes against Merrill Lynch, his employer.
7 Yet, insofar as Gordon's crimes injured both plaintiff and
8 defendant, we think as between the two parties the responsibility
9 and risks must be borne by plaintiff, Gordon's employer.
10 Further, Merrill Lynch failed to reveal to Allegheny what it did
11 know about Gordon, its principal officer at GEM. Although
12 required by credit controls to obtain prior approval from
13 plaintiff's credit department before trading with new partners,
14 Gordon consummated the Falcon transaction without obtaining such
15 approval. Merrill Lynch discovered the violation of its credit
16 control policy and Gordon's lying about his insurance scam in
17 early September 2000. But plaintiff did not disclose these facts
18 to Allegheny. Instead, plaintiff assured defendant that GEM's
19 principal officer, Dan Gordon, was a person of integrity.
20 B. Proximate Cause
21 In assessing the viability of Allegheny's fraud and contract
22 claims, the district court relied heavily on federal cases that
23 were focused primarily on securities fraud claims. See, e.g.,
24 Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005) (addressing
25 fraud claims based on federal securities statutes and
26 implementing regulations); Lentell v. Merrill Lynch & Co., 396
19
1 F.3d 161 (2d Cir. 2005) (same). Following this line of
2 precedent, the trial court held that GEM's positive performance
3 in the year following the sale, together with the lack of any
4 causal link between GEM's ultimate failure and Merrill Lynch's
5 misrepresentations, precluded Allegheny's fraud claim.
6 The concept of loss causation elucidated in Dura is closely
7 related to the common law doctrine of proximate cause. 544 U.S.
8 at 343-44; Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1495 (2d
9 Cir. 1992). Dura culls from the common law the black letter law
10 that a fraud plaintiff must show that he acted on the basis of
11 the fraud and suffered pecuniary loss as a result of so acting.
12 544 U.S. at 343-44. Without doubt, these principles govern
13 defendant's fraud claim, but Dura's conclusion that overpayment
14 alone cannot prove loss causation, as the district court
15 incorrectly believed, is based on the tailored application of
16 these principles set out by the Supreme Court in the securities
17 context. Such application does not govern here.
18 Instead, we look to New York law that follows the well-
19 established common law rule that fraud damages represent the
20 difference between the purchase price of the asset and its true
21 value, plus interest, generally measured as of the date of sale.
22 McGuire v. Russell Miller, Inc. of N.Y., 1 F.3d 1306, 1310 (2d
23 Cir. 1993); Hanlon v. MacFadden Publ'ns, Inc., 302 N.Y. 502, 511
24 (1951); cf. Hotaling v. A.B. Leach & Co., 247 N.Y. 84, 87-88
25 (1928) (explaining that this rule reflects notion that seller's
20
1 fraud is complete at time of sale and subsequent events do not
2 increase or diminish liability).
3 In Dura the Supreme Court explained that a mere disparity
4 between the purchase price plaintiffs paid for their shares of
5 common stock and the shares' true value at the time of purchase
6 is insufficient to prove loss causation. 544 U.S. at 342, 347.
7 Dura's bar on recovery based on overpayment alone represents an
8 easily explained departure from common law guidelines on
9 computing damages. The Supreme Court explained that the inflated
10 purchase payment made for a misrepresented stock is "offset by
11 ownership of a share that at that instant possesses equivalent
12 value." Id. at 342. Further, in securities cases there is a
13 presumption that shares are purchased for the purpose of
14 investment and their true value to the investor is the price at
15 which they may later be sold.
16 Allegheny's fraud claim, by contrast, involves the sale of a
17 business, and under the terms of the Purchase Agreement between
18 the parties New York -- not federal -- law governs its
19 construction and approach to damages. In agreeing on GEM's
20 purchase price, we assume the parties placed value on its
21 intrinsic qualities, including its key personnel and its
22 financial performance. If appellant proves Merrill Lynch
23 fraudulently misrepresented those qualities, it may show that it
24 has acquired an asset at a price that exceeded its true value.
25 If the district court finds Allegheny's fraud claim otherwise
26 valid, damages should be awarded Allegheny to the extent that the
21
1 purchase price overstated GEM's value on the date of sale as a
2 result of Merrill Lynch's misrepresentations and omissions. Such
3 damages, if any, are considered general, not consequential,
4 damages.
5 C. Fraud Counterclaim Not Duplicative of Warranty Counterclaim
6 In Bridgestone/Firestone, Inc. v. Recovery Credit Servs.,
7 Inc., 98 F.3d 13, 20 (2d Cir. 1996), we observed that under New
8 York law, parallel fraud and contract claims may be brought if
9 the plaintiff (1) demonstrates a legal duty separate from the
10 duty to perform under the contract; (2) points to a fraudulent
11 misrepresentation that is collateral or extraneous to the
12 contract; or (3) seeks special damages that are unrecoverable as
13 contract damages. New York distinguishes between a promissory
14 statement of what will be done in the future that gives rise only
15 to a breach of contract cause of action and a misrepresentation
16 of a present fact that gives rise to a separate cause of action
17 for fraudulent inducement. See Stewart v. Jackson & Nash, 976
18 F.2d 86, 88-89 (2d Cir. 1992). Hence, a claim based on
19 fraudulent inducement of a contract is separate and distinct from
20 a breach of contract claim under New York law. Id.; see also RKB
21 Enters., Inc. v. Ernst & Young, 582 N.Y.S.2d 814, 816 (3d Dep't
22 1992) ("A party fraudulently induced to enter into a contract may
23 join a cause of action for fraud with one for breach of the same
24 contract.").
25 Defendant's allegations in this case involve misstatements
26 and omissions of present facts, not contractual promises
22
1 regarding prospective performance. "[A] misrepresentation of
2 present facts is collateral to the contract (though it may have
3 induced the plaintiff to sign the contract) and therefore
4 involves a separate breach of duty." First Bank of the Americas
5 v. Motor Car Funding, Inc., 690 N.Y.S.2d 17, 21 (1st Dep't 1999);
6 see also Deerfield Commc'ns Corp. v. Chesebrough-Ponds, Inc., 68
7 NY2d 954, 956 (1986).
8 That the alleged misrepresentations would represent, if
9 proven, a breach of the contractual warranties as well does not
10 alter the result. A plaintiff may elect to sue in fraud on the
11 basis of misrepresentations that breach express warranties. Such
12 cause of action enjoys a longstanding pedigree in New York. See
13 Ward v. Wiman, 17 Wend. 193 (1837). As to the duplication
14 charge, the New York Court of Appeals has allowed a fraud claim
15 to proceed in tandem with a contract claim where the seller
16 misrepresented facts as to the present condition of his property,
17 even though these facts were warranted in the parties' contract.
18 Jo Ann Homes, 25 NY2d at 119-20 (holding without discussion on
19 duplication); cf. Deerfield, 68 NY2d at 956 (holding oral
20 representation formed proper basis for contract and fraud
21 charge). The Appellate Division has provided a convincing
22 rationale: "A warranty is not a promise of performance, but a
23 statement of present fact." First Bank, 690 N.Y.S.2d at 21.
24 III Allegheny's Breach of Warranty Counterclaim
25 Appellant contends the misrepresentations and omissions
26 discussed above breached §§ 3.12(b), 3.12(c) and 3.16 of the
23
1 Purchase Agreement. The district court did not exonerate Merrill
2 Lynch of all alleged breaches, but dismissed appellant's contract
3 claim because it had failed to prove that any breach had
4 proximately caused its injury or to prove reasonably
5 ascertainable damages.
6 A. Causation and Damages
7 Here too, the district court turned to federal cases
8 addressing securities fraud, discussed above, to hold defendant
9 was required to show Merrill Lynch's misrepresentations caused
10 actual loss. As noted, actual loss cannot be shown in the
11 securities context by mere allegation that a plaintiff purchased
12 shares at a price that exceeded their true value. Dura, 544 U.S.
13 at 342. Our conclusion above that these cases do not govern
14 Allegheny's fraud counterclaim applies a fortiori to its breach
15 of warranty counterclaims.
16 Under New York law, an express warranty is part and parcel
17 of the contract containing it and an action for its breach is
18 grounded in contract. See CBS, Inc. v. Ziff-Davis Publ'g Co., 75
19 NY2d 496, 503 (1990). A party injured by breach of contract is
20 entitled to be placed in the position it would have occupied had
21 the contract been fulfilled according to its terms. Boyce v.
22 Soundview Tech. Group, Inc., 464 F.3d 376, 384 (2d Cir. 2006).
23 It follows that appellant is entitled to the benefit of its
24 bargain, measured as the difference between the value of GEM as
25 warranted by Merrill Lynch and its true value at the time of the
26 transaction. See Bennett v. U.S. Trust Co. of N.Y., 770 F.2d
24
1 308, 316 (2d Cir. 1985); Clearview Concrete Prods. Corp. v. S.
2 Charles Gherardi, Inc., 453 N.Y.S.2d 750, 756 (2d Dep't 1982).
3 It is a well established principle that contract damages are
4 measured at the time of the breach. Sharma v. Skaarup Ship Mgmt.
5 Corp., 916 F.2d 820, 825 (2d Cir. 1990) (collecting cases); Simon
6 v. Electrospace Corp., 28 NY2d 136, 145 (1971). The district
7 court's inquiry into GEM's performance and market conditions in
8 the months following the acquisition was improper because events
9 subsequent to the breach, viewed in hindsight, may neither offset
10 nor enhance Allegheny's general damages. See Sharma, 916 F.2d at
11 826.
12 Our review of the district court's pertinent findings allows
13 us to dispose with confidence of only one of appellant's
14 allegations. The trial court's determination that § 3.12(b) only
15 applied to the January financials, coupled with its finding that
16 this latter set of data was prepared in good faith and was
17 basically accurate, renders reconsideration on remand of the
18 alleged breach of this warranty unnecessary.
19 By contrast, defendant's claims relating to §§ 3.12(c) and
20 3.16 require further consideration by the district court through
21 the lens of the proper legal standard. The trial court found
22 that Merrill Lynch had breached "at least some" warranties and
23 that § 3.12(c) was materially breached by the September and
24 October financials. Its conclusions with respect to § 3.16 are
25 insufficient to determine whether it found plaintiff breached the
26 warranty or whether any such breach resulted in a diminution in
25
1 the objective value of GEM at the time of the sale. For example,
2 the district court's finding that Merrill Lynch did not deny
3 access to Allegheny during due diligence is not tantamount to
4 finding that Merrill Lynch met its contractual obligation under
5 § 3.16 to "provide" certain information to Allegheny. Moreover,
6 the trial judge reached no conclusion with regard to whether
7 plaintiff's failure to disclose Gordon's evasion of its in-house
8 credit controls and to alert defendant to the circumstances
9 underlying the preparation of the September and October
10 financials constituted a breach of this warranty. For correction
11 of the above recited errors, we must remand.
12 On remand the difference between the value of GEM as
13 warranted and its value as delivered should be calculated. GEM's
14 value as delivered should reflect any deductions from its
15 purchase price necessary to reflect the broken warranties. In
16 other words, the district court should determine how GEM would
17 have been valued by knowledgeable investors at the time of the
18 sale were such investors aware of any breaches proved by
19 Allegheny. As any such damages are general rather than
20 consequential, Allegheny is required to show with reasonable
21 certainty the fact of damage, not its amount. See Tractebel
22 Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 110 (2d
23 Cir. 2007).
24 B. Reliance on Express Warranties
25 The district court was of the view that Allegheny would not
26 have insisted on a lower price had it known all the facts and
26
1 appears to have inferred from this finding that Allegheny did not
2 rely on Merrill Lynch's representations in agreeing to close the
3 deal at the agreed upon price. The trial court's reasoning was
4 flawed. It incorrectly used the standard for reliance on express
5 warranties applicable to contract claims. The dispositive
6 question is whether defendant would have insisted on a lower
7 price had it not believed it was purchasing plaintiff's promise
8 to compensate it for any injury caused by the falsity of the
9 warranted facts. See Metropolitan Coal, 155 F.2d at 784
10 (defining warranty as "a promise to indemnify promisee for any
11 loss if the fact warranted proves untrue"); CBS, 75 NY2d at 504.
12 In contrast to the reliance required to make out a claim for
13 fraud, the general rule is that a buyer may enforce an express
14 warranty even if it had reason to know that the warranted facts
15 were untrue. Rogath v. Siebenmann, 129 F.3d 261, 265 (2d Cir.
16 1997) (stating that buyer with knowledge of falsity of warranted
17 facts may purchase seller's warranty as insurance against future
18 claims); Vigortone AG Prods., Inc. v. PM AG Prods., Inc., 316
19 F.3d 641, 648 (7th Cir. 2002). This rule is subject to an
20 important condition. The plaintiff must show that it believed
21 that it was purchasing seller's promise regarding the truth of
22 the warranted facts. Rogath, 129 F.3d at 265. We have held that
23 where the seller has disclosed at the outset facts that would
24 constitute a breach of warranty, that is to say, the inaccuracy
25 of certain warranties, and the buyer closes with full knowledge
26 and acceptance of those inaccuracies, the buyer cannot later be
27
1 said to believe he was purchasing the seller's promise respecting
2 the truth of the warranties. Id. Here, if the district court
3 finds that Merrill Lynch candidly disclosed that the September
4 and October financials were wrongly inflated and therefore
5 inaccurate, Allegheny cannot prevail on its claim that Merrill
6 Lynch breached § 3.12(c).
7 IV Summary Judgment Reversed
8 In April 2005, the district court granted summary judgment
9 to Merrill Lynch on its contract claim and rejected Allegheny's
10 defense that Merrill Lynch's breach of various warranties excused
11 Allegheny from further performance under the Purchase Agreement.
12 The court reasoned that plaintiff had substantially performed
13 inasmuch as it had no further performance pending, i.e., having
14 delivered GEM, there was no further action that Merrill Lynch was
15 required to take under the Purchase Agreement. Further, the
16 summary judgment order suggested that allegations of breach of
17 warranty were insufficient, categorically, to excuse the injured
18 party's performance under a contract. The court also found
19 Allegheny had obtained the primary intended benefit under the
20 contract through its two-year ownership of GEM.
21 Under New York law, a party's performance under a contract
22 is excused where the other party has substantially failed to
23 perform its side of the bargain or, synonymously, where that
24 party has committed a material breach. See Hadden v. Consol.
25 Edison Co. of N.Y., 34 NY2d 88, 96 (1974) (assessing substantial
26 performance on basis of several factors, such as the absolute and
28
1 relative magnitude of default, its effect on the contract's
2 purpose, willfulness, and degree to which injured party has
3 benefitted under contract). The issue of whether a party has
4 substantially performed is usually a question of fact and should
5 be decided as a matter of law only where the inferences are
6 certain. Anderson Clayton & Co. v. Alanthus Corp., 457 N.Y.S.2d
7 578 (2d Dep't 1983).
8 The legal arguments relied on by the district court and the
9 inferences it drew were insufficient to hold that Merrill Lynch
10 substantially performed under the Purchase Agreement at the
11 summary judgment stage. We agree with appellants that there is
12 no reason under New York law to treat a breach of warranty any
13 differently than any other contractual breach. See CBS, 75 NY2d
14 at 503. It follows that if Merrill Lynch breached one or more
15 warranties and the cumulative effect of such breaches was
16 material, it did not substantially perform its side of the deal.
17 Further, while we do not dispute that Merrill Lynch's delivery
18 and Allegheny's two-year ownership of GEM represented advanced
19 performance of the contract in a chronological sense, the trial
20 court was required to address appellant's argument that GEM
21 turned out to be substantially different from what the parties
22 had bargained for, thereby "defeat[ing] the object of the parties
23 in making the contract," Frank Felix Assocs. v. Austin Drugs,
24 Inc., 111 F.3d 284, 289 (2d Cir. 1997). See Richard A. Lord,
25 Williston on Contracts § 63:3, at 438-39 (4th ed. 2002). Such a
29
1 claim, if proved, would excuse defendant's non-performance under
2 the Purchase Agreement.
3 Appellees contend that the district court's eventual factual
4 findings amply support its prior summary judgment ruling. See
5 generally Kerman v. City of New York, 261 F.3d 229, 235 n.3 (2d
6 Cir. 2001) (considering entire record in reviewing summary
7 judgment). Although Allegheny might have argued that we should
8 stand in the shoes of the district court at the time of summary
9 judgment to assess the propriety of its disposition, see U.S. E.
10 Telecomms., Inc. v. U.S. W. Commc'n Servs., Inc., 38 F.3d 1289,
11 1301 (2d Cir. 1994) ("Our review is confined to an examination of
12 the materials before the trial court at the time the ruling was
13 made, and neither the evidence offered subsequently at trial nor
14 the verdict is relevant."), it waived this argument by relying on
15 later-developed portions of the record (including the district
16 court's findings) to support its challenge to summary judgment on
17 appeal. Kerman, supra, which was decided in 2001, did not
18 acknowledge U.S. E. Telecomms., supra, decided in 1994.
19 Thus, we have considered whether the district court's
20 finding that the January financials were mostly accurate and its
21 statement that "everyone wanted this deal to go through and
22 either understood or did not care about the changed financial
23 statements" are dispositive on the issue of materiality. Having
24 considered these findings, we conclude the district court's
25 flawed summary judgment cannot be affirmed on the basis of such
26 partial findings. We note that Allegheny has alleged breach of
30
1 warranty on the basis of material omissions as well as
2 misrepresentations. Allegheny's attitude prior to signing and
3 its nonchalant response to information it possessed at that time
4 has no bearing on the materiality of information that was
5 withheld by Merrill Lynch. More generally, the district court
6 has not provided us with an adequate assessment of the pertinent
7 factors to determine whether the broken warranties amounted to a
8 material breach. See Hadden, 34 NY2d at 96. Accordingly, we
9 must reverse the district court's April 2005 grant of summary
10 judgment to Merrill Lynch.
11 V Allegheny's Jury Demand
12 Under § 11.09(b) of the Purchase Agreement, Allegheny
13 irrevocably waived any right to a jury trial in a proceeding
14 arising out of the Purchase Agreement. According to Allegheny
15 the waiver does not apply to its fraudulent inducement claim.
16 The district court agreed with Merrill Lynch that a jury waiver
17 applies to a claim for fraudulent inducement where it is not
18 alleged that the waiver provision itself was procured by fraud.
19 When asserted in federal court, the right to a jury trial is
20 governed by federal law. McGuire, 1 F.3d at 1313; see also Med.
21 Air Tech. Corp. v. Marwan Inv., Inc., 303 F.3d 11, 18 (1st Cir.
22 2002) (applying federal law to decide enforceability of jury
23 waiver). Although the right is fundamental and a presumption
24 exists against its waiver, a contractual waiver is enforceable if
25 it is made knowingly, intentionally, and voluntarily. Nat'l
26 Equip. Rental, Ltd. v. Hendrix, 565 F.2d 255, 258 (2d Cir. 1977).
31
1 Whether a contractual waiver is effective against a claim that
2 the contract containing the waiver was induced by fraud is a
3 question of first impression in this Circuit, and federal
4 precedent on the topic is thin. We join the Tenth Circuit in
5 holding that unless a party alleges that its agreement to waive
6 its right to a jury trial was itself induced by fraud, the
7 party's contractual waiver is enforceable vis-à-vis an allegation
8 of fraudulent inducement relating to the contract as a whole.
9 See Telum, Inc. v. E.F. Hutton Credit Corp., 859 F.2d 835, 837-38
10 (10th Cir. 1988).
11 Telum drew an analogy to the arbitration context, in which
12 the Supreme Court has held that an agreement to arbitrate is
13 effective with respect to claims of fraudulent inducement that
14 relate to the contract generally, but not to the agreement to
15 arbitrate specifically. Id. at 837. Although we do not disagree
16 with appellant that the arbitration cases rely on a federal
17 statutory scheme favoring arbitrability that runs contrary to the
18 presumption against waiver applicable here, we think the analogy
19 persuasive as a matter of logic.
20 A promise to bring proceedings before a judge, not a jury,
21 is akin to an agreement to arbitrate in that both express the
22 parties' consent as to how to handle differences that may arise.
23 Indeed, arbitration represents a more dramatic departure from the
24 judicial forum than does a bench trial from a jury trial. Id. at
25 838. If one litigant alleges that an agreement's dispute
26 resolution provision itself was procured by fraud, the fairest
32
1 course is to afford that litigant the protections he would have
2 enjoyed had he never been fraudulently induced to forsake them by
3 contract. If, on the contrary, the litigant does not challenge
4 the provision as being the product of fraud, we see no reason to
5 replace the agreed upon mode of dispute resolution with another.
6 Further, as we expressed in the arbitration context, we are
7 concerned that deciding this issue in favor of appellant makes it
8 too easy for a litigant to avoid its contractual promise to
9 submit a case to a judge by alleging fraud. See, e.g., El Hoss
10 Eng'g & Transp. Co. v. Am. Indep. Oil Co., 289 F.2d 346, 349 (2d
11 Cir. 1961) (discussing problems posed by fraud in the inducement
12 claims including sham litigations pursued to avoid arbitration).
13 CONCLUSION
14 For the foregoing reasons, we (1) order the dismissal of
15 Supply; (2) reverse the award of summary judgment to Merrill
16 Lynch on its breach of contract claim; (3) reverse the dismissal
17 of Allegheny's counterclaim for fraudulent inducement; (4)
18 reverse the dismissal of Allegheny's counterclaim for breach of
19 warranty as to §§ 3.12(c) and 3.16 of the Agreement; and (5)
20 affirm the denial of appellant's jury demand. The case is
21 remanded to the district court for further proceedings consistent
22 with this opinion.
33