Schwartz v. Blum ( 2009 )

UNPUBLISHED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Affirmed in part and vacated in part by unpublished per curiam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Unpublished opinions are not binding precedent in this circuit.
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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
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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
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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
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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
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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
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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.
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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.
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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,
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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
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