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### No. 03-3475

U.S. S MALL BUSI

NESS ADMI

NISTRAT ION, as RECEIV ER FOR BISHOP CAPITA L, L.P., Appellant

v. DENNIS M . KATAWCZIK; KEVIN T. WEIR; CAROL M. WEIR; STYLI

NG TECHNOL OGY CORPOR ATION

APPEAL FROM THE UNI TED STATES DIST RICT COURT FO R T HE WE STE RN DIST RIC T O F PE NN SY LV AN IA

D.C. CivilNo. 00-cv-01132 Distri ct Judge: The Honorable GaryL. Lancaste r

Argued: Jul y 13, 2004

Bef or e: SLOVI TER, BARRY, and FIS HE R, Circuit Judges (Opinion Fi led: August 12, 2004)

Anthony J. Basinski , Esq. (Argued) Pietr agall o, Bosick & Gordon 301 Grant Str eet One Oxford Centre, 38 th Floor Pitt sburgh, PA 15219 Attorney for Appellant2

Kevin P. Alle n, Esq. (Argued) Willi am M. W ycoff, Esq. Thorp, Reed & Armstrong 301 Grant Str eet One Oxford Centre, 14 th Floor Pitt sburgh, PA 15219 Atto rneys fo r Ap pellee s Styling T ech C orp. an d D ennis M . Kata wc zik

Ellen L. Surloff, Esq. David L. McClenahan, Esq. Kirkpa trick & L ockha rt 535 Smithfie ld Str eet Henry W. Olive r Building Pitt sburgh, PA 15222 Atto rneys fo r Ap pellee s Ke vin T . We ir and C arol M . We ir

OPI NION

BA RR Y, Circuit

Judge We are asked to dec ide whether officer s and dir ectors have a duty to dis close t o a warrant hol der a third part y’ s offer t o purchase out standi ng shares of the underlyi ng stock, even when there i s no provis ion in t he warrant itsel f imposing s uch a duty . The Distri ct Court he ld that

there was no s uch duty , and granted summary j udgment in t he def end ant s’ fav or . We agr ee, andwil l a ffirm. I. BACKGROUND Becau se the factua l history of this case is long and comp licated, and the pa rties are1 Bish op C apital II, L .P. (“B ishop II”) co ntribute d $2 00,00 0 of the $6 00,00 0 loan ed to Ft. Pitt, an d, in retu rn, rece ived a 1/3 inte rest in the Wa rrant. B ishop II later ass igned its 1/3 i nter est

in t he Warrant t o Cardi nal Ass ociates , L. P. 3 fam iliar w ith th ese fac ts, w e pr ovi de o nly a su mm ary he re. Ft. Pitt A cquis ition, Inc . (“Ft. Pitt”) , a close ly held co rpora tion, ow ned th e N orth American manufacturing and dis tribution rights for a line of hair care produc ts branded “Framesi.” Defendants Den nis M. Kataw czik and Kevin T. W eir were officers, directors, and minority sharehol ders of Ft. Pitt , and together eventuall y owned a controlling interest of the com pany. B ishop Cap ital, L.P. (“ Bish op C apital”) lo aned Ft. Pitt $6 00,00 0 in 1990, and rec eived i n retur n, on Jul y 16, 1990, the Common Stock Purchase Warrant (“Warrant ”) at i ssue in t his cas e. The Warrant

gave it s holder

the ri ght to pur chase 5% of Ft. Pi tt’ s stock f

or $44,000, 1 and gave Ft. Pitt a right of firs t refus al – a ri ght to mat ch any bona fide offer

for the Warr ant that Bishop Capital rec eived fr om a third party . The Warrant expi red on December 21, 1998, six y ears aft er the l oan was paid. On June 5, 1995, t

he U.S. Dist

rict Court for t

he Distr ict of

New Jersey, as the Receivers hip Court, appointe d the U.S. Smal l Busines s Association (“SBA”) as Recei ver for Bishop Capital becaus e of Bishop’s violations of SBIC rul es. The SBA hired Daniel Da vid to a ct as its ag ent, an d to m arsha l and liq uidate Bish op C apital’s a ssets. In e arly 1996, David was conta cted by Donald Chadwick, who was forming a part nership call ed Car di na l As so ci at es , L .P . ( “Card in al ”) inor de r t o a cqui re Bi sh op C ap it al ’s as se ts . O n December 20, 1996, Car dinal of fered t o buy t

he Warrant fr om the SBA as part of an as set4

package. Afte r receiving a repor t valuing the Warrant

at between $72,800 and $93,600, the SBA decided to ac cept Cardi nal’s offer, and did so by letter date d April 15, 1997, subject to approvalby t

he Receivers hip Court and Ft . Pit t’s right of f

irst refusal . On May 12, 1997 , David n otified Ft. Pitt by letter of Cardinal’s offer, and offered to sell the entire packag e of assets to F t. Pitt. On or abou t May 16, F t. Pitt’s lawyer rejected the offer, claim ing tha t the SB A w as ob ligated , by the term s of th e W arrant, to mak e a sep arate offer fo r the sale of th e W arra nt alo ne. On Ju ne 11, 19 97, Card inal offered to buy a smaller pac kage o f Bisho p Cap ital’s asset s, ei ther individual ly or as a gr oup, inc luding i ts 2/ 3 interest i n the Warrant for $124,000. On October

28, 1997, t

he SBA accepted Cardinal ’s offer by l ette r, and requir ed a $5,000 deposit. Nota bly , the acceptanc e, si gned by bot h the SBA and Cardinal , gave t

he SBA the option of voi ding the a greement i f it r eceived a be tter offer for the Wa rrant at a ny time p rior to clo sing. T he S BA , how ever, n ever o ffere d Ft. P itt its right of firs t refus al. When, on January 28, 1998, Ft . Pit

t wrote t o the SBA inquiring abou t any offers rec eived by the S BA for the Wa rrant, the SB A d id no t notify Ft. P itt about it s agreement

with Cardina l, and inst ead offered t o sellthe Warrant to Ft. Pitt

for $20 5,50 0. F t. Pitt re jecte d th e offer. Rather than afford Ft. Pitt its right of firs t refus al, Cardinaland the SBA decided that t he S BA wo uld exe rcise the W arra nt, an d th en s ell th e un der lying s tock to C ard inal. This idea manifest ed in March 1998, and was confirmed by l ette r on July 6, 1998, when2 The parti es dispute whether an agr eement was reache d. Tay lor t esti fied that the

Chicago meeti ng ended with a hands hake agreement , and Katawczik s aying, “Co ngra tulation s, boys. Y ou ju st bou ght you rself a [ hair] co lor com pany.” B ut the Ju ly 29, 1998 le tter

of inte nt was never s igned by anyone at Ft. Pitt , and, thus, became void by its own terms on August 14, 1998 when it remai ned unsigned. It al so contains clear language i ndicat ing that a complete a greement had not been reached. Further

more, Graham Webb’s proposed $2 mill ion deposi t would “at all times be and re main the prop erty of [G raham We bb],” a nd w ould be us ed as a sou rce of fun ds fo r payme nt on ly “[i]f t he parti es are s uccessfulin negoti ating t he terms of an acceptabl e Transact ion.” Oth erw ise, G raham We bb co uld “a band on th e Tra nsac tion an d w ithdraw the [d epos it] (co ntin ued ...) 5 Ca rdin al ga ve th e SB A a n ad ditio nal $ 26,0 00 d epo sit. Mean while, the SBA, Cardinal, and Kataw czik and Weir were each a lso negotiating wit

h Sty ling Technol ogy Corpor ation ( “Sty ling”) . On January 16, 1998, Sty ling di scussed wit

h the SBA the possibili ty of enter ing int o a two year opti on agreement t o purchase t he Ft. Pi tt s tock that the SBA would acquir e by exe rcis ing the Wa rrant. The SB A rejected this in favor of the guaran teed sale to C ardinal. On F ebruary 18, 1998, Car dinal e ntered into an agre ement that gave Sty ling t

he option to buy Cardinal ’s Ft. Pitt

shares at $40 per s hare, and late r agreed to the same ar rangement for any a ddi tion al sh ares that C ard inal o btain ed f rom the S BA

. Yet another

buyer was inter ested in Ft. Pi tt s tock – Graham Webb International Limited P artnership (“G raham W ebb”). K atawcz ik and W eir met w ith Graham We bb’s presi dent, Robert Tay lor, in Chicago on July 13, 1998, and agre ed that Graham Webb

wo uld se nd F t. Pitt a letter o f inten t, later date d July 29 , 1998 , indicatin g its inten tion to buy al l of Ft. Pitt ’s st ock for $45 mil lion, or $166 per share. 2 Between this meeting and2 (.. .cont inued)

withou t liability

to the Seller K atawcz ik, Weir or an y other person.” It certainly appears that n o bi ndi ng a gre em ent w as e ver reac hed wit h G rah am W ebb

. 3 The SB A alleges that Katawczik and W eir agreed to selltheir st ock to Styling because Styling so meh ow extorte d them , by way of a draf t com plaint, w ith its kno wled ge of their alle ged malfeasanc e in running Ft. Pi tt. These all egati ons, even i f true, have no beari ng on the SBA’s federalsecuri ties law clai m, and do not i mpact our analysi s of whether summary j udgment was appropri ate.

4 1/3 of thos e shares would go to Cardina l, whic h held Bishop I I’s 1/ 3 interest i n the Wa rrant.

5 The Agreement provide s for the sale of 8,970 shar es for $124, 000. 6 the rec eipt of

Graham Webb’s lett er of int ent, Katawczik and Weir agr eed inst ead, on July 15, 1998, to selljust

their personal ly

held Ft. Pitt

stock t o Sty ling for

$30 mill ion, or $190 per shar e. 3 This sal e closed on August 4, 1998, and was publici zed that day on t he PR Ne wsw ire. Da vid cla ims to have learne d of this pu rchas e a fe w w eeks after it

occ urre d, an d hi s no tes in dica te tha t he k new of it b y no la ter th an S epte mb er 2 , 199 8. On Au gust 1 1, 199 8, the S BA exerc ised its W arrant, th ereby pu rchas ing 5 % of F t. Pitt ’s shar es for $44, 000. 4 On October 23, 1998, the SBA entered i nto a writ ten Agreement of Sale to sellthe underlyi ng Ft. Pi tt s tock to Car dinal f or $13.82 per

share. 5 It fi led a moti on with the Receivership Court to approve the sal e, and at tached a valuation report while expl aining t

hat the $13.82 per s hare “re present s the bes t value for the receiv ership estate.” T he R eceiv ership Co urt auth orized the tran saction , and th e sale closed on December 2, 1998. On that date, the SBA was aware of Styl ing’s a cquisi tion of Ka taw czik and W eir’s stoc k, bu t wa s un aw are o f the Gr aha m W ebb offer.6 Styling sub seq uen tly filed for ban kru ptcy, a nd t he a ction aga inst it h as b een stayed

. 7 The Distri ct Court ha d juri sdict ion under 28 U.S. C. § 1331. We have jurisdi ction ove r this appeal under

28 U.S.C. § 1291. 7 The S BA comm enced this law suit in the U.S. D istrict Court for the W estern Distri ct of Pennsylvania against Katawczik and Weir, Weir’s wife, and Sty ling on June 8, 2000. 6 It al leged, in it s Second Amended Complaint, violations of Section 10(b) of the Securities and Exchange Act of 1934; viol ations of SEC Rule 10b-5; and st ate l aw causes of acti on. With r espect to its federalsecuri ties clai m against Kat awczik and Weir (Count I), the SB A a lleged that K ataw czik a nd W eir inten tionally and reckle ssly failed to disclos e to it the G raham We bb an d Styling n egotia tions an d agr eem ents; it rea sona bly reli ed on this nondiscl osure when it exerci sed it s Warrant and s old it s Ft. Pitt shares; and this r elian ce c aus ed it t o se ll tho se sh ares to C ard inal for le ss th an th ey w ere w orth

. On Feb ruary 22 , 2002 , Kata wc zik an d W eir filed a mo tion fo r sum mary jud gm ent, arguing t hat the SBA’s federal s ecurities l aw claim fai led as a matter of l aw. The Distri ct Cou rt gr an te d the mot io n onJu ly 31, 200 3, fi nding t

ha t Katawcz ik

an d Weir d id

not owe the SBA a duty to discl ose eit her the Graham Webb negotiati ons or the sale t o Sty ling because both took place w hile the SB A w as still a warrant holde r, to whom no fiduc iary duty is owed. The Court

dismis sed the SBA’s st ate l aw claims without prej udice, decli ning to exe rcis e supplement al jurisdi ction ove r them once i t had dis missed t he federal claim. The SBA ap peals. 78 II . DIS CUSS ION A. Fed eral S ecur ities Fr aud Cla im a gain st K ataw czik a nd W eir Our stan dard of re view o n sum mary judgm ent is well-established : “Sum mary judgment i s appropri ate i f there are no genui ne issue s of materi al fact present ed and the

mov ing party is entitled to judgme nt as a ma tter of law. In de termining w hether a genu ine issu e of fact ex ists, we resolv e all fac tual do ubts a nd d raw all reaso nable infere nces in favor of the nonmovi ng party .” Conoshenti v. Public Ser v. Elec. & Gas Co. , 364 F.3d 135, 140 ( 3d Cir. 2004) (int ernal c itations omit ted). On appeal, “[w]e a pply the same standard that t

he Distr ict Court

should have appl ied. ” Stratton v . E .I . D uPo ntDe Nemours & Co. , 363 F.3d 250, 253 (3d Cir. 200 4). The SBA’s federal cl aim agains t Katawczik and Weir is pre mised on Secti on 10(b) of the Secur iti es and Exchange Act of 1934, 15 U.S.C. § 78j (b) (“ Section 10(b)”), and SE C R ule 10 b-5, 1 7 C .F.R. § 240 .10b- 5 (“R ule 10 b-5” ), wh ich m ake it u nlaw ful to

com mit fra ud in conn ection with the pu rchas e or sa le of a secu rity. To state a valid c laim under thes e provis ions, “a plai ntiff must show that

the defendant

(1) made a miss tate ment or an omissi on of a materi al fact (2) with scient er (3) in connect ion with t he purchase or the sal e of a security

(4) upon which t

he plai ntiff

reasonably r elie d and (5) t hat the plaintiff’s reli ance was the pr oximate caus e of his or her inj ury .” In re I kon Office Soluti ons, I nc. , 277 F.3d 658, 666 (3d Cir. 2002) (ci ting GFL A dvantage Fund, LTD v. Co lkitt , 272 F.3d 189, 212 (3d Cir. 2001), and Weiner v. Quaker Oats Co. , 129 F.3d 310,8 To be clear, the SBA’s exerci se of the Warr ant on August 11, 1998 is not the trans acti on at is sue. David t esti fied that the SBA w ould have exer cised t he Warrant even if it had kno wn abou t the G raham We bb o ffer b ecau se the W arrant w as to ex pire in Decem ber 1998. And the only nondisclosure at iss ue is the Graham W ebb offer, because the S BA knew of K ataw czik a nd W eir’s sale to Styling lo ng b efore the S BA entere d into an A greem ent of

Sale w ith Ca rdinal. 9 315 (3d Cir. 1997 )). The purchase or

sale of s ecurities t

hat is the basi s for the SBA’s Section 10(b) and Rule 10b-5 cl aim is i ts sal e of Ft. Pi tt s tock to Car dinal, agreed t o on October 23, 1998 and final ized on December 2, 1998, a sal e which occurr ed without t he SBA’s knowledge of the G raham W ebb offer. 8 Had it known of the “bet ter offe r,” i t argues , it

would have “contact ed Graham Webb, demanded informati on, cont acted Styl ing and asked Car dinal to pay more”; “pur sued allavail able opt ions t o protect the ass ets of t

he Bishop receiv ership and/o r to ens ure tha t Defenda nts W eir and Ka tawc zik co mp lied w ith their duties a s Officers a nd D irectors o f Ft. P itt Acq uisition In c.”; and “ter minated t

he underst anding with Car dinal. ” Appellant ’s Reply Br. at 11-12. The economi c loss t he SBA allegedly

suffered – t

he differ ence in pr ice per share bet

ween the Graham Webb offer and the sale to Cardinal – was, it concludes, “proximately caused by the Defendants’ omissi ons because t

he Receiver s old it s shares without knowing of t he value t

hat Graham Webb had placed upon the s hares of Ft . Pit t and without

being affor ded the opport uniti es discuss ed above.” Id. Wh atever me rit there might be to the SBA ’s claim that it suffered injury10

proximate ly

caused by

this nondiscl osure, its clai m fails be cause Katawczik and Weir had no d uty to d isclo se th e G rah am W ebb offer to the S BA as a wa rran t ho lder

. See GFL Advantage Fund , 272 F.3d at 213 (the an alysis under Section 1 0(b) and R ule 10b-5 involves two steps: “‘Fir st, was the defendant under a duty

to dis close at

the time at issue? Second, was the all eged omissi on or misst atement mat erial ?’”) (quoting Staffi n v. Green berg , 672 F.2d 1196, 1202 (3d Cir. 1982)). “A duty t o discl ose ari ses only when one party to a transacti on has materi al inf ormation t

hat the other par

ty is ent itl ed to have because of some r elat ionship of trus t and confi dence between the parti es, s uch as when one party is a fi duciary , corpor ate i nsider , or ‘ tippee .’” Id. The SBA argues that Ka tawc zik an d W eir ow ed it, as a wa rrant h older, th e sam e dutie s they ow ed to m inority sha reh old ers. W e reje ct thi s arg um ent. First , as couns el for t

he SBA conceded at oralargument, there i s nothi ng in the Warrant i tsel f that

imposes upon Ft . Pit

t or i ts di rector s or offi cers any duty – fiduci ary

or otherw ise – to in form the W arrant h older w hen d irectors o r offic ers de cide to sell their personal ly

held shar es to a t

hird par ty . Second, the SBA has identi fied no other sourc e of th is as se rt eddut

yfr om s tate orfe de ra l s tatute s, re gul at io ns , o r c ommo n l aw. Inste ad, th e SB A r elies upo n th e de finit ion of “ equ ity secu rity” in 1 5 U .S.C . § 78c (a)(1 1), w hich inclu des wa rran ts fo r pu rpo ses o f Se ction 10( b) a nd R ule 1 0b- 5. See also Kusner v. Fi rst Pa. Corp. , 531 F .2d 12 34, 12 37 (3 d C ir. 1976 ) (“Th e con vertible debenture s and the warr ants her e involve d are securiti es withi n the meaning of bot h the11

Secu rities A ct and the S ecurities Exc hang e A ct.”). Bu t defin ing a w arrant a s an “ equity securi ty ” does not cr eate a dut y owed to t

he warrant hol der; i t merel y gi ves the warr ant holder s tanding to sue under t he federalsecuri ties laws in t he event t

hat some duty

owed to it is b reac hed in co nne ction wit h th e pu rch ase or sa le of sec uritie s. Com pare Kusner , 531 F.2d at 1237- 39 (a warrant holder has standi ng to sue under Rule 10b-5 for mat erial misrepr esentations made in c onnecti on with his purchase of t he warrant) , with Helvering v. Southwest

Consol. Corp. , 315 U.S. 194, 200-01 (1942) ( “Whatever ri ghts a warr ant holder may

have to re quire t

he obligor

corporation to mai ntain t he inte grit

y of t he shares

cov ered by the wa rran ts ... he is no t a sh areh old er . . . H is rig hts a re w hol ly con tract ual . . . And he cannot as sert

the ri ghts of a s hareholde r”) ( inter nal quotations omitt ed). The de fin itio n o f “ eq ui ty se cu rity, ” th en , im po se s n o d ut y. The SBA also direct s our attenti on to Pittsbu rgh T ermin al Co rp. v. B alt. & O hio R.R. Co. , 6 80 F. 2d 9 33 ( 3d Ci r. 198 2) , in whi ch we hel d that SEC Rul e 10 b- 17, 17 C. F. R. § 240.10 b-17 (“R ule 10b-1 7”), impose d upon directors and o fficers a du ty to inform holders of convert ible de bentures (roughl y anal ogous to the warrant hol der here) when those directors and officers purposely t imed the record date for payment of dividends so that the bon dho lders c ould not co nver t in time to receiv e the d ividen d. Th e majority agreed upon onl y one s ource of duty t o those debent ure holder s: the specif

ic language of Ru le 10b -17, w hich d eals w ith pub licly traded s ecurities only and impo ses a d uty to disc lose wh en d ivid end s are to b e pa id. T hus , Pitt sburgh Terminalsimp ly does n ot app ly12

her e. The Distri ct Court relie d on Lorenz v. CSX Corp. , 1 F.3d 1406 ( 3d Cir. 1993) , for the propos iti on that “ [a] corpor ation’ s obli gations toward it s debentur eholders are defi ned by t he terms of t

he indent ure, and s ecti on 10(b) i mposes no additional duties. ” Id. at 1418. We agree that rel iance on Lorenz for thi s generalproposition was appropr iate . The SBA, much like the hol ders of conver tibl e debentur es in Lorenz , was no t a shareholde r, and, therefo re, did not enjoy the sam e status as a shareh older vis à vis the co rporation’s directo rs and offic ers. C onse quen tly, Kataw czik a nd W eir had no f iducia ry duty to discl ose the Graham Webb offer t o the SBA. Moreover, t here is nothing in the Warrant its elf – and t

he Warrant i s, aft er all , a cont ract – whic h even refer s to much les s provide s a duty to dis close any

thing akin to the c onduct chal lenged her e. Because Katawczik and Weir did not

breach any

provisi on of the Warrant , the y cannot be held l iable for fraud ulent n ond isclosu re un der S ection 10(b ) and Ru le 10b -5. W hethe r they are liab le under one or more of

the st ate l aw claims now pending i n stat e court – pe rhaps becaus e of the r elatio nsh ip b etw een the p artie s, fo r ex am ple – ma y we ll be a n en tirely differe nt iss ue. B. Sup pl eme nt alJur is di ct io n Ove r St at e La w Cla ims Having dismissed the SBA ’s federal clai m, the District Court declined to exercise supplementa l jurisdi ction ove r the s tate law clai ms, and dis missed t hem without prejudi ce. Under 28 U.S. C. § 1367(c)( 3), t he Distr ict Court

may do so i f it ha s dismi ssed all c laims over

which it ha s original jurisdi ction. That decis ion “is committed to the13

sound discretion of

the dis tri ct court ,” Queen CityPizza, Inc. v. Dominoes Pizza, Inc. , 124 F.3 d 43 0, 44 4 (3 d C ir. 19 97) , and so w e rev iew for an a bus e of disc retio n. See, e. g. , Pryzbowski v. U.S. Healthcar e, Inc. , 245 F.3d 266, 276 (3d Cir. 2001). We find no a buse of d iscre tion her e. II I. CONCLU SI ON For the for egoing rea sons, we wil l affi rm the Dist rict Court’s order granting defe ndan ts’ mo tion fo r sum mary jud gm ent an d dism issing th e SB A’s s upp leme ntal state law claim s w itho ut p reju dice

.