Opinion ID: 151993
Heading Depth: 3
Heading Rank: 1

Heading: Southern Farm's Duty to Disclose

Text: Southern Farm argues that Instruction 11 erroneously omitted a requirement that the jury find that Southern Farm had a legal duty to disclose material facts to PSC. SEC Rule 10b-5, promulgated under the Securities Exchange Act of 1934, 15 U.S.C. § 78j, states: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, a. To employ any device, scheme, or artifice to defraud, b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or c. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5. Although Rule 10b-5 could be read broadly to require disclosure of any nonpublic information about a security that is the subject of a transaction, the Supreme Court has held that a duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information. Chiarella v. United States, 445 U.S. 222, 235, 100 S.Ct. 1108, 1118, 63 L.Ed.2d 348 (1980). Rather, the Chiarella Court clarified the scope of 10b-5, holding that in order to be liable under that section for failing to disclose a material fact, an entity must have a prior duty to disclose that fact. Id. As under the common law, such a duty arises when one party has information `that the other [party] is entitled to know because of a fiduciary or other similar relation of trust and confidence between them.' Id. at 228, 100 S.Ct. at 1114 (quoting Restatement (Second) of Torts § 551(2)(a) (1976)). The Court noted, for instance, that a purchaser of stock who has no duty to a prospective seller because he is neither an insider nor a fiduciary has been held to have no obligation to reveal material facts in connection with the stock purchase. Id. at 229, 100 S.Ct. at 1115 (citing Gen. Time Corp. v. Talley Indus., Inc., 403 F.2d 159, 164 (2d Cir.1968), cert. denied, 393 U.S. 1026, 89 S.Ct. 631, 21 L.Ed.2d 570 (1969)); see also Roeder v. Alpha Indus., Inc., 814 F.2d 22, 26 (1st Cir.1987) (recognizing the logical corollary of Chiarella that [e]ven if information is material, there is no liability under Rule 10b-5 unless there was a duty to disclose it). Thus, there can be no liability for a failure to disclose under Rule 10b-5 or the common law in the absence of a duty to disclose. Following Chiarella, this Court has also recognized that a defendant's omission to state a material fact is proscribed only when the defendant has a duty to disclose. Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194, 1206 (11th Cir.2001) (quoting Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1043 (11th Cir.1986) (alteration omitted)). See also Williams v. Dresser Indus., Inc., 120 F.3d 1163, 1173 (11th Cir.1997) (recognizing in dicta that a duty to disclose ... does not exist absent a fiduciary relationship or some other similar relationship of trust and confidence). In Ziemba, we noted that this duty arises both `where the law imposes special obligations, as for accountants, brokers, or other experts' and `[w]here a defendant's failure to speak would render the defendant's own prior speech misleading or deceptive.' 256 F.3d at 1206 (quoting Rudolph, 800 F.2d at 1043). In this case, the parties agree that Southern Farm and PSC were engaged in an arm's-length transaction; PSC has not asserted the existence of a fiduciary relationship or other similar relationship of trust and confidence between PSC shareholders and Southern Farm. Rather, at trial, PSC proceeded on the theory that both the Valuation and statement that the Valuation represented a fair price constituted prior speech by Southern Farm that was misleading or deceptive without the omitted information. PSC argued that the legal duty to disclose arose because the omissions made the Valuation and the fair price statement materially misleading. We are doubtful that a buyer's assessment of the value of a seller's debt instrument, or a buyer's accompanying statement that the assessment is fair, could ever constitute misleading or deceptive prior speech giving rise to a duty to disclose. See Kidwell ex rel. Penfold v. Meikle, 597 F.2d 1273, 1295 (9th Cir.1979) (purchaser of corporate assets owed no duty to disclose material facts to members of selling corporation, because selling corporation should be presumed to have known as much about its own assets and affairs as purchaser in an arm's-length deal); see also Restatement (Second) of Torts § 542 cmt. d (If the subject matter of the transaction is one upon which both parties have an approximately equal competence to form a reliable opinion, each must trust to his own judgment and neither is justified in relying upon the opinion of the other.). Indeed, we are aware of no case suggesting that, in an arm's-length transaction, the buyer's opinion of the value of the seller's asset, unaccompanied by a misstatement of fact on which the value is based, could constitute an affirmative statement which could be rendered misleading by an omission. We need not decide, however, whether the Valuation or accompanying statement could have given rise to such a duty to disclose in this case because errors in Jury Instruction 11 require reversal. Instruction 11 imposed on Southern Farm a duty to disclose certain material information to PSC shareholders if Southern Farm knew or was severely reckless as to whether material information had not been fully disclosed to the shareholders or that the disclosures made by [Southern Farm] to [PSC] were materially misleading. Thus, Instruction 11 allowed the jury to hold Southern Farm liable for failing to disclose material information to PSC shareholders either if: (1) Southern Farm knew or was severely reckless as to whether material information had not been fully disclosed to the shareholders or (2) Southern Farm had made disclosures to PSC that were materially misleading. The first condition of this disjunction permitted the jury to find Southern Farm liable for merely knowing that material information had not been disclosed to PSC shareholders, even if Southern Farm itself had no legal duty to disclose that information, i.e., even if Southern Farm had no duty as described in Chiarella and its progeny. Because Instruction 11 omitted the requirement that Southern Farm must have had a legal duty to disclose material information to PSC shareholders in order to be held liable under Rule 10b-5 for withholding that information, the instruction contains an incorrect statement of the law under Chiarella and our own subsequent cases. Although the foregoing error in Instruction 11 is clear, at oral argument Plaintiffs argued that Southern Farm never objected in the district court to the instruction on this specific ground. We have carefully reviewed those portions of the record cited by Southern Farm as evidence that it preserved its objection to Instruction 11 and think the objection probably was not properly preserved. In general, a party must object to a jury instruction prior to deliberations in order to preserve the issue on appeal, and the failure to make a timely objection waives the right to raise the issue on appeal. Landsman Packing Co. v. Cont'l Can Co., 864 F.2d 721, 726 (11th Cir.1989). Thus, if Southern Farm did not make this objection in the district court, it could not prevail on this particular challenge on appeal unless it could show that the error affects substantial rights. Fed.R.Civ.P. 51(d)(2) (A court may consider a plain error in the instruction that has not been preserved... if the error affects substantial rights.). Although this error may well have been responsible for an incorrect verdict, leading to substantial injustice, Farley v. Nationwide Mut. Ins. Co., 197 F.3d 1322, 1330 (11th Cir.1999) (internal quotation omitted), we need not decide whether the stringent standard for plain error is satisfied in this case, because Southern Farm's other challenge to Instruction 11 was clearly preserved, and is clearly meritorious. Thus, we now turn to Southern Farm's argument that Instruction 11 erroneously imposed upon it a duty to disclose material information directly to PSC's shareholders.