United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued January 23, 2007 Decided March 23, 2007
No. 05-7181
ELLIPSO, INC.,
APPELLEE
v.
JOHN B. MANN AND
MANN TECHNOLOGIES,
APPELLANTS
Appeal from the United States District Court
for the District of Columbia
(No. 05cv01186)
David P. Durbin argued the cause for appellants. With
him on the briefs was Thomas A. Mauro.
Natalie O. Ludaway argued the cause for appellee
Ellipso, Inc. With her on the brief was Matthew H. Goodman.
Before: GRIFFITH and KAVANAUGH, Circuit Judges, and
EDWARDS, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge GRIFFITH.
GRIFFITH, Circuit Judge: This appeal challenges a
2
preliminary injunction to preserve assets for a potential
judgment against the appellants. In the underlying dispute,
Ellipso, Inc. (“Ellipso”) claims that appellants Mann
Technologies (individually “Mann Technologies”) and its
managing partner, John Mann, (referred to here jointly as “Mann
Tech”) fraudulently induced Ellipso to enter a loan agreement
secured by shares Ellipso held in another company. In the
matter on appeal before us, Ellipso alleged that Mann Tech was
selling those shares and diverting the proceeds, and persuaded
the district court to freeze those assets. Mann Tech asks us to
set aside the injunction, arguing that the district court erred
when it held that Ellipso had demonstrated a substantial
likelihood of success on the merits of its underlying fraud claim,
that Ellipso would suffer irreparable harm absent the injunction,
and that Mann Tech would not be injured by the injunction. We
affirm the district court’s order because the appellants have not
shown that the district court abused its discretion.
I.
On June 14, 2005, Ellipso, a telecommunications
company that specializes in satellite communications products
for cellular phone companies, filed a complaint against
appellants John B. Mann and Mann Tech, and against Robert
Patterson, Consulting Management, Ltd., and Registry Solutions
Co.1 Ellipso claimed, among other things, that it was
fraudulently induced to enter a loan agreement with the
appellants and sought various remedies including rescission of
the loan. In 2002, Ellipso was struggling financially and hired
Robert Patterson to secure financing from investors, which
1
Neither Patterson, Consulting Management, nor
Registry Solutions have appealed the grant of the preliminary
injunction.
3
Patterson did. Patterson put together a deal in which Mann Tech
loaned Ellipso $90,000, secured by more than 492,000 shares of
publicly-traded ICO Global Communications Holding Ltd.
Stock (“ICOHA shares”) that Ellipso held. At the time of the
loan agreement in January 2004, the ICOHA shares were valued
at about $180,000, twice the amount of the loan. While he was
acting as Ellipso’s agent in securing the financing from Mann
Tech, Patterson had a financial interest in Mann
Tech—unknown to Ellipso—and stood to benefit from the loan.
According to Ellipso, Patterson presented the loan as Ellipso’s
only feasible financing option, and Ellipso relied on Patterson’s
expertise when agreeing to it. Ellipso claims that Patterson took
advantage of his insider’s knowledge of Ellipso’s precarious
financial condition to benefit himself by persuading Ellipso to
enter the loan agreement. The month following the loan
agreement, Patterson strengthened his financial interest in Mann
Technologies when he and John Mann incorporated Mann
Technologies in Nevada. According to Ellipso, Patterson
continued to take advantage of his dual interests in Ellipso and
Mann Technologies to harm Ellipso and benefit himself by
persuading Ellipso to transfer title and possession of the ICOHA
shares to Mann Technologies in August 2004. A month later,
Patterson, on behalf of Mann Technologies, and Ellipso
executed a joint sales order permitting the sale of 25,000 of
those shares. Sometime thereafter (the record is not clear) Mann
Tech sold off nearly another 453,000 ICOHA shares and
transferred some of the resulting proceeds to other accounts
(again, the record is not clear as to the precise amounts or
accounts). Mann Tech counters that it was entitled to sell the
shares because their value had fallen below $10,000 and Ellipso
had failed to make a single payment on the loan, both grounds
for default under the agreement. When Ellipso moved for a
preliminary injunction in August 2005, the price of ICOHA had
rebounded dramatically, and the total market value of the shares
that Ellipso pledged as collateral exceeded $2,500,000.
4
Ellipso moved for a preliminary injunction to ensure that
the remaining ICOHA shares held by Mann Technologies and
the proceeds from those that had been sold would be protected
while Ellipso pursued its claims against Mann Tech and
Patterson. Ellipso argued that only an injunction freezing Mann
Technologies’ assets would guarantee satisfaction of any
judgment on its claims. The district court agreed, concluding
that (1) Ellipso had shown a likelihood of success on the merits
of its fraud claim because Patterson had not disclosed his dual
role to Ellipso, see Ellipso, Inc. v. Mann, No. 05-cv-1186, slip
op. at 5-6 (D.D.C. Nov. 2, 2005) (“Ellipso I”); (2) there was a
likely threat of irreparable injury to Ellipso from Mann Tech’s
further sale of the ICOHA shares because they were Mann
Technologies’ only substantial assets, see id. at 4; (3) the
balance of hardships favored Ellipso because without an
injunction Ellipso might not be made whole and an injunction
would harm no business interests of Mann Technologies, which
would be allowed to hold on to the shares, see id. at 6-7; and (4)
the public interest in preventing fraud favored granting an
injunction, see id. at 7. Mann Tech filed a motion for
reconsideration of the preliminary injunction arguing that new
evidence showed that Ellipso knew of Patterson’s dual role and
with that knowledge actually affirmed the loan agreement by
continuing to act under its terms, eliminating rescission as a
remedy. The district court rejected Mann Tech’s motion for
reconsideration and held that the “purportedly new facts” would
not change its conclusion that Ellipso had demonstrated a
substantial likelihood of success on the merits of its fraud claim.
Ellipso v. Mann, No. 05-civ-1186, slip op. at 3 (D.D.C. Nov. 14,
2005) (“Ellipso II”). Mann Tech timely appealed to this Court.
II.
“We review the district court’s weighing of the
preliminary injunction factors under the ‘abuse of discretion’
5
standard.” Serono Labs., Inc. v. Shalala, 158 F.3d 1313, 1318
(D.C. Cir. 1998) (quoting Transohio Sav. Bank v. Dir., Office of
Thrift Supervision, 967 F.2d 598, 614 (D.C. Cir.1992)). We
review factual determinations “under the clearly erroneous
standard,” while questions of law are reviewed “essentially de
novo.” Id. (internal quotation marks and citations omitted).
When deciding whether to grant a preliminary injunction, the
district court must examine whether “(1) there is a substantial
likelihood plaintiff will succeed on the merits; (2) plaintiff will
be irreparably injured if an injunction is not granted; (3) an
injunction will substantially injure the other party; and (4) the
public interest will be furthered by the injunction.” Id. at 1317-
18 (citing Wash. Metro. Area Transit Comm’n v. Holiday Tours,
Inc., 559 F.2d 841, 843 (D.C. Cir. 1977)). A court must balance
these factors, and “[i]f the arguments for one factor are
particularly strong, an injunction may issue even if the
arguments in other areas are rather weak.” Id. at 1318 (quoting
CityFed Fin. Corp. v. Office of Thrift Supervision, 58 F.3d 738,
746 (D.C. Cir. 1995)).
Mann Tech challenges the district court’s determination
that Ellipso has shown a substantial likelihood of success on the
merits of its fraud claim, that Ellipso would be irreparably
harmed without the injunction freezing Mann Technologies’
assets, and that Mann Technologies would not be harmed by the
injunction. We examine these arguments in turn and find each
lacks merit.
As to the merits of the fraud claim, Mann Tech argues
first that Ellipso failed to prove, as is required for fraud, that it
reasonably relied on Patterson to accept Mann Tech’s loan. See,
e.g., Alicke v. MCI Commc’n Corp., 111 F.3d 909, 912 (D.C.
Cir. 1997). Mann Tech alleges that Ellipso had been willing to
accept a previous similar loan offered by another prospective
investor (Argyll Equities LLC). Because Ellipso was willing to
6
accept this previous similar loan, so the argument goes, the
district court was mistaken to conclude that Ellipso relied on
Patterson to accept a substantially similar loan from Mann Tech.
Mann Tech also argues that Ellipso could not have reasonably
relied on Patterson because it knew of his prior felony theft
conviction and disbarment. We need not consider either
argument because “[i]t is well settled that issues and legal
theories not asserted at the District Court level ordinarily will
not be heard on appeal.” District of Columbia v. Air Florida,
Inc., 750 F.2d 1077, 1085 (D.C. Cir. 1984) (citations omitted).
Mann Tech failed to raise either reliance argument in its
opposition to Ellipso’s motion for a preliminary injunction, at
the district court’s hearing on the injunction, or in its motion for
reconsideration. They were both raised for the first time on
appeal. The district court clearly did not err in failing to
consider arguments that Mann Tech failed to present. Although
Mann Tech did note in its opposition to a preliminary injunction
that it was disputed when Ellipso became aware of Patterson’s
criminal history, it did not argue that reliance on Patterson
would have been unreasonable. Instead, Mann Tech’s argument
about the likelihood of success on the merits of the fraud claim
focused on whether Ellipso could prove the facts necessary to
justify rescission. See Opposition of Defendants John B. Mann
and Mann Technologies, LLC to the Plaintiff’s Motion for
Preliminary Injunction at 4-5, No. 05-civ-1186 (D.D.C. Sept. 27,
2005). Even had Mann Tech preserved its reliance arguments,
it would not be entitled to the relief it seeks because it is by no
means apparent from the record what effect, if any, the Argyll
loan offer had on Ellipso’s reliance on Patterson or when Ellipso
in fact discovered Patterson’s conviction and disbarment.
Mann Tech argues next that Ellipso did not show a
likelihood of success on its fraud claim because it had, in fact,
affirmed the loan agreement with full knowledge of Patterson’s
dual roles with Ellipso and Mann Technologies. Mann Tech is
7
correct that if Ellipso continued to perform under the contract
after learning of Patterson’s conflict, Ellipso cannot then seek
rescission of the contract:
Where a party to an executed contract discovers
a material misrepresentation made in the
execution of the contract, that party may elect
one of two mutually exclusive remedies. He
may either affirm the contract and sue for
damages, or repudiate the contract and recover
that with which he or she has parted.
Dean v. Garland, 779 A.2d 911, 915 (D.C. 2001) (quoting
Dresser v. Sunderland Apartments Tenants Ass’n, 465 A.2d 835,
840 (D.C. 1983)). If the fraud victim “affirms the contract
through continued performance, that party is precluded from
seeking rescission.” Id. (citing Dresser, 465 A.2d at 840 nn.16
& 17).
Mann Tech argues that the August 2004 transfer of the
ICOHA shares and the September 2004 sale of 25,000 of them
were acts affirming the loan agreement because Ellipso agreed
to them with full knowledge of Patterson’s interest in Mann
Technologies. It relies on two documents to make its case.
First, Mann Tech points to the September 2004 joint sales order
signed by Ellipso’s chief executive officer, David Castiel, for
Ellipso and by Patterson for Mann Technologies. Mann Tech
argues that Patterson’s signature for Mann Technologies gave
Ellipso notice of his dual role. The sales order, however, is
hardly unequivocal evidence that Ellipso knew of Patterson’s
financial interest in Mann Technologies, and it says nothing
about what Ellipso knew about Patterson’s conflict in January
2004, when Ellipso entered the loan agreement with Mann Tech.
Patterson brokered the original loan agreement for Mann at
Ellipso’s direction, and it was not unreasonable to assume that
8
Mann Tech would permit Patterson to act as its agent in any
future transactions regarding the loan. Second, Mann Tech
relies on an October 20, 2004 email from Ellipso’s Castiel to
Patterson, which it argues shows that Ellipso knew of
Patterson’s dual role, perhaps as early as June 2004, and did not
object: “My understanding,” Castiel wrote to Patterson, “was
that you were ‘covered’ as you indicated to me starting in June
through a variety of sources, including . . . TRSC/Mann Tech (of
which you are a substantial holder as well) . . . .” Email from
David Castiel, Chief Executive Officer, Ellipso, to Robert
Patterson (Oct. 20, 2004) (emphasis added). There are,
however, two equally plausible readings of this email depending
on how one interprets the phrase “starting in June”: (1) if the
phrase refers to when Castiel became aware of Patterson’s
interest in Mann Technologies, it could reasonably be read to
mean that Ellipso knew in June 2004, two months before it is
alleged to have affirmed the agreement, that Patterson was a
principal in Mann Technologies; or (2) if the phrase refers to
when Patterson gained a financial interest in Mann
Technologies, it could be reasonably read to mean that Ellipso
found out at some later date (no later than October 20, 2004) that
Patterson had been a principal in Mann Technologies since June
2004. This second reading is critical because it undermines
appellants’ argument that the August 2004 share transfer and
September 2004 joint sale were done with knowledge of
Patterson’s dual role. Under this interpretation, therefore, these
actions do not affirm the loan agreement because each was made
before Ellipso had learned of Patterson’s dual role and fraud. It
is the appellants’ burden to show that Ellipso knew of
Patterson’s dual roles before the actions Mann Tech argues
affirmed the loan agreement. It has failed to do so. The district
court was not clearly erroneous in so concluding.
In considering Mann Tech’s motion for reconsideration
of the grant of the preliminary injunction, the district court
9
limited its analysis to what Ellipso knew about Patterson’s
interest in Mann Technologies at the time of the loan agreement,
see Ellipso II at 3 (noting that “purportedly new facts . . . fail to
show that Ellipso knew of Patterson’s dual role at the time of the
negotiation and execution of the loan agreement”), and did not
expressly address whether Ellipso knew of Patterson’s dual roles
at the time of the August 2004 share transfer and September
2004 joint sale, the lynchpin of Mann Tech’s argument that
Ellipso affirmed the loan agreement. The district court’s failure
to address the affirmation argument directly makes our task
more difficult. Given the narrow confines for our review of a
preliminary injunction, a statement by the district court that the
proffered evidence was insufficient to support Mann Tech’s
theory that Ellipso affirmed the loan agreement with knowledge
of Patterson’s dual roles would have made our task more
straightforward. The district court did, however, implicitly find
in its decision to grant the preliminary injunction that Ellipso
had not affirmed the contract when it concluded that the
“defendants are unable to rebut that plaintiff did not know at the
time of the negotiation and execution of the loan agreement on
January 30, 2004 and thereafter.” See Ellipso I at 6 (emphasis
added). Given the ambiguity of the October 2004 email, we
cannot determine that the district court’s factual determination
regarding when Ellipso became aware of Patterson’s dual roles
was clearly erroneous.
Finally, Mann Tech argues that the district court erred in
finding that Ellipso would be irreparably injured without the
injunction and that Mann Technologies would not be harmed by
the injunction. Mann Tech alleges that the court failed to
consider the possible harm to Mann Technologies’ business
interests from the injunction by depriving it of the benefit of the
increase in the value of the risky shares it took as collateral. But
the district court found that “Mann Tech has no business
operations and its only significant assets are Ellipso’s ICOHA
10
Shares and the cash proceeds from its sale of approximately
200,000 ICOHA Shares.” Ellipso I at 4. At oral argument,
counsel for the defendants was asked specifically whether it was
true that Mann Technologies had no significant assets other than
the disputed shares. He responded that, “At the time [of the
injunction], your Honor, that was [] correct.” Recording of Oral
Argument at 7:37. Given that Mann Technologies had no other
assets from which Ellipso might satisfy a judgment and Mann
Technologies had no apparent business use for these assets, we
conclude that the district court did not err in finding that the
balance of hardships favors Ellipso because Ellipso may be
irreparably harmed without an injunction freezing those assets
while Mann Technologies would not be irreparably harmed.
III.
Had Mann Tech been able to prevail on its argument that
Ellipso affirmed the loan agreement, it would have been in a
position to launch a persuasive challenge to the power of the
district court to freeze its assets. An injunction freezing assets
is only permissible when a party has demonstrated an equitable
claim to the assets. See Grupo Mexicano de Desarrollo, S.A. v.
Alliance Bond Fund, Inc., 527 U.S. 308, 332-33 (1999) (holding
that a court may not enter an injunction freezing assets in action
for damages where there is no equitable interest in frozen
assets); cf. Deckert v. Independence Shares Corp., 311 U.S. 282,
289-90 (1940) (permitting an injunction freezing assets because
it assisted the ultimate equitable relief of rescission). If Ellipso
had in fact affirmed the loan agreement, Ellipso’s sole remedy
for fraud in the inducement of that contract would have been
damages—a legal remedy, see Dean, 779 A.2d at 915 (holding
that party affirming contract is precluded from later seeking
rescission); it would have been unable to show the equitable
interest in the shares held by Mann Tech necessary to support
the equitable remedy of an injunction. But Mann Tech never
11
made that argument,2 and so its challenge of the preliminary
injunction fails not only because it could not undermine
Ellipso’s showing of likely success on the merits, our holding
here, but also because Mann Tech waived any objection to any
asserted misuse of the court’s equitable powers. See, e.g., Atlas
Life Ins. Co. v. W.I. Southern, Inc., 306 U.S. 563, 568 n.1 (1939)
(noting that unlike federal subject matter jurisdiction, “the
parties may waive their objections to the equity jurisdiction by
consent, or by failure to take it seasonably”) (citations omitted);
Conn. Gen. Life Ins. Co. v. New Images of Beverly Hills, 321
F.3d 878, 882 (9th Cir. 2003) (finding argument that district
court lacked the equitable authority to issue injunction because
“true gravamen” of complaint was for money damages was
waived because it was raised for the first time on appeal);
Quenzer v. United States (In re Quenzer), 19 F.3d 163, 165 (5th
Cir. 1993) (noting that the principle that appellate courts do not
consider issues raised for the first time on appeal “applies with
even more force when [courts] address questions of the proper
exercise of the equitable powers of the court”).
IV.
Because we cannot conclude that the district court
abused its discretion, we affirm the grant of the preliminary
injunction.
So ordered.
2
Mann Tech only argued that an injunction was not
appropriate because it believed there existed an adequate legal
remedy, not because there existed no equitable interest. See
Opposition of Defendants John B. Mann and Mann
Technologies, LLC to the Plaintiff’s Motion for Preliminary
Injunction at 3-4, No. 05-civ-1186 (D.D.C. Sept. 27, 2005).