Court Opinion

ID: 768812
Source: CourtListenerOpinion
Date Created: 2012-04-18 09:14:21+00
Date Added: 2024-06-11T15:19:06.235793
License: Public Domain

213 F.3d 381 (7th Cir. 2000)
Arnold R. Rissman,    Plaintiff-Appellant,v.Owen Randall Rissman and Robert Dunn Glick,    Defendants-Appellees.
No. 99-2719
In the  United States Court of Appeals  For the Seventh Circuit
Argued April 7, 2000Decided May 23, 2000Rehearing and Rehearing En Banc Denied June 19, 2000.

Appeal from the United States District Court  for the Northern District of Illinois, Eastern Division.  No. 98 C 3656--Blanche M. Manning, Judge.
Before Bauer, Easterbrook, and Rovner, Circuit Judges.
Easterbrook, Circuit Judge.

1
Gerald Rissman formed Tiger  Electronics to make toys and games. In 1979 Gerald gave his sons  Arnold, Randall, and Samuel large blocks of stock in the firm:  Gerald kept 400 shares and gave Randall 400, Arnold 100, and Samuel  100. In 1986 both Gerald and Samuel withdrew from the venture.  Tiger bought Gerald's stock, and Arnold bought Samuel's, leaving  Randall with 2/3 of the shares and Arnold with the rest. Randall  managed the business while Arnold served as a salesman. Arnold did  not elect himself to the board of directors, though Tiger employed  cumulative voting, which would have enabled him to do so. When the  brothers had a falling out, Arnold sold his shares to Randall for  $17 million. Thirteen months later, Tiger sold its assets  (including its name and trademarks) for $335 million to Hasbro,  another toy maker, and was renamed Lion Holdings. Arnold contends  in this suit under the federal securities laws (with state-law  claims under the supplemental jurisdiction) that he would not have  sold for as little as $17 million, and perhaps would not have sold  at all, had Randall not deceived him into thinking that Randall  would never take Tiger public or sell it to a third party. Arnold  says that these statements convinced him that his stock would  remain illiquid and not pay dividends, so he sold for whatever  Randall was willing to pay. Arnold now wants the extra $95 million  he would have received had he retained his stock until the sale to  Hasbro.

2
Because the district judge granted summary judgment to the  defendants, see 1999 U.S. Dist. Lexis 10611 (N.D. Ill.), we must  assume that Randall told Arnold that he was determined to keep  Tiger a family firm. Likewise we must assume that Randall secretly  planned to sell after acquiring Arnold's shares. But we need not  assume that Arnold relied on Randall's statements (equivalently,  that the statements were material to and caused Arnold's decision),  and without reliance Arnold has no claim under sec. 10(b) or Rule  10b-5. See 15 U.S.C. sec. 78j(b); 17 C.F.R. sec. 240.10b-5; Basic,  Inc. v. Levinson, 485 U.S. 224, 243 (1988). Arnold asked Randall to  put in writing, as part of the agreement, a representation that  Randall would never sell Tiger. Randall refused to make such a  representation. Instead he warranted (accurately) that he was not  aware of any offers to purchase Tiger and was not engaged in  negotiations for its sale. Contrast Jordan v. Duff & Phelps, Inc.,  815 F.2d 429 (7th Cir. 1987). The parties also agreed that if Tiger  were sold before Arnold had received all installments of the  purchase price, then payment of the principal and interest would be  accelerated. Having sought broader assurances, and having been  refused, Arnold could not persuade a reasonable trier of fact that  he relied on Randall's oral statements. See Karazanos v. Madison  Two Associates, 147 F.3d 624, 628-31 (7th Cir. 1998). Having signed  an agreement providing for acceleration as a consequence of sale,  Arnold is in no position to contend that he relied on the  impossibility of sale.

3
Indeed, Arnold represented as part of the transaction that he  had not relied on any prior oral statement:

4
The parties further declare that they have not relied upon any  representation of any party hereby released [Randall] or of their  attorneys [Glick], agents, or other representatives concerning the  nature or extent of their respective injuries or damages.    That is pretty clear, but to foreclose quibbling Arnold made these  warranties to Randall:

5
(a) no promise or inducement for this Agreement has been made to  him except as set forth herein; (b) this Agreement is executed by  [Arnold] freely and voluntarily, and without reliance upon any  statement or representation by Purchaser, the Company, any of the  Affiliates or O.R. Rissman or any of their attorneys or agents  except as set forth herein; (c) he has read and fully understands  this Agreement and the meaning of its provisions; (d) he is legally  competent to enter into this Agreement and to accept full  responsibility therefor; and (e) he has been advised to consult  with counsel before entering into this Agreement and has had the  opportunity to do so.

6
Arnold does not contend that any representation in the stock  purchase agreement is untrue or misleading; his entire case rests  on Randall's oral statements. Yet Arnold assured Randall that he  had not relied on these statements. Securities law does not permit  a party to a stock transaction to disavow such representations--to  say, in effect, "I lied when I told you I wasn't relying on your  prior statements" and then to seek damages for their contents.  Stock transactions would be impossibly uncertain if federal law  precluded parties from agreeing to rely on the written word alone.  "Without such a principle, sellers would have no protection against  plausible liars and gullible jurors." Carr v. CIGNA Securities,  Inc., 95 F.3d 544, 547 (7th Cir. 1996).

7
Two courts of appeals have held that non-reliance clauses in  written stock-purchase agreements preclude any possibility of  damages under the federal securities laws for prior oral  statements. Jackvony v. RIHT Financial Corp., 873 F.2d 411 (1st  Cir. 1989) (Breyer, J.); One-O-One Enterprises, Inc. v. Caruso, 848 F.2d 1283 (D.C. Cir. 1988) (R.B. Ginsburg, J.). Several of this  circuit's opinions intimate agreement with these decisions, though  we have yet to encounter a situation squarely covered by them. See  SEC v. Jakubowski, 150 F.3d 676, 681 (7th Cir. 1998); Pommer v.  Medtest Corp., 961 F.2d 620, 625 (7th Cir. 1992); Astor Chauffeured  Limousine Co. v. Runnfeldt Investment Corp., 910 F.2d 1540, 1545-46  (7th Cir. 1990). Jackvony and One-O-One fit Arnold's claim like a  glove, and we now follow those cases by holding that a written  anti-reliance clause precludes any claim of deceit by prior  representations. The principle is functionally the same as a  doctrine long accepted in this circuit: that a person who has  received written disclosure of the truth may not claim to rely on  contrary oral falsehoods. See Carr and, e.g., Associates In  Adolescent Psychiatry, S.C. v. Home Life Insurance Co., 941 F.2d 561, 571 (7th Cir. 1991); Dexter Corp. v. Whittaker Corp., 926 F.2d 617, 620 (7th Cir. 1991); Teamsters Local 282 Pension Trust Fund v.  Angelos, 762 F.2d 522, 530 (7th Cir. 1985). A non-reliance clause  is not identical to a truthful disclosure, but it has a similar  function: it ensures that both the transaction and any subsequent  litigation proceed on the basis of the parties' writings, which are  less subject to the vagaries of memory and the risks of  fabrication.

8
Memory plays tricks. Acting in the best of faith, people may  "remember" things that never occurred but now serve their  interests. Or they may remember events with a change of emphasis or  nuance that makes a substantial difference to meaning. Express or  implied qualifications may be lost in the folds of time. A  statement such as "I won't sell at current prices" may be recalled  years later as "I won't sell." Prudent people protect themselves  against the limitations of memory (and the temptation to shade the  truth) by limiting their dealings to those memorialized in writing,  and promoting the primacy of the written word is a principal  function of the federal securities laws.

9
Failure to enforce agreements such as the one between Arnold  and Randall could not make sellers of securities better off in the  long run. Faced with an unavoidable risk of claims based on oral  statements, persons transacting in securities would reduce the  price they pay, setting aside the difference as a reserve for risk.  If, as Arnold says, Randall was willing to pay $17 million and not  a penny more, then a legal rule entitling Arnold to an extra $95  million if Tiger should be sold in the future would have scotched  the deal (the option value of the deferred payment exceeds 1¢),  leaving Arnold with no cash and the full risk of the venture.  Arnold can't have both $17 million with certainty and a continuing  right to 1/3 of any premium Randall negotiates for the firm, while  bearing no risk of loss from the fickle toy business; that would  make him better off than if he had held his shares throughout.

10
Negotiation could have avoided this litigation. Instead of  taking the maximum Randall was willing to pay unconditionally,  Arnold could have sought a lower guaranteed payment (say, $10  million) plus a kicker if Tiger were sold or taken public. Because  random events (or Randall's efforts) would dominate Tiger's  prosperity over the long run, the kicker would fall with time.  Perhaps Arnold could have asked for 25% of any proceeds on a sale  within a year, diminishing 1% every other month after that (so that  Randall would keep all proceeds of a sale more than 62 months after  the transaction with Arnold). Many variations on this formula were  possible; all would have put Randall to the test, for if he really  planned not to sell, the approach would have been attractive to him  because it reduced his total payment. Likewise it would have been  attractive to Arnold if he believed that Randall wanted to sell as  soon as he could receive more than 2/3 of the gains. Yet Arnold  never proposed a payment formula that would share the risk (and  rewards) between the brothers, and the one he proposes after the  fact in this litigation--$17 million with certainty and a perpetual  right to 1/3 of any later premium--is just about the only formula that could not conceivably have been the outcome of bargaining.

11
Arnold calls the no-reliance clauses "boilerplate," and they  were; transactions lawyers have language of this sort stored up for  reuse. But the fact that language has been used before does not  make it less binding when used again. Phrases become boilerplate  when many parties find that the language serves their ends. That's  a reason to enforce the promises, not to disregard them. People  negotiate about the presence of boilerplate clauses. The sort of  no-reliance clauses that appeared in the Rissmans' agreement were  missing from other transactions, such as the ones in Astor  Chauffeured Limousine and Acme Propane, Inc. v. Tenexco, Inc., 844 F.2d 1317 (7th Cir. 1988). Still other transactions, such as the  one discussed in LHLC Corp. v. Cluett, Peabody & Co., 842 F.2d 928  (7th Cir. 1988), include "strict reliance" clauses, entitling one  party to rely on every representation ever made by the other.  Arnold could have negotiated for the elimination of the no-reliance  clauses, or the inclusion of a strict-reliance clause, but in  exchange he would have had to accept a price lower than $17  million. Judges need not speculate about the reason a clause  appears or is omitted, however; what matters when litigation breaks  out is what the parties actually signed.

12
Contractual language serves its functions only if enforced  consistently. This is one of the advantages of boilerplate, which  usually has a record of predictable interpretation and application.  If as Arnold says the extent of his reliance is a jury question  even after he warranted his non-reliance, then the clause has been  nullified, and people in Arnold's position will be worse off  tomorrow for reasons we have explained. Rowe v. Maremont Corp., 850 F.2d 1226 (7th Cir. 1988), on which Arnold principally relies, does  not assist him. Maremont contended that as a matter of law no oral  representations survive a written contract; we rejected that  conclusion in Rowe, 850 F.2d at 1234, and again in Astor  Chauffeured Limousine, but in neither Rowe nor Astor Chauffeured  Limousine had the parties included a no-reliance warranty in their  written agreement. Arnold, by giving Randall such a warranty, put  himself in a different position.

13
Only one case offers Arnold even a glimmer of support:  Contractor Utility Sales Co. v. Certain-Teed Products Corp., 638 F.3d 1061, 1083 (7th Cir. 1981), concluded that an integration  clause did not preclude reliance on prior fraudulent statements  under the common law of Pennsylvania. To the extent that Contractor  Utility Sales rests on a belief that state law allocates issues  between judge and jury in diversity litigation (for the opinion  cites only state cases in the critical passages), it has been  overtaken by subsequent decisions. See Mayer v. Gary Partners &  Co., 29 F.3d 330 (7th Cir. 1994) (overruling a line of cases that  applied state law to determine which issues must be presented to  juries). To the extent that Contractor Utility Sales states a  proposition of federal practice, it does not extend beyond simple  integration clauses--and must be deemed of doubtful validity even  with respect to them, given the wealth of later decisions such as  Jackvony, One-O-One, Angelos, and Carr. But we need not decide  whether this aspect of Contractor Utility Sales is sound, for the  agreement between Arnold and Randall contained the clauses set out  above, in addition to an integration clause. Perhaps the parties  added the language to make sure that Contractor Utility Sales could  not be used to upset their deal. No matter their motives, however,  their language forecloses any damages based on oral  representations.

14
In order to get anywhere, Arnold must rid himself of the  no-reliance clauses, and to this end he argues that the entire  stock-sale agreement is voidable because signed under duress. The  parties agree that Illinois law supplies the definition of duress.  Arnold contends that he signed under duress because: Randall threatened to fire him from his job at Tiger.

15
His stock was illiquid and worthless unless Randall could  be persuaded to buy it (or to sell Tiger), and Randall threatened  never to buy the stock if Arnold caused trouble.

16
He feared that Randall would cause Tiger to stop  reimbursing the shareholders for taxes that had to be paid on  Tiger's profits. (Tiger became a Subchapter S corporation in 1991,  so its profits were taxable to the shareholders. Part of the 1991  agreement required Tiger to distribute dividends equal to the  shareholders' tax obligations, and Arnold professes fear that  Randall would not honor this commitment.)

17
Late in 1996 Randall caused Tiger to eliminate cumulative  voting, depriving Arnold of the entitlement to elect himself to the  board.

18
Glick told Arnold that he would be subject to penalties  if he revealed confidential information to third parties in order  to stir up acquisition bids.

19
Tiger filed suit against Arnold in an Illinois court to  resolve a dispute about Arnold's right to review Tiger's corporate  records.

20
Randall (according to Arnold) threatened to "drag him  through the courts forever" unless Arnold sold his stock.

21
The district court concluded that none of these assertions calls  into question the validity of the agreement under Illinois law, and  we agree.

22
Illinois defines duress as "a condition where one is induced  by a wrongful act or threat of another to make a contract under  circumstances which deprive him of the exercise of his free will".  Curran v. Kwon, 153 F.3d 481, 489 (7th Cir. 1998), quoting from  Kaplan v. Kaplan, 25 Ill. 2d 181, 185, 182 N.E.2d 706, 709 (1962).  The essential question is whether a "threat has left the individual  bereft of the quality of mind essential to the making of a  contract." Kaplan, 25 Ill. 2d at 186, 182 N.E.2d at 709. Arnold was  of sound mind and readily could understand his options. He had  legal and financial advice--and, despite what Arnold now says, he  had many alternatives to the sale. He could, for example, have  dissented from the decision to eliminate cumulative voting and  demanded that Tiger repurchase his stock at a price to be set by a  neutral appraiser. 805 ILCS 5/11.65(a)(3)(iii), 5/11.70. This was  his absolute right; it did not depend on demonstrating that  elimination of cumulative voting was "oppressive" or the like. If  he thought $17 million too low, he had only to present that  position to the state judiciary. Likewise with his fear that Tiger  would stop distributing the money necessary to cover taxes on its  profits. Tiger's failure to keep its promises would have led to a  remedy in state court, and Arnold's lawyers surely could have  informed him that although litigation (including the records-access  suit then under way) may seem to last "forever," it ends much  faster. At oral argument Arnold's lawyer said that Arnold wanted to  avoid risk; after all, the appraisal might have concluded that his  stock was worth less than $17 million. True enough; many sensible  people want to curtail risk (and all litigation is risky); but that  objective could not be achieved if courts refused to enforce  agreements like the one between Arnold and Randall, for then  litigation would be the only way to resolve disputes. No legal  system can accept an assertion that "this contract was signed under  duress because my only alternative was a lawsuit." That would  eliminate settlement--and to a substantial degree the institution  of contract itself.

23
This is not to say that a remote possibility of litigation as  an alternative to settlement always scotches a claim of duress.  Illinois uses formulaic words such as "free will," but when forced  to choose it applies a functional approach under which  opportunistic exploitation of options that contracts were designed  to foreclose equals duress. The party that performs first incurs  sunk costs, which the other may hold hostage by demanding greater  compensation in exchange for its own performance. The movie star  who sulks (in the hope of being offered more money) when production  is 90% complete, and reshooting the picture without him would be  exceedingly expensive, is behaving opportunistically. The classic  case, though not from Illinois, is Alaska Packers' Ass'n v.  Domenico, 117 F. 99 (9th Cir. 1902) (admiralty). After a fishing  vessel reached a remote location, the crew refused to work (and  threatened to sail home) unless paid double the wage to which they  had agreed immediately before leaving port. The court held that the  vessel owner's promise to double the wage was unenforceable because  obtained under duress: the remote location and lack of an alternate  crew had enabled the sailors to behave opportunistically. See also  Varouj A. Aivazian, Michael J. Trebilcock & Michael Penny, The Law  of Contract Modifications: The Uncertain Quest for a Benchmark of  Enforceability, 22 Osgoode Hall L.J. 173 (1984); Timothy J. Muris,  Opportunistic Behavior and the Law of Contracts, 65 Minn. L. Rev.  521 (1981). No one would have thought that the owner's ability to  file a lawsuit could have helped; the fishing season would be over  before the case could be adjudicated, and the seamen might have  been judgment-proof anyway. Illinois cases holding that particular  agreements were made under duress because litigation was not a  feasible alternative are in the same vein. See People ex rel.  Carpentier v. Daniel Hamm Drayage Co., 17 Ill. 2d 214, 161 N.E.2d 318 (1959); Kaplan v. Keith, 60 Ill. App. 3d 804, 377 N.E.2d 279  (1st Dist. 1978). But for Arnold litigation (especially an  appraisal action under which a state court would have compelled  Tiger to buy his shares for their full value) would have been a  sensible option.

24
People under indictment for murder, and facing the death  penalty, may settle their dispute and avoid the risk with a guilty  plea and a term of imprisonment. North Carolina v. Alford, 400 U.S. 25 (1970). People facing discharge at an advanced age may agree to  early retirement and resolve their dispute with a severance  package. See Henn v. National Geographic Society, 819 F.2d 824 (7th  Cir. 1987). Neither the criminal defendant nor the older worker may  accept the benefits of the bargain and later seek to avoid the  detriments on the theory that unpleasant options mean duress. In  each situation litigation offers a civilized, and proper,  alternative: the innocent person may stand trial, and the worker  may pursue a claim under the ADEA. Arnold could have litigated but  chose to settle instead. If people in Arnold's position can't  assure their antagonists that a settlement will bring peace, then  there will be many fewer settlements, and those that still occur  will be concluded on altered terms. Randall would not have paid $17  million had he thought that Arnold remained free to carry on their  disputes--to drag Randall through the courts forever.       The agreement between Randall and Arnold contains a global  settlement and release. Our conclusion that the agreement is valid  means that the agreement extinguishes all of Arnold's claims, under  both state and federal law.

Affirmed

25
ROVNER, Circuit Judge, concurring.  I join in the majority  opinion, and agree that under the facts of this case, the  non-reliance clause precludes damages for the prior oral  statements. I write separately only to explain further the basis  for, and scope of, that holding. As the majority opinion notes, our  holding follows that of the courts of appeals in Jackvony v. RIHT  Financial Corp., 873 F.2d 411 (1st Cir. 1989) (Breyer, J.) and  One-O-One Enterprises, Inc. v. Caruso, 848 F.2d 1283 (D.C. Cir.  1988) (R.B. Ginsburg, J.). The reasoning in those cases, as well as  other cases in this court, reveals that all circumstances  surrounding the transaction are relevant in determining whether  reliance on prior oral statements can be deemed reasonable. Thus,  although it may be determinative in many--and perhaps most--cases,  the existence of a non-reliance clause will not automatically  preclude damages for prior oral statements.

26
In Jackvony, the First Circuit set forth eight factors that  are relevant in determining whether an investor's reliance on prior  statements was reasonable: (1) the sophistication and expertise of  the plaintiff in financial and securities matters; (2) the  existence of long standing business or personal relationships; (3)  access to the relevant information; (4) the existence of a  fiduciary relationship; (5) concealment of the fraud; (6) the  opportunity to detect the fraud; (7) whether the plaintiff  initiated the stock transaction or sought to expedite the  transaction; and (8) the generality or specificity of the  misrepresentations. 873 F.2d at 416. The court then held that the  reliance on the prior statements in Jackvony was unreasonable  because the prior statements were vague, Jackvony was a  sophisticated investor, the written proxy statement instructed  Jackvony not to rely on any other statements, Jackvony seemed  anxious to expedite the transaction, and Jackvony helped draft the  written acquisition documents. Thus, the Jackvony court did not  hold that a non-reliance statement precludes a fraud claim in all  cases, but notes that it is a factor that may defeat a claim of  reliance.

27
Similarly, the D.C. Circuit in One-O-One, in holding that an  integration clause rendered reliance on prior representations  unreasonable, set forth the context in which that written agreement  was reached. Specifically, the court noted that the parties reached  the written agreement after eight months of vigorous negotiations  involving many offers, promises and representations, and that the  integration clause was included to avoid misunderstandings as to  what was agreed upon in the course of those extensive negotiations. 848 F.2d at 1286. The court also rejected the plaintiffs' claim of  fraud in the inducement based on the circumstances present in that  particular case, holding that "[w]e have here the case of 'a party  with the capacity and opportunity to read a written contract, who  [has] execute[d] it, not under any emergency, and whose signature  was not obtained by trick or artifice;' such a party, if the parol  evidence rule is to retain vitality, 'cannot later claim fraud in  the inducement.'" Id. at 1287, quoting Management Assistance, Inc.  v. Computer Dimensions, Inc., 546 F. Supp. 666, 671-72 (N.D. Ga.  1982 ___, aff'd mem. sub nom. Computer Dimensions, Inc. v. Basic  Four, 747 F.2d 708 (11th Cir. 1984). In fact, in Whelan v. Abell,  48 F.3d 1247, 1258 (D.C. Cir. 1995), the court explicitly  recognized that the conclusion in One-O-One "was plainly not  intended to say that an integration clause bars  fraud-in-the-inducement claims generally or confines them to claims  of fraud in execution. . . . Such a reading would leave swindlers  free to extinguish their victims' remedies simply by sticking in a  bit of boilerplate." Id.

28
Thus, both Jackvony and One-O-One recognize that courts must  consider all of the surrounding circumstances in determining  whether reliance on a prior oral settlement is reasonable, and that  the existence of a non-reliance clause is but one factor, albeit a  fairly convincing one in many cases. This is also consistent with  our decision in Carr v. CIGNA Securities, Inc., 95 F.3d 544, 547  (7th Cir. 1996), which held that "[i]f a literate, competent adult  is given a document that in readable and comprehensible prose says  X . . . and the person who hands it to him tells him, orally, not  X . . . our literate competent adult cannot maintain an action for  fraud against the issuer of the document." In discussing  disclaimers in the context of a fiduciary relationship, Carr noted  that a written disclaimer may not provide a safe harbor in every  case, because "[n]ot all principals of fiduciaries are competent  adults; not all disclaimers are clear; and the relationship  involved may involve such a degree of trust invited by and  reasonably reposed in the fiduciary as to dispel any duty of  self-protection by the principal." Id. at 548. The reasonableness  of the reliance thus depends on an analysis of the surrounding  circumstances. Just as it would be unreasonable to expect a person  to pore through a 427 page document looking for "nuggets of  intelligible warnings," a person may not claim reasonable reliance  when a written disclaimer is apparent in an eight page document.  Id.

29
This is nothing new. The issue of reasonable reliance has  always depended upon an analysis of all relevant circumstances. I  write separately merely to avoid the inevitable quotes in future  briefs characterizing our holding as an automatic rule precluding  any damages for fraud based on prior oral statements when a  non-reliance clause is included in a written agreement. The world  is not that simple, and our holding today cannot be interpreted so  simplistically. On the facts in this case, involving extensive  negotiations aided by counsel and with numerous rejections of  efforts to include the oral representations in the written  agreement, the non-reliance clause rendered any reliance on the  prior statements unreasonable.