Court Opinion

ID: 6984113
Source: CourtListenerOpinion
Date Created: 2022-07-24 02:46:07.086197+00
Date Added: 2024-06-11T16:09:21.180662
License: Public Domain

KENNEDY, Circuit Judge,
dissenting.
Judge Moore’s concurring opinion sets out comprehensively the formulation and the development of the virtual representation theory. Judge Moore’s formulation, with which I agree, closely approximates the formulation of virtual representation as discussed in Wright, Miller, & Cooper:
To justify preclusion by virtual representation on this broad view, there must be “some special relationship between the parties justifying preclusion.” The factors considered in evaluating the relationship include identity of interests, a close relationship in fact, participation in the prior litigation, apparent acquiescence, and deliberate maneuvering to avoid the effects of the first action. In addition, “adequacy of representation” is to be considered.
18 Charles Alan Wright, Arthur R. Miller, & Edward H. Cooper, Federal Practice and Procedure § 4457 (1981) (footnote omitted). My disagreement with Judge Moore is in the result of applying the aforementioned factors and judging the equities in this case. I would reach the opposite result, i.e., that the Florida plaintiffs were virtually represented and are bound by the Becherer judgment and may not pursue those fraud claims as to which the district court held the Florida plaintiffs were virtually represented.
In this case, the district court considered each of the aforementioned factors and concluded that the Florida plaintiffs had been virtually represented. “The question whether a party’s interests in a ease are virtually representative of the interests of a nonparty is one of -fact for the trial court.” Aerojet-General Corp. v. Askew, 511 F.2d 710, 719 (5th Cir.1975). After a lengthy hearing, the district court found:
1. Membership in the AUO is mandatory for all investors in the hotel. Each Florida plaintiff therefore is a member of the AUO.
2. The AUO sought counsel for the Becherer suit. It paid attorney Elwood S. Simon $250,000 to investigate the claims which were the subject of the suit. It also arranged and participated in meetings with counsel for the Becherer suit, Elwood S. Simon, concerning strategy for the suit. The court further determined that the unit owners as a group had “many opportunities” to object to the AUO’s litigation efforts, but instead gave a positive “overall response.” Class action status reports were a routine subject at AUO Board and Advisory Board meetings as well as unit owner’s meetings.
3. The AUO implemented a comprehensive strategy to advance the unit owner’s interest vis-a-vis the foreclosure proceeding. It actively encouraged unit owners to withhold mortgage payments.
4. In 1990, Florida plaintiffs’ counsel, Thomas Grady, represented to a Florida state court that the resolution’ of the Becherer case in the Eastern District of Michigan would determine the rights of his clients in the Florida case.
5. At least twenty-two Florida plaintiffs provided affidavits in the Becherer lawsuit in order to bolster Simon’s opposition to defendants’ motion for summary judgment.
6. The AUO raised funds and recruited members for the Becherer suit. Approximately 29 Florida plaintiffs responded to the solicitations and contributed $14,500 of the total $58,500 unit owners contributed to the class-action expense fund.
7. Becherer plaintiffs’ counsel, Simon, and Florida plaintiffs’ counsel, Grady, extensively shared information. The court noted that they “worked closely together at the time that litigation strategies were being formulated”’ and “worked as a team to further their mutual interests.”
8. Grady had a “working relationship” with the AUO Board and with some of the Becherer plaintiffs.
*4389. At least four Florida plaintiffs retained Simon to represent them.
10. Grady acknowledged that the Florida plaintiffs’ interests were substantially identical to those of the AUO.
11. Grady stated that Simon, in his prosecution of the Becherer suit, was adequately representing the Florida plaintiffs’ interests. Conversely, Simon claimed adequately to have represented the Florida plaintiffs’ interests.
12. Grady recognized that his clients might be bound by the outcome in the Becherer lawsuit and advised the Florida plaintiffs that they might be so bound whether or not a class was certified for all claims.
13. Florida plaintiffs’ counsel, Grady, opted to wait for the outcome of the Becherer suit to see if it furthered his clients’ objectives before proceeding with the second lawsuit.
14. The Florida plaintiffs decided to forego individual claims against the defendants so that they could “wait and see” if the class action furthered their objectives.
Based on these factual findings, the court found a “special relationship.” The Florida plaintiffs do not attack these factual findings, but contend they are insufficient for the court to conclude that the Florida plaintiffs were virtually represented in the Becherer litigation beyond the trial of the contract claims for which the class of unit owners was certified.
The district court also found that the Florida plaintiffs’ interests had been adequately represented. This, too, seems not to be seriously contested. There is complete identity of interest between the Becherer plaintiffs and the Florida plaintiffs with respect to the fraud claims as to which the district court found res judicata. All the claims are based on the same documents and agreements. Any individual unrelated fraud claims that any plaintiff has, such as to whether the hotel was a suitable investment, were not foreclosed.
While Judge Moore has concluded that the AUO did not control the litigation it initiated and funded, there was considerable evidence that it assisted in the ongoing litigation by paying for the damages expert used by the class in the contract trial and amending its AUO agreement with the Registry to make Registry’s legal fees and expenses a “hotel expense” paid for by the unit owners and paying the expenses of the president of the AUO to testify at trial. AUO’s 1992 budget included $360,000 in legal costs with the explanation to the unit owners that “[tjhese legal expenses are not just the AUO’s role in the class action lawsuit.” AUO’s counsel, Susan La Cava, extensively assisted with the class action. The Board of AUO helped recruit the class representative. While membership in AUO was mandatory, the Florida plaintiffs, represented by Grady, cooperated in the litigation. Only one unit owner opted out of the class that was certified for the contract claims. The first summary judgment had been granted long before that date. Class counsel would seem to have some fiduciary duty to all the unit holders in view of the AUO’s financing of the ongoing litigation on their behalf. I also believe this evidence was sufficient to support findings by the district court of both consent and maneuvering.
In my opinion, the aforementioned considerations all tend to show that the Bech-erer plaintiffs were the virtual representatives of the Florida plaintiffs. There is yet another factor, however, which neither the majority opinion nor Judge Moore’s concurrence addresses, that I believe must be considered in “judging the equities.” I believe it is necessary to consider those claims that the district court found were barred and their relationship to the claims tried in the class action. There appear to be four separate fraud claims alleged in both the Becherer and Florida litigation. The district court decided the merits of these claims in the Becherer litigation and subsequently held them barred by virtual *439representation from further litigation in the Florida case.1
My colleagues overlook the fact that these four fraud claims are most likely barred anyway in the Florida litigation pursuant to state law. While Florida does not recognize offensive estoppel, Florida applies the economic loss rule, a doctrine which generally bars a tort action for purely economic losses. The rule as pronounced by the Florida Supreme Court in Florida Power & Light Co. v. Westinghouse Elec. Corp., 510 So.2d 899 (Fla.1987) (contract for goods), and AFM Corp. v. Southern Bell Telephone and Telegraph Co., 515 So.2d 180, 181-82 (Fla.1987) (contract for services) holds that without some conduct resulting in personal injury or property damage, there can be no independent tort claiming solely economic losses flowing from a contractual breach. See Leisure Founders, Inc. v. CUC Int'l, Inc., 833 F.Supp. 1562, 1572 (S.D.Fla.1993). The rule’s purpose is to keep the risk of liability in commercial transactions reasonably calculable. See Bay Garden Manor Condominium Assoc. v. James D. Marks Associates, Inc., 576 So.2d 744, 745 (Fla.Dist.Ct.App.1991). “Where the parties have limited liability and allocated risk by agreement, tort remedies should not be allowed to supersede the parties’ prior understanding of the consequences of deficient performance.” Leisure Founders, 833 F.Supp. at 1572.
Therefore, in Florida, if a plaintiff has both a claim for breach of contract and a claim for fraud relating to performance of the contract, the economic loss rule precludes recovery under the fraud theory of liability. See id. Fraud in the inducement of a contract, however, is a cause of action entirely independent from breach of contract, requiring proof of facts separate and distinct from the breach of contract, and with separate and consistent remedies. See HTP. Ltd. v. Lineas Aereas Costarricenses, S.A., 685 So.2d 1238, 1239 (Fla.1996).
True fraudulent inducement attends conduct prior to striking the express or implied contract and alleges that one party tricked the other into contracting. It is based on pre-contractual conduct which is, under the law, a recognized tort. Where the complainant alleges fraudulent inducement, but the facts comprising the fraudulent inducement claim are closely interwoven with ... those constituting the breach of contract, the economic loss rule bars the pleading of a separate tort claim.
Leisure Founders, 833 F.Supp. at 1572 (citations and quotation marks omitted). Thus, where the facts give rise to a claim for breach of contract, the economic loss rule will bar claims for fraud in the performance of a contract, but not claims for fraud in its inducement.2
In three of the four fraud claims alleged in the Becherer and Florida suits, the facts relating to the alleged fraud are “closely interwoven” with those facts constituting the breaches of contract tried and resolved by the district court in the Becherer case.
In one of the four fraud claims, the Florida plaintiffs contend that Merrill Lynch and SSG made material misrepresentations of the requirements for closing *440of title. They allege that the Private Placement Memorandum (“PPM”), Merrill Lynch Marketing Guide, and affidavits of former Merrill Lynch sales agents represented that the hotel had to be fully completed prior to closing. The Unit Sale Agreement — the sales contract — however, had a merger and integration clause which explicitly stated that the purchaser acknowledges he or she has not relied on any other representations made by the seller or seller’s agent. The Unit Sale Agreement required SSG only to “substantially complete” the hotel prior to closing. On August 7, 1992, Judge Feikens found that SSG breached the contract by not “substantially completing” the hotel prior to closing (although he found no damages.) See Becherer, et al. v. Merrill Lynch, et al., 799 F.Supp. 755, 768-69 (E.D.Mich.1992).
In another fraud claim, the Florida plaintiffs complain that Merrill Lynch and SSG materially misrepresented that SSG would purchase furnishings, fixtures, and equipment (“FFE”) for the hotel when both knew that SSG intended to lease these items. Plaintiffs claim that this conduct violated rule 10b-5 of the Securities Exchange Act, and constituted common law fraud and negligent misrepresentation. In its August 7, 1992 opinion, the district court found that SSG breached the Unit Sale Agreement with regard to FFE terms and awarded damages in the class action.3 In the same decision, the court also held that securities law and state common law prohibit double recovery for the same, violation, so recovery under a fraud theory of liability was foreclosed. See Becherer I, 799 F.Supp. at 769.
In a third fraud claim, the Florida plaintiffs contend that Merrill Lynch violated Rule 10b-9 and 15c2-4 of the Securities Exchange Act by allowing the closing of title to occur on October 31, 1986 despite Merrill Lynch’s knowledge that all conditions for closing were not met. The plaintiffs’ amended complaint in the contract class action alleged this same claim as a breach of contract, however.4 Judge Feik-ens determined that Rules 10b-9 and *44115c2-4 did not apply to the conduct of which plaintiffs complained. Rather, these rules apply to the issuer’s or broker’s obligation to cancel an offering and provide a refund if there is less than a full or specified subscription to the shares being offered. In his August 7, 1992 opinion in the contract class action, Judge Feikens held that Merrill Lynch did not breach the contract because it satisfied these rules on February 15, 1985, when the minimum sales conditions were met and the escrow was closed, irrevocably binding the investors. Because Rules 10b-9 and 15c2^4 do not apply to Merrill Lynch’s conduct after February 15, 1985, Judge Feikens dismissed this fraud claim. See Becherer I, 799 F.Supp. at 770.
Unlike the three claims described above, plaintiffs’ fourth fraud claim involves “conduct prior to striking the express or implied contract and alleges that one party tricked the other into contracting.” See Leisure Founders, 833 F.Supp. at 1572. The plaintiffs allege that the PPM neglected to state that another hotel built on Pelican Bay would be a Ritz-Carlton, and that the materials omitted the competitive impact of this hotel. In an Order dated November 20, 1990, Judge Feikens granted summary judgment for the defendants on this claim. See Becherer I, 799 F.Supp. at 781 Appendix B. This order was issued before the district court’s certification of any class.
In any litigation that would proceed in Florida state court, operation of the economic loss rule would appear to foreclose the first three claims described above. The facts of the first claim, misrepresentation in the requirements for closing of title, and the second claim, that Merrill Lynch and SSG materially misrepresented that SSG would purchase rather than lease FFE, are clearly allegations of fraud relating to the performance of the Unit Sale Agreement rather than fraud in inducement of the agreement. Breach of contract was therefore the appropriate theory of liability for the alleged conduct.
As regards the third claim, the securities fraud claim, the plaintiffs chose to proceed under a breach of contract theory of liability in the class action. See n. 4, supra. The underlying facts of their securities fraud claim, that Merrill Lynch allowed the closing of title to take place on October 31, 1986, are indistinguishable from its conduct relating to performance of its alleged contractual obligations. In Florida, it appears that securities fraud claims — both state and federal — are barred by the economic loss rule when the plaintiff also has a breach of contract claim if the particular deception alleged relates to performance of terms memorialized in the agreement rather than inducement to enter the agreement. See Mergens v. Dreyfoos, No. 95-8793-CIV, 1997 WL 611576, *3 (S.D.Fla., July 18, 1997), aff'd. 166 F.3d 1114 (11th Cir.1999). See also Leisure Founders, 833 F.Supp. at 1571-72 (“It is clear that Florida law bars all claims for fraud where the plaintiff has a remedy in contract for the breach.”). When the plaintiffs recast what were originally alleged as fraud claims or securities claims as breaches of contract, and tried these claims as breaches of contract, they subjected those claims as well to the economic loss rule.
While the fourth claim, i.e., that the defendants failed to disclose that the other “luxury hotel” under development nearby was a Ritz Carlton, is indisputably a claim of fraud in the inducement, the plaintiffs included in the class breach of contract claim the claim that Merrill Lynch failed to inform the members of the class “of adverse information known [to it] that would have allowed them to protect their respective interests and avoid incurring damages.” The plaintiffs then litigated the issue of whether they were damaged by the nearby construction of a Ritz Carlton (rather than some other luxury hotel) in their contract trial. The district court held that the plaintiff class failed to prove that the fact the other luxury hotel was a Ritz Carlton made any difference to the *442success of plaintiffs’ own luxury hotel. Once again, when the plaintiffs recast what was originally alleged as a fraud claim as a breach of contract, and tried this claim as a breach- of contract, it seems to me that in equity they should be foreclosed from re-litigating the same facts and damages under a different theory of liability.
As Judge Moore observes in her concurrence, it is not appropriate to limit the factors that a district court may consider in judging the equities. Some of the fraud claims that the Florida plaintiffs seek to litigate in state court would seem to be foreclosed, regardless of any finding of virtual representation, by Florida law. Absent affirmance of the district court’s decision to enjoin litigation of the fraud claims for this reason alone (which to me appears sufficient), this consideration should at least figure into the “judging of the equities” that the court must undertake to determine whether the Florida plaintiffs were virtually represented. It is at least anomalous that counsel represents a party on one legal theory but does not even virtually represent the same party for the same claim because it is brought on a different legal theory.
This approach necessarily translates into a broader theory of virtual representation applicable in class actions than that espoused by Judge Moore. The Eighth Circuit observed in Tyus v. Schoemehl that a broader theory “give[s] wider use to virtual representation. This liberal use better accommodates the competing considerations of judicial economy and due process ... [T]he notion that a party is entitled to his day in court ... [is] better addressed through a careful application of the doctrine to the facts in a given case than by artificially limiting the scope of the doctrine. Tyus v. Schoemehl, 93 F.3d 449, 455 (8th Cir.1996). Careful application of the doctrine to the facts in this case leads me to agree with the result reached below. I would affirm the decision of the district court.

. The district court's judgment did not seek to bar claims relating to registration under the Florida Securities Act or individual claims as to suitability of the investment.

. Although it is not relevant to resolution of the instant case, it is worth noting that the Florida Supreme Court has determined that some statutory fraud actions, such as claims under the Florida Deceptive and Unfair Trade Practices Act (FDUTPA) involving consumer transactions based on a written sales contract, are not barred by the economic loss rule. See Delgado v. J.W. Courtesy Pontiac GMC-Truck, Inc., 693 So.2d 602, 610-11 (Fla.Dist.Ct.App.1997). In the case of FDUTPA claims relating to consumer transactions based on written sales contracts, the Florida District Court of Appeals determined that application of the rule would frustrate the intent of the state legislature to provide "expanded remedies for recovering economic losses suffered as a consequence of deceptive and unfair trade practices and acts.” Id. at 609.

. In addition to money damages, plaintiffs sought recission of the purchase for material breach of contract in the class action. Although the court found breaches of the contract, it also found that the plaintiffs failed to prove that any of the breaches caused them economic loss. Thus, plaintiffs were not entitled to recission. The damages awarded to them of $6,000,000 were to make them whole for their right under the contract to have defendants pay for the furnishings, etc. rather than lease them.

. When plaintiff class filed its amended complaint it recast its securities fraud claims as breaches of contract when it alleged:
In connection with its sale of Hotel Interests, Merrill Lynch entered into customer agreements (or had previously entered into customer agreements) with each of the Plaintiffs and members of the Class to act as their broker/dealer and, as implied by the terms of the customer agreements and/or its conduct, Merrill Lynch was required to act fairly, in good faith and in full compliance with federal securities laws in its dealings with Plaintiffs and members of the Class.
(e) Merrill Lynch further breached each of the customer agreements and its obligations incurred in connection with its participation in the Offering (and sale) of Hotel Interests to Plaintiffs and members of the Class by failing to comply with Rule 10b-9 and Rule 15c2-4 (promulgated by the SEC pursuant to and under the Exchange Act) in (1) allowing the delivery of the Investors deposits, Mortgage Notes, Mortgages, and other investment documents (which Merrill Lynch held in escrow for its customers) to Midwest Title pursuant to the escrow closing on February 15, 1985, when Merrill Lynch knew that the Subscriptions of Plaintiffs and members of the Class had been automatically cancelled [sic] as a result of failure to provide timely notice of financing approval and/or as a result of the expiration (not later than February 1, 1985) of the offering period for Hotel Interests, and (2) over 20 months thereafter, allowing the breaking of Midwest Title escrow and the closing of the sale of Hotel Interests to Plaintiffs and members of the Class to occur on October 30, 1986 prior to Hotel being physically complete, unencumbered, and fully operable for its intended purpose as a world class, luxury resort hotel.