Dubelko v. Abdalla

Filed 10/24/06 Dubelko v. Abdalla CA2/5

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FIVE

APPEAL from a judgment of the Superior Court of Los Angeles County.

George H. Wu, Judge. Affirmed.

Fox & Spillane LLP and John Shaeffer for Plaintiffs/Cross-Defendants and Appellants.

Arkin Kaplan LLP, Stanley S. Arkin, Howard J. Kaplan, and Sean R. O'Brien; and Sullivan & Cromwell LLP, Robert A. Sacks, Steven W. Thomas, and Adam S. Paris for Sullivan & Cromwell and Alison S. Ressler; Law Offices of Henry N. Jannol, Henry N Jannol and Tracey Hom for David Bergstein; and Quinn Emanuel Urguhart Oliver & Hedges, LLP, Richard A. Schirtzer and Patrick M. Shields for Kenneth Abdalla and Waterton Management, LLC, Defendants, Cross-Complainants and Respondents.

_______________

In December 1999, a corporation called Maximum Holdings ("Maximum") merged with and into another corporation, DVD Express ("DVD"). In March 2001, the surviving entity, called Express.com, filed for bankruptcy. This litigation, by DVD stockholders against Maximum officers and investors and its merger lawyers, soon followed. The complaint brought causes of action for fraud and negligent misrepresentation, and alleged that the defendants made numerous fraudulent misrepresentations and withheld relevant information in order to induce DVD to merge with Maximum and to induce DVD's majority shareholder, plaintiff Michael Dubelko, to vote for the merger.

The trial court granted defendants' motions for summary judgment, finding that a November 2000 release barred Dubelko's causes of action against defendants Kenneth Abdalla, David Bergstein, and Waterton Management LLC, and that there were no triable issues of material fact on his causes of action against the remaining defendants, Sullivan & Cromwell and Sullivan & Cromwell partner Allison Ressler. The court also found that the other plaintiffs, the 1999 Dubelko Children's Trust ("Trust") and Geocapital IV, LP and Geocapital V, LP Delaware ("Geocapital") had no standing to sue any of the defendants[1] because their claims were derivative. (The court did not decide the issue of Dubelko's standing.) The court entered judgment in favor of all defendants. We affirm, and thus need not reach Dubelko's and Geocapital's challenge to the trial court finding of jury waiver.

Sullivan & Cromwell cross-complained against the former directors of DVD for equitable indemnity. The cross-complaint was dismissed after demurrer. Sullivan & Cromwell has appealed from that ruling, asking us to proceed with the appeal only if we reverse the judgment in its favor on the complaint. Sullivan & Cromwell's appeal is thus dismissed as moot.

Factual and Procedural Summary

The facts are many and complex, and are best recounted with our discussions of the issues to which they are relevant. This is the background:

Dubelko was the founder, president, CEO, chairman of the board, and controlling shareholder of DVD, which sold DVDs on line. The other plaintiffs were DVD stockholders. The Trust owned less than 1.7 percent of the pre-merger outstanding shares of DVD Express, and Geocapital owned 14.5 percent of those shares.

DVD was incorporated in 1995. Its revenue increased every year thereafter, to $24.9 million in the first six months of 1999, but so did its losses; from $192,000 in 1997 to $12.4 million in first six months of 1999.

Maximum operated video game websites. Like DVD, Maximum was founded in 1996 and had losses every year. David Bergstein was a shareholder in Maximum and was its CEO at the time of the merger.

In 1999, DVD's proposed initial public offering was withdrawn due to unfavorable market conditions, and Dubelko was looking elsewhere for additional financing. He was referred to Abdalla, who was chairman of Maximum's board and who managed the business of Waterton Management LLC, which held about 16 percent of Maximum's stock. According to the complaint, Abdalla owned 50 percent of Maximum.

In October of 1999, it was agreed that Maximum would merge into DVD.

The law firm of Troop, Steuber, Pasich, Reddick and Tobey represented DVD in the merger. Sullivan & Cromwell and Ressler represented Maximum.

The Joint Proxy Statement/Offering Memorandum, dated October 27, 1999, was prepared by DVD, Maximum, and their lawyers. The plan was that DVD would issue new stock to pay for the merger, and that all outstanding shares of Maximum would be converted to DVD stock. Outstanding DVD stock remained as issued and outstanding. Maximum shareholders were to hold 51.1 percent of the outstanding shares of stock in the surviving corporation.

One of the conditions to the merger was that Maximum raise $25 million in equity capital for the surviving company. Maximum was already negotiating with a British company, Eidos plc, which eventually agreed to invest $55 million in Maximum. During negotiations, Eidos sought a use of funds restriction which would have restricted Maximum's right to engage in a stock repurchase, but Maximum would not agree. Maximum and Eidos nevertheless executed an agreement on November 12, 1999. Maximum then used $30 million of the investment to repurchase Maximum stock from certain stockholders.

On December 14, 1999, the parties issued a Supplement to the Joint Proxy Statement. This Supplement has but two sections, Recent Developments and Amendments to the Merger Agreement. The recent developments were Eidos's $55 million investment in Maximum, which left Maximum with $30 million over and above the $25 million promised in the merger, and Maximum's use of the $30 million to repurchase stock, including a repurchase from an entity affiliated with Abdalla. The amendments included changes in the terms of certain stock, and a change in the equity split: DVD shareholders would hold 44.2 percent of the shares of the merged entity, and Maximum shareholders would hold 55.8 percent.

The merger closed on December 17, 1999. Dubelko was chief executive officer and director of the surviving company. Abdalla was chairman of the board, and Bergstein was president and director.

Discussion[2]

1. Trust and Geocapital: standing

The parties and the trial court agreed that Delaware law applies (both DVD and Express.com were Delaware corporations), and that Tooley v. Donaldson, Lufkin & Jenrette, Inc. (Del.2004) 845 A.2d 1031 sets out the relevant Delaware law.

In that case, the Delaware Supreme Court wrote "We set forth in this Opinion the law to be applied henceforth in determining whether a stockholder's claim is derivative or direct. That issue must turn solely on the following questions: (1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?" (Id. at p. 1033.) Thus, "a court should look to the nature of the wrong and to whom the relief should go. The stockholder's claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation."

Here, Trust and Geocapital's claim is that defendants fraudulently induced them to vote in favor of the merger by representing that Maximum was worth more than it truly was.[3] The complaint alleges that defendants failed to disclose pending litigation, misrepresented Maximum's web traffic, and otherwise inflated Maximum's value and the value of the merger.

As to injury, they contend that they seek recovery for the difference in what they gave up, the value of their minority interest in pre-merger DVD, and what they received, the value of their minority interest in the merged entity. They argue that by voting in favor of the merger, they permitted DVD to issue additional stock, expecting that they would be compensated with their interest in the assets Maximum's shareholders gave up in exchange for the DVD stock. They then argue that their injury is distinct from an injury to DVD, contending that "DVD could not make out a damage claim against respondents for fraud because DVD cannot show that it gave up anything of value in DVD other than diluting Appellants' ownership interest in DVD."

The trial court found that the claims were derivative in that Trust and Geocapital could not show damage to themselves without showing damage to the corporation. The court held "If DVD Express did not get what it bargained for in its merger with Maximum, then any resulting claim would be a derivative one since the primary injury would be to the corporation and the harm to the shareholders would simply be incidental thereto."

First, we agree with defendants that Trust and Geocapital's claim is derivative under Tooley because their injury is not distinct from an injury to the corporation. As the trial court found, the corporation, too, would have suffered injury from any misrepresentation or fraud concerning Maximum's value. Trust and Geocapital essentially argue that DVD paid no consideration for the merger with Maximum. That is not so, and could not be so. DVD's consideration was the stock it issued, and DVD suffered if Maximum was worth less than the amount represented by its officers and reflected in the merger agreement.

Parnes v. Bally Entertainment Corp. (Del.1999) 722 A.2d 1243,[4] cited by plaintiffs, is not to the contrary. In that case, the plaintiff was a stockholder in Bally Entertainment, which merged with and into Hilton Hotels. Plaintiff alleged that Bally's directors breached their fiduciary duties by entering into a merger agreement that was the product of unfair dealing and provided Bally's stockholders with an unfair price. (Id. at p. 1244.) In essence, she objected to various payments Bally's chairman demanded, and got, from Hilton. The Court found that the complaint challenged the fairness of the merger process and the price, and that plaintiff's causes of actions were not derivative. Trust and Geocapital here contend that they were in the same position as the plaintiff in Parnes, since they too challenge the fairness of a merger. We see a critical difference. The Parnes plaintiff was a stockholder in the acquired company, complaining that stockholders were not paid the right price for their stock. The acquired corporation would have no such claim. Plaintiffs here are stockholders in the acquiring company, complaining that the company paid too much for Maximum. That is the same claim DVD could have brought.

What is more, Trust and Geocapital's arguments ignore the fact that they are minority shareholders, whose votes in favor of the merger were not determinative. Contrary to their assertion, their votes did not cause DVD to issue stock.

Even if Trust and Geocapital could prove that they were defrauded into voting for the merger, they cannot prove that the merger resulted from that fraud. Their claim for damages caused by the merger must thus fail. The merger would have taken place even without their votes.

Gentile v. Rossette (Del. 2006) 906 A.2d 91, decided by the Delaware Supreme Court after this matter was submitted on appeal, does not change this. In that case, minority shareholders sued for a breach of a fiduciary duty owed to them by the controlling shareholder. The Delaware Supreme Court held that such a claim could be a direct claim, where "(1) a stockholder having majority or effective control causes the corporation to issue 'excessive' shares of its stock in exchange for assets of the controlling stockholder that have a lesser value; and (2) the exchange causes an increase in the percentage of the outstanding shares owned by the controlling stockholder, and a corresponding decrease in the share percentage owned by the public (minority) shareholders." (Id. at p. 100.) That is not this case.

2. Dubelko vs. Abdalla, Waterton, and Bergstein: the release

In November 2000, in conjunction with a new investment, Dubelko released Abdalla, Bergstein, and Waterton from "all claims or disputes . . . relating to any matter or occurrence prior to this Agreement . . . ." This language covers Dubelko's claims against Abdalla, Waterton, and Bergstein in this action. Dubelko does not contend otherwise. He does contend that the release is ineffective, citing a clause which provides that "This Agreement . . . [is] expressly and solely conditioned on the execution of the Stock Purchase Agreement by all parties hereto and completion of the closing described therein on or prior to November 6, 2000. In the event that these have not occurred on or prior to November 6, 2000, this Agreement shall be null and void, and of no force and effect."

The Stock Purchase Agreement did not close until November 9, but the trial court found that Dubelko was estopped from raising that defense and that the release was binding. We agree.

We begin with the facts:

By the end of October 2000, Dubelko believed that Express.com had "very little time" unless it obtained additional funding, and so informed Abdalla and others. Abdalla offered to arrange $10 million in new funding in exchange for stock. Part of the funding would be from an entity called the EU Group, which Abdalla managed, and which had already lent Express.com $1.5 million in bridge loans. Part would be from Hillcrest, a newly formed LLC managed by an acquaintance of Abdalla's. Further, Bergstein agreed that a $675,000 loan to Express.com from an entity called General Media LLC, which he managed, would be converted to stock.

However, disputes and disagreements had already arisen between the parties. Abdalla and Bergstein made it clear to everyone, including Dubelko, that they would do nothing about any investment unless Dubelko and Express.com entered into a general release with them, Waterton, and the former directors of Maximum Holdings.

Thus, on October 27, when counsel for Express.com circulated draft financing documents to Dubelko and others, he wrote that both Abdalla and Bergstein had indicated that they would not sign the documents without a release. At its November 1 meeting, the Express.com Board was told that a release was a condition precedent for the financing. Dubelko himself raised the issue, in Abdalla's and Bergstein's presence. On November 3, Dubelko emailed Eidos: "Ken Abdalla is holding up the funding unless I give him a full release . . . ."

At the November 1 meeting, the Express.com Board agreed to a release. On that same day, in reliance on the Board's actions, Abdalla caused the EU Group to issue a new $1 million bridge loan to Express.com. The release, a Stock Purchase Agreement, and other necessary documents were then drafted. The Stock Purchase Agreement makes the release a condition of the closing. The release recites that it is entered into "as of the 3rd day of November," but it was not signed on that date. Abdalla and Bergstein signed on about November 6. Dubelko contends that he signed on November 5. This is hardly an established fact: the trial court noted that in his deposition and declaration, Dubelko was vague on the point, and also noted the evidence that Dubelko was still suggesting changes to the release on November 6. At any rate, Dubelko signed again on November 7, for himself. On November 9, at the behest of Express.com's counsel, he signed on behalf of Express.com.

When Abdalla was informed that Dubelko had executed the release, he caused the EU Group to convert its loans to stock and advised Hillcrest to wire $7.5 million to Express.com. He declared that he would not have done so without Dubelko's signature on the release. Bergstein declared that General Media would not have agreed to the stock conversion deal without the release.

Between November 6, when the first signatures were obtained on the release, and November 9, when the Stock Purchase Agreement was executed, Dubelko received at least 12 communications indicating that the parties were working on Stock Purchase Agreement, the release, and other documents. He never indicated that the release would be void or unenforceable.

The trial court found that Dubelko was estopped from denying the enforceability of the release both by his conduct and by his failure to notify the other parties to the release that he no longer considered it valid.

Estoppel "is a nonjury fact question to be determined by the trial court in accordance with applicable law."

(DRG/Beverly Hills, Ltd. v. Chopstix Dim Sum Cafe & Takeout III, Ltd. (1994) 30 Cal.App.4th 54, 61.) When the facts are undisputed, the existence of an estoppel is a question of law. (California Cigarette Concessions, Inc. v. City of Los Angeles (1960) 53 Cal.2d 865, 868.) Dubelko argues that there are relevant disputed facts which precluded the court from finding estoppel on summary judgment. "[T]he determination of whether a defendant's conduct is sufficient to invoke the doctrine of equitable estoppel is a factual question entrusted to the trial court's discretion." (Brookview Condominium Owners' Assn. v. Heltzer Enterprises-Brookview (1990) 218 Cal.App.3d 502, 510.) We see no abuse of discretion.

"Four elements must ordinarily be proved to establish an equitable estoppel: (1) The party to be estopped must know the facts; (2) he must intend that his conduct shall be acted upon, or must so act that the party asserting the estoppel had the right to believe that it was so intended; (3) the party asserting the estoppel must be ignorant of the true state of facts; and, (4) he must rely upon the conduct to his injury." (Gaunt v. Prudential Ins. Co. of America (1967) 255 Cal.App.2d 18, 23.)

Dubelko challenges the evidence on several of these elements. On the first and last elements, which concern reliance, he contends that there is no evidence that with his post-November 6 signatures, he intended to induce Abdalla and Bergstein to believe that he was waiving the "null and void" clause. While he agrees that there is evidence that they acted in reliance on his signatures, he contends that there is no evidence that they relied on his post-November 6 signatures. In his reply brief, Dubelko expands this argument by contending that there is no evidence that he intended to communicate his post-November 6 signatures to Abdalla, Bergstein, and Waterton, or that he did communicate those signatures to them.

The evidence is that Dubelko faxed his November 7 signature to his lawyer at Troop.[5] He suggests that he might have done so not to induce reliance, but because his lawyers asked him for the signature. These are not two separate reasons. Counsel asked Dubelko for his signature because it was needed to close the deal -- that is, because Abdalla and Bergstein would act in reliance.

And, contrary to Dubelko's argument, there was evidence that defendants knew that Dubelko signed the release on November 7 and 9. The release was a condition of the funding. Abdalla and Bergstein did not proceed with the funding until he signed. The conclusion that Bergstein and Abdalla relied on Dubelko's post-November 6 signatures, and that he intended to induce reliance, is inescapable.

As the trial court found, "By signing and transmitting signature pages to the release at least twice after the November 6th closing deadline had passed, and by signing the Stock Purchase Agreement which was expressly conditioned on execution and delivery of the release, Dubelko led Abdalla, Waterton, and Bergstein to believe that he had dispensed with the requirement that the financing close by November 6th. Indeed, Dubelko's agreement on November 9th to countersign his signature (even if in his corporate capacity) on the same signature page Abdalla had previously signed on behalf of Waterton was clearly an action designed to induce Abdalla and Waterton into believing that Dubelko was still issuing a release in exchange for . . . . " the investment.

This is not, as Dubelko suggests, a finding of estoppel through silence. Instead, it is an estoppel created by Dubelko's acts.

As part of his argument on reliance, Dubelko argues that Abdalla, Waterton, and Bergstein benefited from the Stock Purchase Agreement, even without the release, because that agreement delayed or prevented a lawsuit from Eidos. Perhaps, but we do not see that any such fact invalidates the reliance element of estoppel. We have a similar reaction to Dubelko's citation to the evidence that he did not personally receive any of the money invested in this transaction: personal and immediate profit is not an element of estoppel.

Dubelko also challenges the evidence on the third element of estoppel, that the party asserting the estoppel must be ignorant of the true state of facts. He argues that Abdalla, Waterton, and Bergstein knew the true fact, that the Stock Purchase Agreement did not close on November 6. They did know that. They did not know that when Dubelko signed the release -- after November 6 -- he did so as a meaningless act, and that rather than intending to release any party, as his signature indicated, he intended to deny the effect of the release in the future.

Finally, Dubelko argues that these defendants suffered no detriment through their reliance, contending that they did not invest in Express.com through the Stock Purchase Agreement and again arguing that the agreement provided a benefit to them with regard to threatened litigation from Eidos. Again, these facts are not meaningful. The trial court found that in reliance on the release, Abdalla and Bergstein caused the EU Group, Hillcrest, and General Media to invest substantial sums in Express.com. Perhaps they did not invest their own money, but anyone who can "cause" such substantial investments suffers detriment when the investment ends disastrously.

At bottom, the facts are simple and undisputed: financing was offered on condition of a release. Dubelko accepted the benefits of the financing and signed the release, and now must accept the limits imposed by the release.

3. Dubelko vs. Sullivan & Cromwell

By the time of summary judgment, the claims against Sullivan & Cromwell had been narrowed down to two; that Sullivan & Cromwell, which represented Maximum in the merger, committed fraud and negligent misrepresentation by not disclosing a lawsuit (the "Valentino lawsuit"), and that Sullivan & Cromwell committed fraud in its disclosures concerning Maximum's $30 million repurchase of its stock.

Facts

The Joint Proxy Statement and the Supplement

Generally, these allegations involve statements made (or not made) in the Joint Proxy Statement and the Supplement to the Joint Proxy Statement. The Joint Proxy Statement was prepared by both DVD and Maximum and is a statement by DVD and Maximum. Sullivan & Cromwell's only role in the merger transaction was its representation of Maximum. It worked on the Joint Proxy Statement, and the Supplement, in that capacity. The law firm of Troop, Steuber, Pasich, Reddick and Tobey represented DVD in the merger and in the preparation of the Joint Proxy Statement.

The Joint Proxy Statement provides that "Neither the delivery of this Joint Proxy Statement/Offering Memorandum nor the consummation of the merger of Maximum with and into DVD means that information contained in this Joint Proxy Statement/Offering Memorandum is correct after the date of this joint proxy Statement/Offering Memorandum."

The Joint Proxy Statement was issued on October 27, 1999. A limited Supplement was issued in December. The Supplement to the Joint Proxy Statement is a five page document which states that it "is being delivered to amend and update information" in the Joint Proxy Statement/Offering Memorandum. It describes the Eidos investment in Maximum and lists the changes to the Merger Agreement made as a result. The trial court found that with the Supplement, the parties did not undertake to update the entire Joint Proxy Statement.

The Valentino Lawsuit

The Joint Proxy Statement included the statement that Maximum was "not involved in any pending, nor is it aware of any threatened, legal proceedings which it believe[d] could reasonably be expected to have a material adverse effect on its business, operating results or financial condition." (DVD made a similar representation.)

On November 8, 1999, after the Joint Proxy Statement was issued, shareholders of an entity called Metropolis Publications filed suit against Metropolis in federal court. (Valentino was the lead plaintiff.) Bergstein was president of Metropolis, which was a shareholder of Maximum. Maximum was a defendant in the litigation, on the allegation that Metropolis's assets had been improperly conveyed to Maximum.

The evidence on Sullivan & Cromwell's knowledge of the lawsuit is as follows: Bergstein declared that in the summer of 1999, he learned that Metropolis shareholders might sue him. He called "Maximum's counsel" and told them of the possibility. Patrick Brown of Sullivan & Cromwell testified at his deposition that Bergstein called in November or December of 1999 and said that Metropolis had been sued and that the allegations concerned his, Bergstein's, conduct as an officer of Maximum. Bergstein said that he was concerned that Metropolis's disgruntled creditors would try to get the Maximum shares held by Metropolis or its officers. Brown concluded that the lawsuit need not be disclosed in the Supplemental Proxy because it did not involve Maximum or its officers.

After the merger, Express.com was named as a defendant in the Valentino suit. The case was ultimately dismissed without a recovery from Express.com.

The Repurchase

Prior to the merger, Eidos plc invested $55 million in Maximum. Maximum used $30 million of the money to repurchase Maximum stock from certain stockholders. That fact was disclosed to shareholders in the Supplement to the Joint Proxy Statement.

Dubelko's fraud theory is that Sullivan & Cromwell failed to disclose that the repurchase exposed Express.com to claims from Eidos and other former Maximum shareholders. He offers citations to evidence that prior to the Eidos investment Maximum officers and/or Sullivan & Cromwell falsely told Eidos that Maximum had no plans for any significant repurchase , and to evidence that Eidos believed that Express.com needed the entire $55 million investment for operating expenses. He also cites evidence which he contends shows Sullivan & Cromwell's scienter, none of which concerns Sullivan & Cromwell's conduct with regard to himself, but which instead concerns Sullivan & Cromwell's conduct with regard to Eidos (that it failed to timely send documents to Eidos and made misrepresentations to Eidos), Sullivan & Cromwell's knowledge of the repurchase, or Sullivan & Cromwell's representation of Maximum with regard to the repurchase. Finally, Dubelko cites evidence which he contends establishes that the representations at issue were Sullivan & Cromwell's, including his own deposition testimony that Ressler told him that Eidos had approved the repurchase.

The trial court found that it was undisputed that under all the applicable agreements the repurchases were authorized; that Eidos was aware that Maximum was permitted to engage in the repurchase with the excess $30 million; that while Maximum was obligated to secure $25 million in additional equity capital for DVD Express, it was under no obligation to deliver any amounts in excess of the $25 million; and that Eidos did not have the right to either approve or disapprove Maximum's stock repurchase or to be notified of the amount of the buyback. Further, the court found that there was no evidence that there was any legal impropriety vis-Ã -vis Maximum's shareholders in regard to the repurchase of shares, and no evidence that any Maximum shareholder ever sued Maximum or Sullivan & Cromwell or otherwise filed any action challenging the repurchase.

Discussion

Standing

The fraud claims against Sullivan & Cromwell essentially assert that Sullivan & Cromwell deceived DVD and its shareholders about Maximum's actual or potential liabilities. As we will see, there are no triable issues of fact which would allow Dubelko to proceed on those theories. We also conclude that like Trust and Geocapital, Dubelko lacked standing to bring these claims.

Dubleko makes the same arguments about his standing vis-Ã -vis Sullivan & Cromwell as he does about his standing vis-Ã -vis the other defendants. He contends that his claim as one of fraud on him as a shareholder, and that his vote for the merger permitted DVD to issue additional shares of common stock, something which, in his view, did not constitute an injury to DVD's business or property. Like Trust and Geocapital, he argues that "DVD could not make out a damage claim . . . for fraud because DVD cannot show that it gave up anything of value in DVD, other than diluting [plaintiffs] interest in DVD."

Under Delaware law, "'the duty of the court is to look at the nature of the wrong alleged, not merely at the form of the words used in the complaint.'" (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 316, citing In re Syncor International Corporation Shareholders Litigation (Del.Ch.2004) 857 A.2d 994, 997.) When we do so, we find that Dubelko's claim could indeed have been brought by DVD, and that his claim is derivative.

Dubelko's case against Sullivan & Cromwell, which was not a party to the merger, is essentially that through its omissions, Sullivan & Cromwell made misrepresentations about Maximum's value. Such fraud could harm Dubelko as a DVD shareholder, but it also harmed DVD. Based on its understanding of Maximum's potential and actual liabilities, DVD issued stock on certain terms, with certain value, and proceeded with the merger with Maximum. DVD would of course have been harmed by the fraud, because the terms of the merger, and the merger itself, depended on accurate information about Maximum. As we noted earlier, DVD paid consideration to Maximum through the stock it issued, and DVD suffered if Maximum was worth less than the amount represented by its officers and reflected in the merger agreement.

The Valentino Lawsuit

Dubelko's theory is that Sullivan & Cromwell committed fraud and negligent misrepresentation by failing to disclose the Valentino lawsuit after it was filed, in particular in the Supplement to the Joint Proxy Statement.[6] He phrases his claim as one that Sullivan & Cromwell owed him a duty to correct prior truthful statements rendered false or misleading by subsequent events. He cites in support the rule that active concealment or suppression of facts, even by a nonfiduciary, is the equivalent of a false representation and is fraud (Vega v. Jones, Day, Reavis & Pogue (2004) 121 Cal.App.4th 282, 290); and the rule that if an attorney commits fraud in his dealings with a third party, the fact that he did so in the capacity of attorney for a client does not relieve him of liability, so that a lawyer communicating on behalf of a client with a nonclient may not knowingly make a false statement of material fact. (Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003) 107 Cal.App.4th 54, 69.) He also cites Koch v. Williams (1961) 193 Cal.App.2d 537, 541, which concerned a seller of property who initially and truthfully represented that there were no easements on the property, but who granted an easement during escrow, a fact which he never mentioned to the buyers. In particular, Dubelko cites the holding that "One who learns that his statements, even if thought to be true when made, have become false through a change in circumstances, has the duty before his statements are acted on to disclose the new conditions to the party relying on his original representations." (Id. at p. 541.)

The rules of law are correct, but we do not see their application here. Sullivan & Cromwell was Maximum's lawyer in the merger, but, as Dubelko agrees, that alone does not make the Joint Proxy Statement's representation concerning pending or threatened litigation Sullivan & Cromwell's representation, rather than Maximum's own. We see nothing in the Joint Proxy Statement itself which would make the representations therein Sullivan & Cromwell's own, and we are cited to no other evidence that the statement was Sullivan & Cromwell's. We thus see no convincing argument that Sullivan & Cromwell had a duty to update the representation, in the Supplement to the Joint Proxy Statement or elsewhere. Dubelko's theories rest on an assumption that Joint Proxy Statement was a statement by Sullivan & Cromwell -- but an assumption is not enough. (See Friedman v. Arizona World Nurseries Ltd. Partnership (S.D.N.Y.1990) 730 F.Supp. 521, 533 [counsel who merely draft the memorandum cannot be held liable for the general statements not specifically attributed to them.].)

Along these lines, Dubelko agrees with Sullivan & Cromwell that negligent misrepresentation requires a positive assertion and cannot be based on mere silence. (Wilson v. Century 21 Great Western Realty (1993) 15 Cal.App.4th 298, 306.) However, he seeks to avoid the rule by citing disclosure schedule issued in connection with the merger, and arguing that because Sullivan & Cromwell made disclosures about other liabilities that could impact Maximum's business, it had a duty to disclose the Valentino suit, too. Nothing in the cited evidence indicates that the disclosure schedule was a statement by Sullivan & Cromwell, or that the existence of the schedule means that Sullivan & Cromwell can be liable for fraud for failure to tell Dubelko about later-arising potential liabilities.

Vega v. Jones, Day, Reavis & Pogue, supra, 121 Cal.App.4th 282, which Dubelko cites, proves the point. That case, which came to the Court of Appeal on demurrer, concerned a merger. Jones Day represented the acquiring company, and the plaintiff was a shareholder in the acquired company. During the weeks between the acceptance of the merger offer and the closing, the acquiring company secured financing from a third party. The complaint alleged that the financing deal included "toxic stock" provisions, and that Jones Day knew that 95 percent of companies who engaged in such financing end up in bankruptcy. The complaint further alleged that Jones Day prepared an accurate disclosure statement about the financing. However, instead of distributing the statement, Jones Day told plaintiff, and the acquired company and its lawyers, that the financing transaction was standard and that there was nothing unusual about it, and sent out a sanitized version of the statement which did not include the "toxic stock" provisions. (Id. at p. 287.)

The court found that with the allegation concerning the sanitized (that is, false) disclosure, the complaint stated a cause of action for fraud: "Jones Day specifically undertook to disclose the transaction and, having done so, is not at liberty to conceal a material term." (Vega v. Jones, Day, Reavis & Pogue, supra, 121 Cal.App.4th at p. 291.) We see no parallel evidence, or indeed allegation, here.

Nor do Courtney v. Waring (1987) 191 Cal.App.3d 1434 or Murphy v. BDO Seidman (2003) 113 Cal.App.4th 687, also cited by Dubelko, change our analysis.

Courtney was a legal malpractice claim brought by franchisees against the franchisor's attorney, who was also an officer and director of the franchisor. The relevant discussion concerns the parameters of an attorney's duty to third parties in legal malpractice actions. (Courtney v. Waring, supra, 191 Cal.App.3d at pp. 1443-1444.) Murphy was a suit against accountants for fraud in preparation of financial statements -- that is, for their own statements.

The existence of the Supplement to the Joint Proxy Statement does not compel another result. As we have seen, the Supplement was on its terms limited to one subject, the Eidos investment, and does not purport to update the entire Proxy Statement. Further, the trial court found that the Supplement was not Sullivan & Cromwell's statement, but that of the parties to the merger, DVD and Maximum. Dubelko argues that there is at least a triable issue of fact on the issue, citing drafts of the Supplement circulated by Sullivan & Cromwell. That evidence is not enough to create a triable issue on whether the Supplement was Sullivan & Cromwell's statement -- and what if it was? A Sullivan & Cromwell representation about post-Eidos changes to the merger agreement would not create a duty to correct all aspects the Joint Proxy Statement.

The Repurchase

Dubelko's allegation is that although the Supplement to the Joint Proxy Statement disclosed the fact that Maximum used $30 of Eidos's $55 million investment for a repurchase, Sullivan & Cromwell failed to disclose that: "(1) the repurchase amounted to a breach of [Maximum's] Stock Agreement with Eidos, to whom it had been represented that there were no actual or contingent repurchase obligations; (2) Eidos had not known about or approved the repurchase; (3) that the 'independent' Maximum board voted in favor of the repurchase and its allocation to only insiders was tainted by a payoff to the voting board members; and (4) the repurchase went only to insiders."

This theory fails on a number of grounds, the most compelling being that

Sullivan & Cromwell could not have committed fraud by failing to disclose that the repurchase violated Maximum's agreement with Eidos, because the repurchase did not violate the agreement. The trial court made that finding, and Dubelko does not contend that the court erred in this respect. He could not. He has admitted that "Eidos knew that the Stock Agreement did not prevent Maximum from using some or all of Eidos' investment to repurchase Maximum shares."[7]

Nor do we see a triable issue of fact on fraud in the evidence that Sullivan & Cromwell did not disclose that misrepresentations were made to Eidos about Maximum's plans for a repurchase. It was undisputed that Eidos had no right to approve or disapprove the repurchase and that it invested in Maximum despite the fact that it was not able to secure a use of funds agreement from Maximum, and thus knew Maximum could use the $30 million for a repurchase. Maximum's plans for a repurchase were not significant to Eidos. We say the same about the contention that Sullivan & Cromwell failed to tell Dubelko that Eidos had not been told that the repurchase involved insiders or was decided by a biased Maximum board. Dubelko has cited no evidence that Eidos ever knew about, or was bothered by, the involvement of insiders or the independence (or lack thereof) of Maximum's board.

This is also the problem with Dubelko's argument that even though nothing in the Maximum-Eidos agreement prohibited the repurchase, Eidos had a right to rely on Maximum's fiduciary duty to its shareholders. That is a duty which Dubelko -- but not Eidos -- contends Maximum breached.

Dubelko's theory is that fraud on Eidos would have mattered to him because Eidos could make it matter to Express.com. In the absence of evidence that any of the alleged misrepresentations or failures to disclose actually did matter to Eidos, where is the harm to Dubelko? And that leads us to the fundamental problem, that there is no evidence that Dubelko suffered because Eidos was deceived or ill-used.

Disposition

The judgment is affirmed. Sullivan & Cromwell's cross-appeal is dismissed. Respondents to recover costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

ARMSTRONG, J.

I concur:

TURNER, P. J.

MOSK, J., Concurring

I concur.

I agree that plaintiffs Geocapital IV, LP; Geocapital V, LP and 1999 Dubelko Children’s Trust have no direct claims against any of the defendants. Their purported claims are derivative, even if the economic and voting powers of their minority interests in DVD Express, Inc. were significantly diluted by the merger. (In re J.P. Morgan Chase & Co. Shareholder Litigation (Del., 2006) 906 A.2d. 766, 773-74.) Although it might seem anomalous, the form of the merger--in which only DVD Express, Inc., and none of the plaintiffs, acquired shares of Maximum Holdings--appears decisive. (Loss & Seligman, Fundamentals of Securities Regulation (5th ed. 2004), p. 1043 [“In stockholders’ derivative actions it is the corporation, not the plaintiff, that must have bought or sold”].)

Plaintiff Michael Dubelko, however, might have a direct claim, an issue not decided by the trial court. He asserts that the misrepresentations caused him to relinquish control over DVD Express, Inc. Such loss of control might constitute a direct or individual injury under Delaware law. (See In re Tri-Star Pictures, Inc. Litigation (Del. 1993) 634 A.2d 319, 330, fn. 12; 12B Fletcher Cyclopedia of the Law of Private Corporations (2000 rev. vol., Perm. Ed.) § 5915, pp. 472-74.) Nevertheless, I believe that the summary judgment as to Dubelko’s claims is correct even if he had standing.

I agree that Dubelko released his claims against Kenneth Abadalla, David Bergstein and Waterton Management, LLC. Normally, “the existence of an estoppel is . . . a question of fact for the trier of fact. . . .” (Albers v. County of Los Angeles (1965) 62 Cal.2d 250, 266; see Estate of Housley (1997) 56 Cal.App.4th 342, 358-61.) “When, however, the facts are undisputed and only one inference may reasonably be drawn, the issue is one of law. . . .” (Platt Pacific, Inc. v. Andelson (1993) 6 Cal.4th 307, 319.) Here, the operative facts are not in dispute. One could argue, based solely on the plain language of Dubelko’s release, that the release was “null and void” due to the failure of a condition (that is, closing the November 2000 financing prior to November 6), but that the obligations of Adballa, Waterton and Bergstein under the Stock Purchase Agreement persisted. Based on the uncontradicted facts and the reasonable inferences therefrom, however, no reasonable finder of fact could come to such a conclusion. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 856.)

I also agree that defendant Sullivan & Cromwell is entitled to summary judgment on Dubelko’s claims for fraud and negligent misrepresentation. Attorneys may be liable for false or misleading documents they prepare that they know will be relied upon by third parties. (See Vega v. Jones, Day, Reavis & Pogue (2004) 121 Cal.App.4th 282, 291-296 [concealment]; SEC v. Fehn (9th Cir. 1996) 97 F.3d 1276, 1293-1295 [attorney who prepared 10-Q disclosure statements aided and abetted violation of disclosure requirements of Securities Exchange Act of 1934]). I am not sure that an attorney is immune from liability if he or she knows that the final proxy statement that he or she prepared is inaccurate and will be relied upon by a thirty party--at least, as in this case, if it is the attorney rather than the client who has the allegedly concealed information. But I do not need to examine that issue, for Dubelko’s claims against Sullivan & Cromwell lack legal merit for other reasons.

As stated in the majority’s opinion, the record establishes that Eidos had no right to prevent Maximum from using $30 million of Eidos’s $55 million investment to fund a stock repurchase. Therefore, any misrepresentation by Sullivan & Cromwell that Eidos knew or approved of Maximum’s intentions could not have been a material misrepresentation, or one upon which Dubelko could reasonably have relied.

Plaintiffs’ allegations concerning Sullivan & Cromwell’s failure to disclose the Valentino lawsuit fail for a different reason. The record at least raises a triable issue of fact regarding whether, if Sullivan & Cromwell fraudulently concealed the Valentino lawsuit prior to the merger, such concealment amounted to a material misrepresentation, even though the lawsuit later turned out to be of no significance. (See Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 977 [not material as a matter of law only if “‘so obviously unimportant that the jury could not reasonably find that a reasonable man would have been influenced by it’”] [quoting Rest.2d Torts, § 538, com. e, p. 82].)

If we assume that Dubelko actually and reasonably relied on the alleged omission in voting for the merger, then what happens after the merger when the company fails for reasons unrelated to the subject of the omission, and Dubelko suffers significant damages as result? Would Dubelko be entitled to recover all of those damages? Authorities suggest not. It was not the Valentino lawsuit that caused the demise of the company, and therefore any misrepresentation, according to some authorities, would not be the legal or proximate cause of any damage Dubelko suffered. (See Rest.2d Torts, § 548A, coms. a & b, pp. 106-107 [no liability when misrepresentation about financial condition of company inducing purchase of stock when loss caused by something other than financial condition: “Although the misrepresentation has in fact caused the loss, since it has induced the purchase without which the loss would not have occurred, it is not a legal cause of the loss for which the maker is responsible”]; cf. Service By Medallion, Inc. v. Clorox Co. (1996) 44 Cal.App.4th 1807, 1818-1819; Goehring v. Chapman University (2004) 121 Cal.App.4th 353, 364-366.) Moreover, the claim that DVD Express, Inc. paid more than Maximum was worth is a derivative claim. Dubelko’s direct claim (if he has one) is the damage he suffered from his loss of control of the pre-merger entity. This factor further complicates his claim that he was proximately damaged by Sullivan & Cromwell’s alleged misrepresentation regarding the Valentino lawsuit.

In any event, there is no evidence controverting Sullivan & Cromwell’s evidence that it did not know that the Valentino lawsuit named Maximum as a defendant. Bergstein, in his declaration, only testified that, when he learned that a lawsuit “might effect [sic] Maximum,” he contacted Sullivan & Cromwell and “informed them of the possibility of a lawsuit.” That enigmatic statement is not inconsistent with Sullivan & Cromwell’s evidence, and without more, is not sufficient to raise a triable issue of fact as to fraud or neglect on the part of Sullivan & Cromwell in connection with the Valentino lawsuit.

I would affirm the summary judgment.

MOSK, J.

Publication courtesy of San Diego pro bono legal advice.

Analysis and review provided by Poway Property line Lawyers.

[1] An entity called GameFan Investors, LLC, was also a defendant in the case, as were former Maximum directors Anthony Young and Craig Sheftell. Bergstein informs us that Young and Sheftell have been dismissed from the case. In any event, none of these defendants are parties to this appeal.

[2] Since a summary judgment motion raises only questions of law regarding the construction and effect of the supporting and opposing papers, we independently review them on appeal, applying the same three-step analysis required of the trial court. We identify the issues framed by the pleadings, determine whether the moving party has negated the opponent's claims, and determine whether the opposition has demonstrated the existence of a triable, material factual issue. (Kim v. Sumitomo Bank (1993) 17 Cal.App.4th 974, 978-979.)

[3] Before Tooley was decided, they also contended that defendants' misconduct adversely affected Express.com's value and diminished its post-merger fundraising abilities. After Tooley, they conceded that those claims were derivative.

[4] As defendants point out, Parnes pre-dates Tooley, but the fact is irrelevant, because Tooley approved Parnes.

[5] He faxed his November 9 signature to Maximum's lawyers, Sullivan & Cromwell.

[6] Dubelko also seeks to contend that Sullivan & Cromwell committed the torts because it failed to disclose the Valentino suit not just in the Supplement, but in the Joint Proxy Statement itself. Dubelko conceded that issue in the trial court, and we thus do not consider it here.

[7] Dubelko does take issue with the trial court's finding that the Maximum-Eidos agreement "authorized" the repurchase, citing Maximum's representation, in that agreement, that it had no outstanding obligation to repurchase shares, and contends that the representation was "breached" by the obligation Maximum undertook in the merger agreement with DVD -- citing a provision of the merger agreement which allowed the repurchase. This does not establish trial court error.