Court Opinion

ID: 1027753
Source: CourtListenerOpinion
Date Created: 2013-07-05 07:29:07.313608+00
Date Added: 2024-06-11T12:29:46.670305
License: Public Domain

UNPUBLISHED

                    UNITED STATES COURT OF APPEALS
                        FOR THE FOURTH CIRCUIT

                                 No. 07-1948

DAVID SCHWARTZ,

                  Plaintiff - Appellant,

           v.

KENNETH BLUM; KENNETH BLUM, II; WILLIAM A. RICHTER,

                  Defendants – Appellees,

           and

GRANT THORNTON LLP; SHULMAN, ROGERS, GANDAL, PORDY & ECKER,
Non-party recipient of Subpoena Duces Tecum,

                  Respondents.

Appeal from the United States District Court for the District of
Maryland, at Baltimore.    Richard D. Bennett, District Judge.
(1:06-cv-02851-RDB)

Argued:   October 30, 2008                     Decided:   January 29, 2009

Before TRAXLER and SHEDD, Circuit Judges, and HAMILTON, Senior
Circuit Judge.

Affirmed in part and vacated in part by unpublished per curiam
opinion.

ARGUED: Brian M. Maul, GORDON & SIMMONS, Frederick, Maryland,
for Appellant.    George W. Shadoan, SHADOAN, MICHAEL & WELLS,
LLP, Rockville, Maryland, for Appellees.     ON BRIEF: Roger C.
Simmons, GORDON & SIMMONS, Frederick, Maryland, for Appellant.
Unpublished opinions are not binding precedent in this circuit.

                                2
PER CURIAM:

       David    Schwartz        appeals      the        order    of    the    district       court

dismissing      his     action        against       his     former      business        partners

stemming       from    the      sale    of     their       company,          Rent-A-Wreck        of

America, Inc., and its 2006 merger with MBFG, Inc.                                      For the

reasons    that       follow,    we    affirm        the    decision         of   the   district

court.     We vacate as moot the district court’s order granting

summary judgment.

                                              I.

       Schwartz founded Rent-A-Wreck of America (“RAWA”), a low-

budget    car     rental     company         that       traded    on    the       NASDAQ     stock

exchange until 2002.             At the time of the 2006 merger, Schwartz

was a major RAWA shareholder, but RAWA’s day-to-day operations

were overseen by CEO Kenneth Blum, Sr. (“Blum”), and Blum’s son,

Kenneth Blum II (“Blum II”), who served as president of RAWA

until 2004.        William Richter, who owned a controlling interest

in    RAWA’s    preferred       stock     and       a    substantial         interest      in   the

common shares, sat on the Board of Directors.

       Schwartz alleges that, from approximately 1994 until “the

early 2000s,” J.A. 372, the Blums mismanaged the company and

engaged in a pattern of self-dealing with Richter’s acquiescence

and    occasional        active        assistance.              Schwartz          alleges,      for

example, that RAWA hired companies owned by Blum II to develop

                                                3
software that was unnecessary; that the Blums leased property to

RAWA   through        their     own    real       estate      company;       that      the   Blums

caused    RAWA     to     pay    excessive            fees     for    management         services

performed by K.A.B., Inc., a company controlled by the Blums;

that   Blum      II     and     Richter      purchased          cars       through      RAWA    but

retained the profits from resale for themselves; that the Blums

diverted company funds for their own personal use and misused

company   credit        cards;        and    that       the    Blums       and    their      family

members used company cars without compensating RAWA.

       According to Schwartz, Mitra Ghahramaniou, RAWA’s financial

controller,       became       concerned          about       this   alleged          pattern    of

misconduct and financial improprieties and its effect on RAWA’s

mandatory SEC filings.                 Ghahramaniou communicated her concerns

to   Richter,     who    allegedly          permitted         the    Blums       to   “cover    up”

their activities.             J.A. 13.        Schwartz claims that, because the

Blums feared the activities reported by Ghahramaniou subjected

them to potential individual liability under the Sarbanes-Oxley

Act, see Pub. L. No. 107-204, § 804, 116 Stat. 745, 801 (2002),

codified in part at 28 U.S.C. § 1658(b), the Blums caused RAWA

to delist its shares from the NASDAQ exchange so that Sarbanes-

Oxley would no longer apply.                       The complaint alleges that the

delisting resulted in a significant drop in the value of RAWA

shares and eventually lead to the resignation of Blum II as

president.        According           to    the       complaint,       a    subsequent         audit

                                                  4
revealed numerous financial irregularities, forcing the Blums to

repay RAWA for “improper and undocumented expenses.”                    J.A. 14.

        Schwartz alleges finally that Richter and Blum, in order

“to   extract         themselves   from   the    problems     created”    by    their

conduct, began looking for a company that would purchase RAWA.

J.A. 14.        Ultimately, RAWA entered into a Merger Agreement with

MBFG.      Schwartz alleges that Richter, who held a controlling

interest in RAWA, and Blum approved the proposed merger even

though another buyer produced a more favorable tender offer.

Schwartz claims that Richter and Blum settled on MBFG because,

unlike    the    other     bidder,   MBFG      agreed   to   grant,     among   other

things, “a waiver and release of all claims arising from the

facts contained in the Audit Report.”               J.A. 16.

        The Merger Agreement offered RAWA shareholders the option

of tendering their shares for the price being offered by MBFG or

dissenting from the proposed merger and pressing their appraisal

rights.     Schwartz opted to accept MBFG’s offer and redeem his

400,000 shares of RAWA stock.                  Schwartz concedes that at the

time he tendered his shares to MBFG, he was fully informed as to

all material facts related to the merger, including defendants’

alleged self-dealing, which occurred years before the merger.

        Based    on    these   factual    allegations,       Schwartz    asserted   a

breach-of-fiduciary-duty             claim       against       all      defendants,

contending that RAWA shareholders did not receive a fair price

                                           5
for the merger.        According to Schwartz, RAWA’s “value included

claims against the Defendants” that were waived in the merger

transaction and, therefore, MBFG paid less than it should have

for the merger.        J.A. 16.        Furthermore, Schwartz alleged in his

complaint that the value of RAWA’s stock dropped significantly

when   RAWA   delisted     from     the   Nasdaq         exchange       as    a    result    of

defendants’       failure         to      adhere              to      their        fiduciary

responsibilities.

       Defendants   moved    to     dismiss        the    complaint,          arguing   that

Schwartz,     having     tendered      his       RAWA    shares       and    accepted       the

consideration offered in the merger proposal, was barred from

challenging the fairness of the merger price.                          While the motion

to dismiss was pending, defendants filed a motion for summary

judgment asserting that, to the extent Schwartz was pursuing a

claim based on defendants’ alleged self-dealing and wrongdoing

as directors or officers of RAWA, such a claim was barred by

Maryland’s three-year statute of limitations.

       The    district     court       granted          the        motion     to    dismiss,

concluding that under Bershad v. Curtiss-Wright Corp., 535 A.2d

840 (Del. 1987), Schwartz could not challenge the fairness of

the merger after tendering his shares and accepting the benefits

of the 2006 merger.         Noting that the nature of Schwartz’s claim

was “difficult to discern from the Complaint,” J.A. 377, the

district court decided to address defendants’ motion for summary

                                             6
judgment even though it had granted the motion to dismiss.                     The

court granted summary judgment, agreeing with defendants that

any claim based on the allegations of wrongdoing was barred by

the statute of limitations.             Schwartz challenges both rulings on

appeal.

                                           II.

                                           A.

     The lack of clarity and precision in Schwartz’s complaint

complicated the district court’s task in this case.                       Even on

appeal with the aid of counsel’s post hoc characterizations of

the claim asserted by Schwartz, it is indeed difficult to pin

down Schwartz’s theory.           That said, we conclude that the heart

of Schwartz’s claim is a challenge to the price of the merger.

This conclusion is confirmed by language in the complaint and

Schwartz’s opening brief:             “The gravamen of Schwartz’s Complaint

is that [defendants] breached their fiduciary duties . . . which

resulted in a lower price term being realized from the 2006

Merger    than    would    otherwise       have   been   obtained.”    Brief      of

Appellant    at   22;     see   id.   at    23    (“Schwartz’s   Complaint   is   a

challenge to the terms of the 2006 Merger.”).

     As     we    understand      the       claim,    the   allegations      about

defendants’ improper conduct go to Schwartz’s theory about why

the merger price was unfair.               He believes that defendants feared

                                            7
liability     as    a     result      of     their    alleged        misconduct           and    thus

“bought”      protection        by    agreeing       to    a   lower        merger        price    in

exchange for a waiver from MBFG.                     On the face of the complaint,

however, such a theory is simply not apparent.                                 Nevertheless,

even   if   we     were    to   superimpose          this      theory       onto     the    actual

complaint,       Schwartz’s          basic    claim       would    remain          the    same     --

defendants       negotiated        or      otherwise      caused       an    unfair,       lowball

merger price.

       Accordingly, although we appreciate the dilemma created by

the pleadings and understand the district court’s reasons for

ruling   on    a    second      dispositive          motion,      we    conclude          that    the

motion for summary judgment was essentially duplicative of the

motion to dismiss and that it was unnecessary for the court to

address it.        For the reasons that follow, we affirm the district

court’s dismissal of Schwartz’s complaint and vacate as moot the

order granting summary judgment.

                                               B.

       Schwartz      argues          that     the     district         court        erroneously

concluded that, by accepting consideration from MBFG in exchange

for his RAWA stock, he essentially acquiesced to the proposed

merger and could not subsequently challenge the fairness of the

price MBFG paid for the shares.

       Federal      courts       sitting        in     diversity            must     apply        the

substantive        law    of    the     forum       state,     see     Erie        R.R.    Co.     v.

                                                8
Tompkins, 304 U.S. 64, 78 (1938); Food Lion, Inc. v. Capital

Cities/ABC, Inc., 194 F.3d 505, 512 (4th Cir. 1999), including

its choice of law rules, see Klaxon Co. v. Stentor Elec. Mfg.

Co., 313 U.S. 487, 496 (1941).                  The parties agree that Delaware

law applies to Schwartz’s claim; accordingly, we look to the

corporate law of Delaware as determined by the highest court of

that state.         See Ellis v. Grant Thornton LLP, 530 F.3d 280, 287

(4th Cir. 2008) (“As a federal court sitting in diversity, we

have an obligation to apply the jurisprudence of West Virginia’s

highest court, the Supreme Court of Appeals of West Virginia.”).

      The district court relied upon the Delaware Supreme Court’s

Bershad       decision,       which       considered     whether        an     informed

stockholder -- and Schwartz concedes he was fully informed --

can challenge the fairness of the merger price after “vot[ing]

in    favor    of    a   merger     or    accept[ing]        the    benefits    of   the

transaction.”         Bershad, 535 A.2d at 842 (emphasis added).                     The

Bershad court answered this question in the negative, holding

that a stockholder who has “tendered his shares and accepted the

merger    consideration”       has       “acquiesced    in    the    transaction     and

cannot [subsequently] attack it.”                Id. at 848.

      Despite the apparent death-knell sounded by Bershad for his

claim, Schwartz contends that numerous Delaware Chancery Court

decisions have narrowed the scope of Bershad.                       Representative of

the   decisions       cited    by    Schwartz      is   In    re    Best   Lock   Corp.

                                            9
Shareholder Litigation, 845 A.2d 1057 (Del. Ch. 2001), in which

the court concluded that Bershad precludes a stockholder from

challenging the merger price only when he tenders his shares and

affirmatively     votes      to   ratify        the    merger.          Id.       at    1079

(observing that “[t]he result in Bershad would . . . have been

different . . . if there had not been a ratifying vote of the

minority    shareholders”).         Moreover,         according    to    In       re    Best

Lock, even if the shareholder votes for the merger and accepts

its benefits, he may still challenge the fairness of the merger

in an equitable action.           See id.; see also In re JCC Holding

Co., 843 A.2d 713, 722-23 (Del. Ch. 2003) (“[A] stockholder who

casts a vote in favor of, or later accepts the consideration

from,   a   merger    effected    by   a    controlling       stockholder          is   not

barred by the doctrine of acquiescence, or any other related

equitable doctrine such as waiver, from challenging the fairness

of the merger.”).

      There     are   some    circumstances           under      which        a    federal

diversity court, in determining the applicable state law, can

consider the decisions of a lower state court.                      If the highest

state court has not addressed the issue or the law is unclear,

the   federal    court    must    “forecast      a    decision     of    the       state’s

highest court” in light of “canons of construction, restatements

of the law, treatises, recent pronouncements of general rules or

policies by the state’s highest court, well considered dicta,

                                           10
and the state’s trial court decisions.”                           Wells v. Liddy, 186

F.3d 505, 528 (4th Cir. 1999); see also Private Mortgage Inv.

Servs., Inc. v. Hotel & Club Assocs., 296 F.3d 308, 312 (4th

Cir. 2002) (considering, in the absence of decision by the state

supreme court, a decision by the state’s intermediate appellate

court    to    be    “the    next     best    indicia   of    what    state     law    is”)

(internal       quotation      marks     omitted).           No    such   circumstances

present       themselves     here.       In    Bershad,      the    Supreme     Court    of

Delaware directly addressed this issue.                   Since that decision, as

Schwartz concedes, the Delaware Supreme Court has not fashioned

an   exception       to     Bershad    or     otherwise      narrowed     its   holding,

either explicitly or implicitly.                    Accordingly, we believe that

Bershad remains controlling and it is dispositive of the claim

raised by Schwartz.

                                             III.

      For the foregoing reasons, we affirm the district court’s

dismissal       of   Schwartz’s       complaint.        To    the    extent     that    the

district court also granted summary judgment, we vacate that

order.        Having reviewed and carefully considered the remaining

issues raised on appeal by Schwartz, we reject these arguments

as well.

                                         AFFIRMED IN PART AND VACATED IN PART

                                              11