Court Opinion

ID: 9411682
Source: CourtListenerOpinion
Date Created: 2023-07-27 17:00:52.695457+00
Date Added: 2024-06-11T16:41:08.917915
License: Public Domain

NOT PRECEDENTIAL

  UNITED STATES COURT OF APPEALS
       FOR THE THIRD CIRCUIT

         _______________________

               No. 22-3031
         _______________________

            GEORGE V. KELLY

                      v.

   PEERSTAR LLC; LARRY J. NULTON,
             Appellants

         _______________________

On Appeal from the United States District Court
   for the Western District of Pennsylvania
       District Court No. 3-18-cv-00126
District Judge: The Honorable Kim R. Gibson
        __________________________

               No. 22-3087
       ___________________________

          CHARLES J. KENNEDY,
                Appellant

                      v.

           GEORGE V. KELLY
      ____________________________

On Appeal from the United States District Court
   for the Western District of Pennsylvania
       District Court No. 3-18-cv-00187
District Judge: The Honorable Kim R. Gibson
                       Submitted under Third Circuit L.A.R. 34.1(a)
                                      June 30, 2023

                Before: JORDAN, KRAUSE, and SMITH, Circuit Judges

                                     (Filed July 27, 2023)

                              __________________________

                                          OPINION*

                              __________________________

SMITH, Circuit Judge.

       This case arises out of a business relationship gone sour. Appellants are Dr. Larry

Nulton, a psychologist, his peer support service center, Peerstar LLC (Peerstar), and Dr.

Charles Kennedy, a psychologist employed by Peerstar. Appellee is George Kelly, Dr.

Nulton’s former business partner who served as Chief Operating Officer at Peerstar.

Kelly asserted a claim against Dr. Nulton and Peerstar for breach of a Settlement

Agreement in which Dr. Nulton had agreed to buy out Kelly’s ownership interest in

Peerstar. Dr. Nulton and Peerstar asserted a host of counterclaims, including identity theft

and fraudulent inducement to enter into the settlement agreement. Dr. Kennedy also

initiated suit against Kelly alleging, inter alia, identity theft. The District Court

consolidated these cases.

*
 This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not
constitute binding precedent.
                                               2
       The District Court granted summary judgment for Kelly on the breach of contract

and fraudulent inducement counterclaims. The identity theft claim proceeded to a bench

trial, after which the District Court entered judgment in favor of Kelly. We will affirm.

 I.    Background

       Dr. Nulton is a licensed psychologist. He met Kelly in the late 1990s through their

work at a social services center. Kelly was a case manager at the time. Dr. Nulton later

recruited Kelly to join him at his own behavioral health center, Nulton Diagnostic and

Treatment Center (NDTC). One lucrative division within NDTC provided behavioral

health rehabilitative (BHR) services, a type of treatment for children with autism. Kelly

eventually rose to the position of Chief Operating Officer (COO) of the division

providing BHR services and helped the division succeed in growing from an operation

with just a handful of employees to a thriving entity with a workforce of nearly 300 and a

gross revenue of $10 million per year.

       In 2005, Dr. Nulton transferred NDTC’s BHR services programs to a separate

entity called Children’s Behavioral Health (CBH) and sold it to Providence Service

Corporation for $14.5 million. Kelly remained with CBH as COO. Kelly held no

ownership interest in NDTC, yet he and Dr. Nulton were close and amiable at the time.

Dr. Nulton chose to give Kelly $1 million from the sale to Providence as a reward for

Kelly’s contributions to the growth and success of NDTC.

       And Dr. Nulton and Kelly maintained their close relationship after the sale of

CBH. They spoke regularly and developed a referral relationship for BHR services. CBH

                                             3
referred most of its patients to NDTC for their required psychological evaluations. Drs.

Nulton and Kennedy then prescribed—but did not provide—those services.

       In 2009, Dr. Nulton asked Kelly to join Dr. Nulton’s new business, Peerstar LLC,

which provided behavioral health peer support services for adults. Kelly agreed and

joined Peerstar as COO in exchange for a 25 percent ownership interest in the company.

When a third party sold his ownership interest in Peerstar, Kelly’s interest increased

to approximately 38 percent of the company. Peerstar grew under Kelly’s leadership and

proved to be a profitable business venture for both Dr. Nulton and Kelly.

       By March 2016, both the friendship and business relationship between Dr. Nulton

and Kelly had deteriorated. The two men attempted to negotiate the sale of Kelly’s share

in Peerstar, but their efforts were unsuccessful. The dispute ended up in federal court,

with Dr. Nulton seeking a declaratory judgment that Peerstar’s operating agreement

permitted him to purchase Kelly’s ownership interest at a certain price. The parties

reached a settlement (Settlement Agreement) in September 2016, in which Dr. Nulton

agreed to buy out Kelly’s share for $4.3 million plus interest, which was to be paid in 60

monthly installments.

       Approximately one and a half years later, Dr. Nulton stopped making the monthly

payments to Kelly. Dr. Nulton alleged that he stopped the payments when he learned that

CBH, under Kelly’s leadership, had used both his and Dr. Kennedy’s names on insurance

forms without obtaining their authorizations. Kelly filed suit against Dr. Nulton and

Peerstar in the Western District of Pennsylvania for breach of the Settlement Agreement.

Dr. Nulton and Peerstar asserted several counterclaims, including claims for fraudulent
                                             4
inducement of the Settlement Agreement and identity theft under Pennsylvania state law.

Dr. Kennedy also sued Kelly for identity theft, among other related claims.

       In support of their fraudulent inducement claim, Dr. Nulton and Peerstar alleged

that Kelly concealed that he had forged Dr. Nulton’s signatures on CBH’s insurance

forms. Dr. Nulton claimed that had he known of the forgery, he would never have signed

the Settlement Agreement. Dr. Nulton and Peerstar also asserted fraudulent inducement

as an affirmative defense to Kelly’s breach of contract claim. The District Court resolved

these issues on the parties’ cross-motions for summary judgment, ruling in favor of Kelly

on both his breach of contract claim and his defense to Dr. Nulton’s and Peerstar’s

fraudulent inducement claim. The District Court held that because the Settlement

Agreement was fully integrated, Dr. Nulton and Peerstar could not introduce parol

evidence to show fraudulent inducement. Without that evidence, their claim and

affirmative defense failed.

       For their identity theft claims, Drs. Nulton and Kennedy alleged that Kelly had

forged their signatures and placed their identifying information on various insurance

forms, representing falsely that they were “rendering providers” of BHR services. Drs.

Nulton and Kennedy did not actually provide BHR services, but only prescribed such

services. According to Drs. Nulton and Kennedy, Kelly personally forged their signatures

in order to get CBH accredited with private insurers. Drs. Nulton and Kennedy sought

statutory damages of $500 for every claim that CBH submitted to insurers under their

names, which they claimed totaled over 45,000 claims.

                                            5
          The identity theft claim proceeded to a bench trial. The District Court concluded

that Drs. Nulton and Kennedy failed to carry their burden as to each element of identity

theft. Accordingly, the District Court entered final judgment in favor of Kelly.

    II.   Discussion1

          Dr. Nulton, Dr. Kennedy, and Peerstar appeal two aspects of the final judgment:

(1) entry of judgment in favor of Kelly on his breach of contract claim and on Dr. Nulton

and Peerstar’s fraudulent inducement claims; and (2) entry of judgment in favor of Kelly

on Drs. Nulton and Kennedy’s identity theft claims.

          A. Breach of Contract Claim and Fraudulent Inducement Counterclaims

          As to the breach of contract claim and the fraudulent inducement counterclaims,

Dr. Nulton and Peerstar argue that the District Court misapplied the parol evidence rule

because the Settlement Agreement does not contain a fraud-insulating clause. And even if

it does, Dr. Nulton and Peerstar argue that they may still assert a fraudulent inducement

affirmative defense.

          Under Pennsylvania law, parol evidence of fraudulent inducement is barred if the

contract contains what this Court has termed a “fraud-insulating clause.” SodexoMAGIC,

LLC v. Drexel University, 24 F.4th 183, 213–15 (3d Cir. 2022) (summarizing

Pennsylvania law); see Bardwell v. Willis Co., 100 A.2d 102, 104 (Pa. 1953); Toy v.

1
  The District Court had jurisdiction under 28 U.S.C. § 1332. We have jurisdiction under 28 U.S.C.
§ 1291. We review entry of summary judgment de novo. Wilson v. USI Ins. Serv. LLC, 57
F.4th 131, 140 (3d Cir. 2023). “On appeal from a bench trial, our court reviews a district court’s
findings of fact for clear error and its conclusions of law de novo.” VICI Racing, LLC v. T-Mobile
USA, Inc., 763 F.3d 273, 282–83 (3d Cir. 2014).

                                                6
Metropolitan Life Insurance, 928 A.2d 186, 205–07 (Pa. 2007). Fraud-insulating clauses

may “take many forms,” but all serve the same purpose of “prevent[ing] a party from

satisfying the justifiable-reliance element of a fraudulent inducement claim.” One form of

a fraud-insulating clause is a “no-reliance” clause, in which the parties disclaim reliance

on any extra-contractual representations or understandings in reaching the agreement. Id.

at 214. Such a clause insulates parties to a written agreement from claims of fraudulent

inducement by precluding any such party from claiming justifiable reliance on alleged

misrepresentations.

       The Settlement Agreement contains two pertinent clauses. First, the parties agreed

that the Settlement Agreement was their “entire agreement and understanding” and that it

“supersede[d] all prior negotiations and/or agreements.” JA 3442–43. Second, they

agreed that the Settlement Agreement would “remain[] in effect despite any . . . discovery

or existence of any new or additional fact, or any fact different from that which either

[p]arty now knows or believes to be true.” JA 3443.

       These clauses work to bar parol evidence of fraudulent inducement.

Their effect is to prevent Dr. Nulton and Peerstar from claiming that they justifiably

relied on any matter that Kelly may have concealed up to the time the Settlement

Agreement was executed. And these clauses resemble contractual language that

Pennsylvania appellate courts have treated as fraud-insulating clauses. See Yocca v.

Pittsburgh Steelers Sports, Inc., 854 A.2d 425, 438–39 (Pa. 2004) (“This Agreement

contains the entire agreement of the parties with respect to the matters provided for herein

and shall supersede any representations or agreements previously made . . . .”); 1726
                                             7
Cherry St. P’ship v. Bell Atl. Props., Inc., 653 A.2d 663, 665 (Pa. Super. Ct. 1995)

(“[T]here are no other agreements, understandings, representations or warranties between

them except as set forth herein.”).

       Turning to Dr. Nulton and Peerstar’s fraudulent inducement affirmative defense,

the Court sees no basis under Pennsylvania law to conclude that parol evidence barred for

purposes of a fraudulent inducement claim should be admissible to prove a defense of

fraudulent inducement. Dr. Nulton and Peerstar point to authority that stands for the

uncontroversial proposition that a fraudulent contract is invalid. But as explained above,

when a signatory to a contract expressly disavows reliance on extra-contractual

“understandings” or new facts, there can be no fraud in the inducement.

       Appellants also call our attention to a quotation from Blumenstock v. Gibson, in

which the Pennsylvania Superior Court states: “the theory holds that since fraud induced

the agreement, no valid agreement came into being and parol evidence is admissible to

show that the alleged agreement is void.” 811 A.2d 1029, 1036 (Pa. Super. Ct. 2002). But

in the next sentence, the Court explains: “Nevertheless, the case law clearly holds that a

party cannot justifiably rely upon prior oral representations yet sign a contract denying

the existence of those representations.” Id. In other words, even though a court generally

may set aside a contract founded on fraud, there is no fraud when the contract disclaims

any reliance on representations beyond those stated in the contract. Those very

circumstances are present here.

                                             8
       In sum, we conclude that the District Court properly applied the parol evidence

rule as to both Kelly’s breach of contract claim and Dr. Nulton and Peerstar’s fraudulent

inducement counterclaim.

       B. Identity Theft Claims

       Pennsylvania’s identity theft statute provides: “A person commits the offense of

identity theft of another person if he possesses or uses, through any means, identifying

information of another person without the consent of that other person to further any

unlawful purpose.” 18 Pa. Cons. Stat. § 4120(a). As to the CBH insurance forms, the

District Court found that Drs. Nulton and Kennedy failed to prove that Kelly: (1) used or

possessed their identities; (2) without their consent. JA 96–123. Drs. Nulton and Kennedy

argue that the District Court erred on both fronts.

       First, Drs. Nulton and Kennedy argue that the District Court misconstrued the

Pennsylvania identity theft statute by finding that they failed to prove that Kelly “placed”

their signatures on the insurance forms. Drs. Nulton and Kennedy contend that the

District Court’s use of the word “placed” in its Bench Trial Memorandum effectively

added an element to the statute, which requires only that the defendant “possess or use”

the plaintiff’s identifying information. See 18 Pa. Cons. Stat. § 4120(a).

       The District Court did not add an element to the identity theft statute. The District

Court merely described the ways that Drs. Nulton and Kennedy had alleged that Kelly

“possessed or used” their identities. Throughout all stages of litigation, Drs. Nulton and

Kennedy have alleged that Kelly “forged” their signatures and “placed” their identifying

                                              9
information on the insurance forms.2 It is true that in Drs. Nulton and Kennedy’s

response to Kelly’s proposed findings of fact and conclusions of law, they argued that

forgery was not a required element of identity theft. JA 3031–32. But the District Court

did not require Drs. Nulton and Kennedy to prove forgery. Rather, the judge simply

found that Drs. Nulton and Kennedy failed to prove the facts that they alleged.

       Next, Drs. Nulton and Kennedy argue that Kelly is liable for identity theft as a

matter of law because it is undisputed that Kelly signed the insurance forms in his own

capacity as COO. Even if we were to assume for the sake of argument that Kelly

“possessed or used” Drs. Nulton and Kennedy’s identities, Drs. Nulton and Kennedy

have not undermined the District Court’s finding as to the second element of their claim.

After weighing all the testimony and other evidence, the District Court declined to find

that Drs. Nulton and Kennedy’s identities “appeared on the [insurance] form without

their consent.” JA 103–04 & n.20. We will not disturb that finding.

       Having concluded that there was no clear error in the District Court’s findings as

to the first two elements, we need not address Drs. Nulton and Kennedy’s argument as to

the third element of identity theft.

III.   Conclusion

       For the foregoing reasons, we will affirm.

2
  See JA 416 (Answer, Affirmative Defenses, and Counterclaims); JA 1600–01 (Motion for
Summary Judgment); JA 2797 (Trial Brief); JA 2952 (Proposed Findings of Fact and Conclusions
of Law); JA 2976 (Brief in Support of Proposed Findings of Fact and Conclusions of Law).
                                            10