George Kelly v. Peerstar LLC ( 2023 )

NOT PRECEDENTIAL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
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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
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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.
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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).
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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.
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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
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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