FILED 

 U.S. COURT OF APPEALS

 ELEVENTH CIRCUIT 

 10/15/98 

 THOMAS K. KAHN 

 CLERK

PUBLISH

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

 

No. 97-8246

 

D.C. Docket No. 1:95-CV-2994-WBH

WILLIAM J. HALL, BARBARA LISSER, Individually

and on behalf of all others similarly situated,

 Plaintiffs-Appellants,

versus

CORAM HEALTHCARE CORPORATION, JAMES M. SWEENEY,

PATRICK FORTUNE, SAM LENO,

Defendants-Appellees.

 

Appeal from the United States District Court for the

Northern District of Georgia

 

(October 15, 1998)

Before EDMONDSON and HULL, Circuit Judges, and CLARK, Senior Circuit Judge.

CLARK, Senior Circuit Judge:
1

 130 F.3d 990 (11th Cir. 1997).

2

 This price reflected an initial exercise price of $20.25 that was adjusted based on the

average closing price for Coram common stock for the ten business days preceding the date on

which the judgment became final.

3

 The trading day following the announcement, the closing price of Coram common

stock was $5.25 per share.

2

BACKGROUND

A complete account of the facts in this case is set out in In re T2

Medical, Inc. Shareholder Litigation ("In re T2").1 Briefly, the appellants here were

the plaintiff class members of a prior federal securities action that had resulted in a

settlement with the defendants from that action, Coram Healthcare Corporation

(“Coram”) and two officers from a company that had merged with Coram. As part

of the settlement agreement, appellants were issued over 2.5 million warrants to

purchase Coram common stock at approximately $22 per share.2

 Several months

after the settlement was final, Coram announced a second-quarter loss of over 66

million dollars, leading to a significant decrease in the value of the warrants.3

Appellants alleged that during the pendency of the settlement, the defendants

publicly made false and misleading statements and omitted material facts that led

to an inflated price of their stock, and that they misrepresented the true financial

condition and performance of the company.
4

 See In re T2, 130 F.3d at 993.

5

 Id. at 993-94.

6

 Id. at 995.

7

 15 U.S.C. § 78j(b).

8

 17 C.F.R. § 240.10b-5.

9

 15 U.S.C. § 78t(a).

10 O.C.G.A. § 10-5-12(a)(2).

11 O.C.G.A. § 51-6-4.

3

Appellants filed a Motion to Enforce Stipulation of Settlement,

alleging numerous claims under Georgia law and requesting damages, or, in the

alternative, reformation of the settlement agreement to adjust the price of the

warrants.4

 The district court denied the motion, holding that it no longer retained

authority or jurisdiction over the settlement.5

 The appellants appealed that

decision, but this court affirmed the district court’s denial of the motion for lack of

jurisdiction.6

After filing their notice of appeal, the appellants filed this suit against

Coram and several of its officers, asserting claims for violation of (1) section 10(b)

of the Securities Exchange Act of 1934 (the Exchange Act),7

 and Rule 10b-5;8 (2)

section 20(a) of the Exchange Act;9

 (3) state law claims of unlawful securities

practices;10 (4) state law claims of fraud by silence;11 and (5) breach of the implied
4

covenant of good faith and fair dealing. They sought compensatory damages and

an award of damages to reflect the difference in the value of the warrants from the

price in the settlement and the closing price of Coram stock on the trading day

following the announcement.

The district court dismissed the complaint under Fed.R.Civ.P.

12(b)(6), finding that the settlement was a contract subject to the ordinary rules of

contract construction, and that the settlement contained a merger or “entire

agreement” clause. The district court relied on Georgia law holding that when the

injured party sought damages rather than recission, a merger clause prevented

recovery by estopping the claimant from asserting reliance on any

misrepresentations or omissions made outside of the four corners of the contract. 

The district court found that because the plaintiffs specifically disavowed reliance

on statements not included in the settlement documents, and could show no

statements within the settlement documents by which they were defrauded, they

failed to state a claim for securities fraud. Because the appellants could not recover

any relief on their federal claims, and thus no federal jurisdiction existed, the

district court dismissed the state law claims. This appeal followed.
12 Harper v. Thomas, 988 F.2d 101, 103 (11th Cir. 1993).

13 Pataula Elec. Membership Corp. v. Whitworth, 951 F.2d 1238, 1240 (11th Cir. 1992),

cert. denied, 506 U.S. 907, 113 S.Ct. 302, 121 L.Ed.2d 225 (1992).

14 See Basic, Inc. v. Levinson, 485 U.S. 224, 243, 108 S.Ct. 978, 989, 99 L.Ed.2d 194

(1988)(emphasis added).

5

DISCUSSION

This Court reviews de novo the dismissal of a complaint for failure to

state a claim, accepting all allegations in the complaint as true and construing facts

in a light most favorable to the plaintiff.12 A complaint may not be dismissed

unless it appears beyond doubt that the plaintiff cannot prove any set of facts in

support of his claim which would entitle him to relief.13

Federal securities claims

To state a cause of action under Section 10b of the Exchange Act or

Rule 10b-5, plaintiffs must be able to demonstrate reliance on a material

misrepresentation or omission made either directly or through fraud on the

market.14 In their complaint, the appellants alleged that the statements were made

or omitted from “public statements, press releases and filings with the Securities

and Exchange Commission.”

Appellants argue that their claims are governed by federal securities

law, not by state contract law, and that a merger clause is insufficient to bar a claim
6

under the Exchange Act for securities fraud. During oral argument, counsel for

the appellants specifically alleged that the fraud occurred after the district court’s

order finalizing the settlement, disavowed any claim of fraud in the inducement,

and argued that because the fraud occurred after the settlement, it was not barred

by the merger clause. However, the allegations of fraud in the complaint

specifically and repeatedly state that the misstatements and omissions of fact

comprising the fraud occurred “[p]rior to the final determination of the exercise

price of the Warrants.”

The problem with the argument that the fraud occurred after the

settlement was final is that appellants have failed to show the reliance necessary to

state a cause of action for a federal securities fraud claim. Fraud occurring after

the settlement would be irrelevant to any stock purchased by the appellants through

the exercise of the warrants, because the warrants’ price was fixed by the

settlement. The price was arrived at through negotiation, and was not set by the

market. Thus, in order to establish reliance, any claim for fraud that the appellants

have necessarily would have had to occur by the time the settlement was made

final.

Paragraph 10.7 of the settlement provides that the “Side Letter

Agreement, Stipulation and the Exhibits attached hereto constitute the entire
15 Settlement Agreement ¶ 10.7 (emphasis added).

16 Matsushita Elec. Indus. Co. Ltd. v. Epstein, 516 U.S. 367, 369-70, 116 S.Ct. 873, 876,

134 L.Ed.2d 6 (1996).

17 Id. at 370, 116 S.Ct. at 876.

7

agreement among the parties hereto and no representations, warranties or

inducements have been made to any party concerning the Stipulation, the Exhibits

or the Side Letter Agreement other than the representations, warranties and

covenants contained and memorialized in such documents.”15 The settlement

agreement also contained a paragraph preventing any modification of the

settlement based on judicial decisions, changes in the financial conditions of any of

the parties, any newly discovered facts, events or allegations, or any other conduct

which related to the settlement or the released claim. Because the appellants allege

that the statements that constituted fraud occurred outside of the settlement

agreement, a cause of action could be maintained only if the merger clause in the

agreement did not prohibit admission of those statements.

In a recent Supreme Court case, two suits were initiated on behalf of

the stockholders of a Delaware corporation, MCA, Inc., after another corporation

tendered an offer for the common stock of MCA.16 The first suit was a class

action, filed in Delaware against MCA and its directors, alleging violations of

Delaware law.17 While that action was pending, the second suit was brought in
18 Id.

19 Id.

20 Id.

21 Id.

22 Id. at 375-76, 96 S.Ct. at 878-879.

8

California, alleging violations of Securities and Exchange Commission Rules 10b3 and 14d-10.18 The California district court entered summary judgment for the

defendants, and the plaintiffs appealed.19 Before the appeal was heard, the first

suit was settled.20 The settlement included a release of all claims arising out of the

acquisition.21

On appeal, the defendants/appellees invoked the Delaware judgment

as a bar to further prosecution of the action, relying on the Full Faith and Credit

Act, 28 U.S.C. § 1738. The Supreme Court agreed, holding that the Delaware

settlement judgment was entitled to full faith and credit, notwithstanding the fact

that it released claims within the exclusive jurisdiction of the federal courts.

The Court used a two-step analysis in reaching its decision. The

Court first looked to state law to ascertain the rules regarding the preclusive force

of class-action settlement judgments in subsequent suits.22 The Court found that

Delaware law held that the judgment barred subsequent pursuit of the claims, even

though the federal securities claims could not have been pursued in the state
23 Id. at 377, 96 S.Ct. at 880.

24 Id. at 381, 96 S.Ct. at 881.

25 See Southern Med. Corp. v. Liberty Mut. Ins Co., 216 Ga.App. 289, 291, 454 S.E.2d

180 (1995)(“an agreement alleged to be in settlement and compromise of a pending lawsuit must

meet the same requisites of formation and enforceability as any other contract."

26 See e.g., Velten v. Regis B. Lippert, Intercat, Inc., 985 F.2d 1515, 1522 (11th Cir.

1993); Rampey v. Jay Pontiac GMC Truck, Inc., 211 Ga.App. 632, 440 S.E.2d 52 (Ga. Ct. App.

1993); City Dodge, Inc. v. Gardner, 232 Ga. 766, 208 S.E.2d 794 (Ga. 1974).

9

chancery court where the first suit was filed.23 The Court then looked to the

Exchange Act, and noted that although the Act conferred exclusive jurisdiction on

federal courts for suits arising under it, it neither allowed “plaintiffs with Exchange

Act claims to have more than one day in court to challenge the legality of a

securities transaction” . . . nor prevented litigants “from voluntarily releasing

Exchange Act claims in judicially approved settlements.”24

Here, Georgia law regards a settlement as a contract.25 Merger clauses

are enforceable and may prevent parties from recovering for fraud, depending on

the relief sought. Georgia law is clear that plaintiffs have two options available

against a defendant for alleged misrepresentations in a contract action: a plaintiff

can affirm the contract and sue for damages, in which case the merger clause

applies, or the plaintiff can rescind the contract and sue in tort for alleged fraud,

and the merger clause does not prevent introduction of parole evidence.26 Because

the appellants affirmed the contract and sued for damages, the merger clause
27 236 Ga. 862, 226 S.E.2d 49 (Ga. 1976).

28 226 S.E.2d at 51.

29 Id. at 50.

30 Id.

10

applies, and they are barred from introducing evidence outside the settlement

documents. As the district court noted, the appellants did not allege that there was

any fraud within the settlement documents, and thus, they have failed to state a

claim.

The appellants rely on Meason v. Gilbert.

27 In Meason, the court

found unenforceable an integration clause in a stock purchase agreement that no

representations other than those contained in the prospectus induced the purchaser

to buy certain securities.28 The purchaser alleged that he had been induced to

purchase the securities because of fraudulent oral misrepresentations, and sought

rescission of the contract.29 The court held that to allow a purchaser to waive all

violations of the Georgia Securities Act by contract would eviscerate the

protections of that statute, and that such a waiver would be void and without

effect.30 However, unlike the appellants, the purchaser in Meason sought

rescission of the contract. 
31 91 F.3d 337 (2d Cir. 1996).

32 Id. at 339.

33 Id. at 342-43.

34 Id.

11

A case from the Second Circuit is analogous. In Harsco Corp. v.

Segui,

31 the purchaser of a company brought claims of securities fraud under Rule

10b-5 and state law claims against the company’s seller.32 The transaction had

been governed by a written agreement that contained a merger clause explicitly

precluding any claim of fraud based on representations not in the agreement.33 The 

district court held that the merger clause precluded the plaintiff from establishing

reasonable reliance, and the Second Circuit agreed.34 The appellants attempt to

distinguish Harsco by arguing that the agreement in that case was more detailed,

but as the merger clause in the instant case is specific, this argument is not

persuasive.

Here, the settlement agreement contained a merger clause specifically

stating that the settlement and the attached exhibits constituted the entire

agreement, and that no representations, warranties, or inducement were made to

any party other than what was contained in the documents. The appellants did not

attempt to rescind the settlement, but elected to sue for damages on the contract,
35 United States v. Martinez, 83 F.3d 371, 377 n.6 (11th Cir. 1996), cert. denied, --- U.S.

—, 117 S.Ct. 998, 136 L.Ed.2d 877 (1997).

36 See Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365, 372 n.11, 98 S.Ct.

2396, 2402 n.11, 57 L.Ed.2d 274 (1978) (state claim could be heard in federal court only if an

anchoring federal claim extended the district court’s jurisdiction over the state claim). 

12

rather than in tort. The merger clause governs, and the district court correctly

found that the complaint failed to state a claim. 

State law claims

The appellants also argue that the district court erred in dismissing

their state law claims because they pleaded the necessary elements under state law. 

They raise this argument for the first time in their reply brief, in response to the

appellee’s contention that the district court properly dismissed the pendant state

law claims. Arguments raised for the first time in a reply brief are not properly

before this court.35 Moreover, the district court did not abuse its discretion in

deciding that because the appellants’ federal claim failed, the state law claims

should be dismissed at that early stage of the lawsuit.36

The district court’s order is AFFIRMED.