Case: 09-30275 Document: 00511037461 Page: 1 Date Filed: 02/26/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
February 26, 2010
No. 09-30275 Charles R. Fulbruge III
Clerk
D & J TIRE INC,
Plaintiff–Appellant
v.
HERCULES TIRE & RUBBER CO; LAWRENCE B SEAWELL,
Defendants–Appellees
Appeal from the United States District Court
for the Western District of Louisiana
Before HIGGINBOTHAM, GARZA, and PRADO, Circuit Judges.
PRADO, Circuit Judge:
D & J Tire Inc. (“Appellant”) appeals the district court’s grant of summary
judgment in favor of Hercules Tire & Rubber Company and Lawrence B.
Seawell, a Hercules officer (collectively, “Appellees”). Appellant, a former
Hercules minority shareholder, sued Appellees for breach of fiduciary duty
arising out of Seawell’s failure to disclose that Hercules was in talks to be
acquired by FdG Associates (“FdG”) when Seawell served as a mandatary on
Appellant’s behalf to redeem Appellant’s shares, and that Hercules is vicariously
liable for Seawell’s breach. Appellant also sought rescission of its stock
redemption based on fraud by Hercules directors for not disclosing the
acquisition discussions. Appellant claims that had it known of FdG’s impending
Case: 09-30275 Document: 00511037461 Page: 2 Date Filed: 02/26/2010
No. 09-30275
purchase, it would not have redeemed its stock. Because we find that the grant
of summary judgment was premature, we vacate and remand to the district
court.
I. FACTUAL AND PROCEDURAL BACKGROUND
Hercules is a Connecticut corporation with its principal place of business
in Ohio. During the relevant time period, Seawell served as Hercules’ Chief
Financial Officer (“CFO”), and resided in Ohio. Hercules operated a sales
cooperative for tire retailers in Louisiana and other states. Appellant, a tire
retailer, incorporated and domiciled in Louisiana, was one of Hercules’ thirty-
three stockholders, owning fourteen shares.
In September 2004, Hercules engaged Morgan Keegan & Company to
conduct a business valuation, and to identify and approach potential buyers. By
January 14, 2005, Morgan Keegan reported that the equity value of the business
was roughly $78 million, or $63,000 per share, and that there were several
interested buyers. On January 19, 2005, Appellant informed Hercules that it
wished to redeem its stock and apply the proceeds to the $360,787.72
outstanding balance it owed Hercules. Seawell responded, in a letter dated
February 2, 2005, that in order to complete the transaction, Appellant would
need to execute a Stock Power of Attorney to Seawell. Seawell also informed
Appellant that Hercules would honor redemption at 80 percent of book value
because it considered Appellant’s redemption a “hardship withdrawal.” James
Greer, an officer and agent for Appellant, executed the Stock Power of Attorney
on behalf of Appellant on February 15, 2005. The document read:
I, James W. Greer, hereby sell, assign and transfer unto The
Hercules Tire and Rubber Company (14) Shares of Common Stock
of THE HERCULES TIRE & RUBBER COMPANY standing in
their name on the books of said corporation represented by of [sic]
Certificate No. __ herewith and do hereby irrevocably constitute
and appoint LAWRENCE B. SEAWELL attorney to transfer the
said stock on the books of the with-in-named Company with full
2
Case: 09-30275 Document: 00511037461 Page: 3 Date Filed: 02/26/2010
No. 09-30275
power of substitution in the premises.
On February 21, 2005, Seawell sent an e-mail directing redemption of
Appellant’s stock for 80 percent of the book value of $26,380.07 per share.1 The
e-mail indicated that Hercules’ board of directors (the “Board”) had approved the
redemption by consent. Hercules issued a credit memo applying the proceeds of
the stock redemption to Appellant’s outstanding balance, but the final director
did not fax written consent until March 23, 2005.2
On March 4, 2005, the Board voted to move forward with the proposal by
FdG, giving them an exclusive agreement to perform due diligence before a
target sale date of April 30, 2005. The Board voted to approve the merger on
April 26, 2005. The Board recommended that shareholders approve the merger,
and, after receiving proxies, approved the merger by shareholder vote on May
9, 2005. FdG and Hercules executed the merger on May 11, 2005, and publicized
the merger via press release. Pursuant to the merger agreement, the Hercules
shareholders received more than $60,000 per share. On June 27, 2005,
Appellant sent Seawell a letter accusing him of securities violations, fraud, and
breach of fiduciary duty by failing to inform Appellant of the possibility of the
FdG acquisition.
Greer and Appellant filed this lawsuit on May 15, 2008 in Louisiana state
court. The complaint alleges that Seawell breached his fiduciary duty by failing
to disclose the material fact of the merger discussions; that Hercules was
vicariously liable for Seawell’s breach; and that Hercules suppressed the fact
1
Hercules later credited Appellant’s account so that it received 100 percent of its
shares’ book value.
2
The parties disagree over the date that the redemption occurred under Connecticut
law for purposes of whether facts known to Seawell and other directors were material at the
time. We express no opinion on that matter because it is a fact question more appropriately
determined on remand.
3
Case: 09-30275 Document: 00511037461 Page: 4 Date Filed: 02/26/2010
No. 09-30275
that FdG was actively pursuing the acquisition of its shares, rendering
Appellant’s consent to redemption invalid and entitling Appellant to rescission.
Hercules and Seawell removed the case to federal court.
Appellees filed a motion to dismiss and a motion for partial summary
judgment which the district court converted into a motion for summary
judgment. The district court found that the Stock Power of Attorney created
only a “limited mandate,” without fiduciary duties, because the mandate only
gave Seawell power to effect the actual transfer of property to the board upon
consent, and because the parties had agreed to the terms of the redemption
before appointing Seawell as mandatary.
As a result, the district court reasoned, any breach of fiduciary duty must
stem from Seawell’s duty to shareholders as an officer of Hercules. The district
court did not specifically address Appellant’s rescission claim, but found that all
claims for breach of the directors’ general fiduciary duty to shareholders were
prescribed under Louisiana corporations law, because shareholder suits against
officers and directors for breach of their fiduciary duties must be brought within
two years. See L A. R EV. S TAT. A NN. § 12:96. The district court also found that
Greer lacked individual standing to maintain his claims. The district court
granted Appellees summary judgment on all claims. This appeal followed.3
II. DISCUSSION
We review the “grant of summary judgment de novo, applying the same
standards as the district court.” Hill v. Carroll County, Miss., 587 F.3d 230, 233
(5th Cir. 2009) (citing Mack v. City of Abilene, 461 F.3d 547, 555 (5th Cir. 2006)).
“Summary judgment is appropriate when no genuine issue of material fact exists
and the movant is entitled to judgment as a matter of law. Fact questions are
viewed in the light most favorable to the nonmoving party and questions of law
3
Greer did not appeal.
4
Case: 09-30275 Document: 00511037461 Page: 5 Date Filed: 02/26/2010
No. 09-30275
are reviewed de novo.” Floyd v. Amite County Sch. Dist., 581 F.3d 244, 247–48
(5th Cir. 2009) (citations omitted).
A. Choice of Law
We must first determine whether the district court properly applied
Louisiana law to Appellant’s claims. Because Appellant filed this case in
Louisiana, we apply Louisiana’s choice of law rules. See Torch Liquidating Trust
v. Stockstill, 561 F.3d 377, 385 n.7 (5th Cir. 2009) (citing Klaxon Co. v. Stentor
Elec. Mfg. Co., 313 U.S. 487, 496 (1941)) (“In a diversity action, a federal court
must apply the choice of law rules of the state in which the district court where
the complaint was filed sits.”). We must “determine as best [we] can what
[Louisiana’s] highest court would decide regarding the appropriate choice of law
rule.” Patin v. Thoroughbred Power Boats Inc., 294 F.3d 640, 646 (5th Cir. 2002)
(citing Howe v. Scottsdale Ins. Co., 204 F.3d 624, 627 (5th Cir. 2000)). Louisiana
choice of law statutes mandate that we apply the law of the state whose “policies
would be most seriously impaired if its law were not applied to that issue.” See
L A. C IV. C ODE A NN. arts. 3515, 3539 & 3542. We have recently held that
Louisiana law requires that “the law of the place where the corporation was
incorporated [governs] disputes regarding the relationship between the officers,
directors, and shareholders and the officers’ and directors’ fiduciary duties.”
Torch Liquidating Trust, 561 F.3d at 385 n.7 (citations omitted).
We find that because Hercules is a Connecticut corporation, the district
court should have applied Connecticut law to determine the scope of the
fiduciary duties the directors owe to corporate shareholders. However,
Louisiana law applies to Appellant’s claim for breach of fiduciary duty based on
Seawell’s duties as mandatary because Seawell and Appellant entered into the
mandate in Louisiana, and Louisiana’s policies would be most seriously impaired
if another state law applied to actions by Louisiana citizens for breach of
mandates entered into in Louisiana. Louisiana’s policies would also be most
5
Case: 09-30275 Document: 00511037461 Page: 6 Date Filed: 02/26/2010
No. 09-30275
seriously impaired if another state’s law applied to actions by Louisiana citizens
for rescission of contracts based on fraud. Therefore, we find that while
Connecticut law controls the scope of the Board’s duties, Louisiana law controls
both the applicable prescriptive period and the question of whether a failure to
fulfill those duties constitutes fraud warranting rescission of the contract.
B. Rescission Claim
1. Prescription
Under Louisiana law, actions for rescission of a contract based on fraud
must be brought within five years after the plaintiff discovers the fraud. L A. C IV.
C ODE A NN. art. 2032. Appellant filed its complaint on May 15, 2008, just over
three years after Hercules announced its merger with FdG. This was well-
within the prescriptive period.
The district court erred by applying the one year prescriptive period in
Louisiana Revised Statute 12:96, because that statute only applies to “action[s]
for damages against any director or officer for breach of his duty as a director or
officer.” The rescission claim does not seek damages and it is against Hercules,
not a director or officer. Furthermore, Louisiana law provides that its corporate
law does not apply to foreign corporations except “where express reference is
made to foreign corporations.” L A. R EV. S TAT. A NN. 12:175. Section 12:96 makes
no such reference.
Because Louisiana’s prescription statute does not bar Appellant’s
rescission claim, we must remand to the district court to determine whether
Appellant can prove that Hercules’s directors failed to disclose a material fact,
thereby rendering Appellant’s consent to the redemption null.
2. Louisiana Fraud Law
Under Louisiana law, “[c]onsent of the parties is a requisite to the validity
of a contract, and there is no valid consent where it has been produced by error,”
such as fraud. Sonnier v. Boudreaux, 673 So. 2d 713, 717 (La. Ct. App. 1996)
6
Case: 09-30275 Document: 00511037461 Page: 7 Date Filed: 02/26/2010
No. 09-30275
(citing L A. C IV. C ODE A NN. art. 1948). “[S]ummary judgment is rarely proper in
fraud cases because the intent requested to establish fraud is a factual question
‘uniquely within the realm of the trier of fact because it so depends on the
credibility of witnesses.’” Rimade Ltd. v. Hubbard Enters., Inc., 388 F.3d 138,
144 (5th Cir. 2004) (quoting Beijing Metals & Minerals v. Am. Bus. Ctr., 993 F.2d
1178, 1185 (5th Cir. 1993)).
“Fraud is a misrepresentation or a suppression of the truth made with the
intention either to obtain an unjust advantage for one party or to cause a loss or
inconvenience to the other. Fraud may also result from silence or inaction.” L A.
C IV. C ODE A NN. art. 1953. There are three elements to an action for fraud
against a party to a contract: “(1) misrepresentation, suppression, or omission
of true information; (2) the intent to obtain an unjust advantage or to cause
damage or inconvenience to another; and (3) the error induced by a fraudulent
act must relate to circumstances substantially influencing the victim’s consent
to the contract.” Simmons v. Clark, 8 So. 3d 102, 110 (La. Ct. App. 2009).
The defendant must have induced the plaintiff so that the plaintiff “must
at least be able to say that had he known the truth, he would not have acted as
he did to his detriment.” See Sun Drilling Prods. Corp. v. Rayborn, 798 So. 2d
1141, 1153 (La. Ct. App. 2001). “To find fraud from silence or suppression of the
truth, there must exist a duty to speak or to disclose information.” Greene v.
Gulf Coast Bank, 593 So. 2d 630, 632 (La. 1992).
3. Duty to Disclose under Connecticut Law
As discussed above, Connecticut law governs whether a fiduciary duty
exists, and if it does, the scope of that duty. Under Connecticut law, “[a]n officer
[or] director occupies a fiduciary relationship to the corporation and its
stockholders.” Katz Corp. v. T.H. Canty & Co., Inc., 362 A.2d 975, 978–79 (Conn.
1975) (citation omitted). “He occupies a position of the highest trust and
therefore he is bound to use the utmost good faith and fair dealing in all his
7
Case: 09-30275 Document: 00511037461 Page: 8 Date Filed: 02/26/2010
No. 09-30275
relationships with the corporation.” Id. at 979. “It is essential to the validity of
a contract between a fiduciary and a beneficiary containing matters within the
scope of that relationship that a full disclosure be made of all relevant facts
which the fiduciary knows or should know.” Pacelli Bros. Transp., Inc. v. Pacelli,
456 A.2d 325, 329 (Conn. 1983).
Connecticut courts have not yet addressed whether directors and officers
owe minority shareholders fiduciary duties when acquiring stock on the
corporation’s behalf. However, other courts have found that such a duty does
exist.4 Because Hercules’ directors were acting in their official capacity when
redeeming Appellant’s stock, we find that Connecticut courts would impose a
fiduciary duty to disclose material facts in this situation.
Having determined that Connecticut courts would impose a fiduciary duty,
we now turn to the scope of that duty under Connecticut law. Because
Connecticut courts would only require disclosure of material facts, Appellant
must show that non-disclosed facts were material. The Supreme Court has
stated that in order to show materiality under federal securities law, “there must
be a substantial likelihood that the disclosure of the omitted fact would have
been viewed by the reasonable investor as having significantly altered the ‘total
mix’ of information available.” Basic Inc. v. Levinson, 485 U.S. 224, 231–32
(1988) (quotation omitted). Although Basic does not control, it is persuasive.
State courts have applied Basic outside of its original context, and we believe
that Connecticut would likely adopt the Basic test if confronted with the issue.
See, e.g., Alessi v. Beracha, 849 A.2d 939, 946 (Del. Ch. 2004) (applying the
4
See, e.g., Hardy v. S. Bend Sash & Door Co., 603 N.E.2d 895, 900 (Ind. Ct. App. 1992)
(“A corporate director acting for the corporation in a purchase of its own stock stands in a
fiduciary relationship with respect to the shareholder from whom the stock is purchased and
is under a duty to disclose to the shareholder the facts affecting the value of the stock.”); Wood
v. MacLean Drug Co., 266 Ill. App. 5, 15 (Ill. App. Ct. 1932) (finding that when directors buy
on behalf of the corporation they act as trustees for the minority shareholder and are “bound
to advise [the shareholder] of all the facts”).
8
Case: 09-30275 Document: 00511037461 Page: 9 Date Filed: 02/26/2010
No. 09-30275
materiality test discussed in Basic); Wisehart v. Zions Bancorporation, 49 P.3d
1200, 1205 (Colo. Ct. App. 2002) (same). Upon remand, Appellant must prove
that before redemption of the stock, the acquisition discussions had progressed
far enough along that there existed a “substantial likelihood” that a reasonable
investor would have viewed the discussions as significantly altering the total
mix of facts. See Basic, 485 U.S. at 231–32.
C. Mandate Claim
Contrary to the district court’s analysis, we find that Appellant’s claim
against Seawell is not prescribed by Louisiana law. A claim for breach of a
contract of mandate is subject to a prescriptive period of ten years. L A. C IV.
C ODE A NN. art. 3499. Appellant filed suit well within this period. There is no
reason to apply another prescriptive period merely because Seawell was also
CFO of Hercules when the claim is based on his duties as mandatary.
1. Scope of the Mandate
The Louisiana Civil Code governs mandates (a common law agent) at
articles 1985 through 3034. “These articles cover the nature and form of
mandates, the obligations of a person acting under a power of attorney, and
cases where a person is a mandatory [sic] or agent of both parties.” Texoma
Broadcasters, Inc. v. Hosp. Corp. of Am., 542 So. 2d 780, 783 (La. Ct. App. 1989).
“A mandate is a contract by which a person, the principal, confers authority on
another person, the mandatary, to transact one or more affairs for the principal.”
L A. C IV. C ODE A NN. art. 2989. “The contract of mandate is not required to be in
any particular form.” L A. C IV. C ODE A NN. art. 2993.
“The mandatary is bound to fulfill with prudence and diligence the
mandate he has accepted. He is responsible to the principal for the loss that the
principal sustains as a result of the mandatary’s failure to perform.” L A. C IV.
C ODE A NN. art. 3001. “Therefore, it follows that a mandatary owes fiduciary
duties to the principal.” Sampson v. DCI of Alexandria, 970 So. 2d 55, 59 (La.
9
Case: 09-30275 Document: 00511037461 Page: 10 Date Filed: 02/26/2010
No. 09-30275
Ct. App. 2007); see also Gerdes v. Estate of Cush, 953 F.2d 201, 205 (5th Cir.
1992) (“[A] mandatory is a fiduciary . . . .”). “Generally, whether a fiduciary duty
exists, and the extent of that duty, depends upon the facts and circumstances of
the case and the relationship of the parties.” Sampson, 970 So. 2d at 59.
A mandatary must “disclose to his principal all facts relating to his
principal’s affair.” Woodward v. Steed, 680 So. 2d 1320, 1325 (La. Ct. App. 1996)
(citing Robinson v. Thomson, 31 So. 2d 734, 740–41 (La. 1947)). “It is the duty
of an agent to make known to his principal all the true facts that he has
knowledge of concerning the transaction and the subject matter of the agency.”
Robinson, 31 So. 2d at 740.
The district court found that the Stock Power of Attorney created a
mandate. The district court, however, also found that the Stock Power of
Attorney only created a “limited mandate” because Appellant had already agreed
to the material terms of the redemption before entering into the contract of
mandate. Appellant claims that the Stock Power of Attorney alone does not
represent the scope of the mandate to which Seawell agreed and that the
agreement contemplated a more substantial relationship. Appellant has not yet
had the opportunity to fully litigate the scope of the mandate.
We must reverse because Louisiana law does not recognize the concept of
a “limited mandate.” The district court did not provide any support under
Louisiana law for its finding of a “limited mandate,” and no Louisiana court has
ever suggested that a mandatary’s duties depend on the principal’s agreement
to the underlying terms of the transaction. The extent of Seawell’s fiduciary
duties depends on the “subject matter of the agency.” See id. Therefore, on
remand, the district court should allow Appellant to present evidence of the
scope of the agreement with Seawell.
2. Materiality of Non-Disclosure
10
Case: 09-30275 Document: 00511037461 Page: 11 Date Filed: 02/26/2010
No. 09-30275
If Appellant shows that Seawell had a duty to disclose material facts to the
transaction, Appellant must also show that the facts Seawell failed to disclose
were material. The district court must make this determination pursuant to
Louisiana law.
Louisiana courts have explicitly adopted the Basic test, holding that
“[m]ateriality depends on the significance the reasonable investor would place
on the withheld or misrepresented information.” Feiber v. Cassidy, 723 So. 2d
1101, 1105 (La. Ct. App. 1998). “Information is material only if its disclosure
would alter the ‘total mix’ of facts available to the investor and if there is a
substantial likelihood that a reasonable shareholder would consider it important
to the investment decision.” Id. (citing Milton v. Van Dorn Co., 961 F.2d 965,
969 (1st Cir. 1992)).
III. CONCLUSION
Because we find that Louisiana law does not prescribe Appellant’s claims,
and that the district court erred in its interpretation of Louisiana law, we
VACATE the district court’s grant of summary judgment on Appellant’s
mandatary claim and on Appellant’s rescission claim, and REMAND for further
proceedings consistent with this opinion.
VACATED and REMANDED.
11