Opinion
CL-2010-8635
02-14-2011
Jared & Donna Murayama 1997 Trust, Through Its Trustee, Jared Muravama v. NISC Holdings. LLC, et al.
Shelby J. Kelly, Esquire Bracewell & Giuliani, LLP Counsel for Plaintiff Randall K. Miller, Esquire Arnold & Porter, LLP Counsel for Defendants
dennis j, smith, chief judge
marcus d williams
jane marum housh
leslie m. alden
jonathan c. thacheh
r.terrence ney
randy i. bellows
charles j. maxfeeld
bruce 0. white
robert jr smith
david s. schell
jan l srodie
lorraine nohdlund
brett a kassasian
michael f. dev1ne
judges
barnaro f jennings
thomas j. midoleton
thomas a. fortodht
richard j. jamborsky
jack b. stevens
j. howe brown
r bruce bach
m.langhorneketth
arthur &vieregg
kathleen h. mackay
robert w. wooldhidge, jr.
michael r McWeeny
gaylord l finch, jr
stanley p. klein
retired judges
February 14, 2011
Dear Counsel:
This matter comes to the Court on Defendants' demurrer. Upon consideration of the pleadings, arguments of counsel, and the applicable governing authorities, the Court sustains Defendants' demurrer.
Background
On June 16, 2010, Plaintiff Jared & Donna Murayama 1997 Trust ("Murayama Trust") filed suit in this Court against Defendants NISC Holdings, LLC. ("NISC"), chairman of NISC Thomas Campbell ("Mr. Campbell"), DC Capital Partners, LLC, and International Business Machines Corporation ("IBM') (collectively "Defendants")- On November 3, 2010, Murayama Trust filed its Second Amended Complaint against Defendants, alleging fraud in the inducement (Count I), negligent misrepresentation (Count II), breach of fiduciary duty and duty of good faith and fair dealing (Count III), abuse of process (Count and unjust enrichment (Count V). The Second Amended Complaint and attachments thereto set forth the following facts.
In 2007, Murayama Trust was the majority owner of Omen, Inc., an information technology management company based in Maryland. In June 2007, Murayama Trust sold Omen, Inc. to NISC. As consideration for this sale, Murayama Trust received 48.78 percent of the Class A voting stock in NISC, a cash sum of $1,425,000 payable in November 2008, a significant portion of Class B shares in NISC, and a seat on NISC's board of directors.
In July 2007, Murayama Trust appointed Mr. Murayama to NISCs board of directors. This position entitled Mr. Murayama to inspect NISCs books and records and notice of all board meetings.
On November 9, 2009, NISC initiated a lawsuit against the organization Hawaii 5-0. Mr. Murayama was acting as an advisor to Hawaii 5-0 when NISC filed suit. NISC did not include Mr. Murayama or the Murayama Trust in the suit; however, the complaint made numerous allegations of misconduct directly against Mr. Murayama. Specifically, the complaint alleged that Mr. Murayama joined Hawaii 5-0 and thereafter launched a new business to compete directly with NISC.
Within three days of filing the Hawaii 5-0 lawsuit, NISC delivered a copy of the Hawaii 5-0 complaint and a settlement agreement to Mr. Murayama. NISC threatened to join Mr. Murayama if he did not agree to their settlement offer, which demanded that Mr. Murayama and the Trust return its Class A shares of NISC without compensation.
Mr. Murayama retained counsel and began negotiating a settlement. Murayama Trust alleges that during these negotiations Defendants failed to inform Mr. Murayama that NISC was actively negotiating a sale of the company, and that NISC had been valued in excess of $400,000,000. Moreover, Murayama Trust alleges that Defendants misrepresented the value of the Trust's shares. According to Murayama Trust, Defendants asserted that the Trust's shares were worth $1,000,000 when in fact they knew the value was closer to $9,000,000.
Finally, Murayama Trust claims that Defendants intentionally withheld this information despite their disclosure obligation to Mr. Murayama as a member of the board. According to Murayama Trust, Mr. Campbell scheduled a board meeting to discuss the possible sale of NISC in November 2009. At this meeting, Mr. Campbell informed the board that a sale of NISC was imminent, that NISC had retained the investment banking firm Jefferies & Company, and that NISC had received purchase offers in excess of $300,000,000. Mr. Campbell did not notify Mr. Murayama of this meeting, and Murayama Trust alleges that Mr. Campbell and NISC purposefully concealed this meeting and its contents from Mr. Murayama.
On December 9, 2009, Mr. Murayama and the Murayama Trust executed a settlement agreement ("Settlement") with NISC.1 The Settlement required Murayama Trust to return its Class A stock to NISC for $2,000,000 and Mr. Murayama to resign from NISCs board, in return for NISC releasing any claims against Mr. Murayama for his alleged misconduct in the Hawaii 5-0 lawsuit. The Settlement also contains the following provision: "NISC is considering and pursuing a range of strategic alternatives, including a sale of the company or a qualified public offering that could ultimately result in a different valuation" of the Class A shares. Also included within the Settlement is a "no reliance" clause, whereby Murayama Trust promises it is not relying on any representations outside of the Settlement, and that Murayama Trust has "fully informed itself' regarding the Settlement terms. Furthermore, the Settlement contains the following release language:
"Murayama Trust... hereby irrevocably and unconditionally release, acquit, and forever discharge NISC, Omen, and theirs affiliates ... from any and all claims, rights, demands, actions, habihties, obligations, causes of action of any and all kinds ... known or unknown, arising at anytime before the execution date of this Agreement... including, but not limited to, any and all claims which [Murayama Trust] ... may now have or may have had, arising in any way whatsoever connected with ... ownership of a Class A Membership Interest in NISC ... and that the Parties specifically agree that this Agreement extends to claims which [Murayama Trust] ... do not know or expect to exist in their favor ..."Mr. Murayama and the Murayama Trust did not object to any of the language or terms outlined above. Instead, Mr. Murayama and the Murayama Trust executed the Settlement in exchange for $2,000,000.
A little more than a month later, IBM and NISC issued a press release announcing IBM's acquisition of NISC for approximately $367,000,000. Based on this price, the shares NISC purchased from Murayama Trust through the Settlement were re-sold for nearly $7,000,000 more than the settlement price.
Based on these facts, Murayama Trust filed the Second Amended Complaint detailed above.
On November 19, 2010, Defendants NISC, Mr. Campbell, and DC Capital Partners filed the Demurrer at issue, which argues that the Second Amended Complaint fails to state a claim because Mr. Murayama entered into a global release of all known and unknown claims in the December 9,. 2009 Settlement. According to Defendants, when a party voluntarily enters into a global release of all known and unknown claims, he cannot later complain that he was "fraudulently induced because material information was, in fact, not disclosed" during negotiations. Moreover, Defendants argue that Murayama Trust is precluded from claiming fraudulent inducement because there could be no reasonable reliance in this case.
Murayama Trust filed a reply arguing that the Demurrer should be overruled because a contract or release induced by fraud is unenforceable notwithstanding any provision of the contract purporting to bar ah future claims between the parties. Murayama Trust further argues that its claim for fraudulent inducement is valid because Defendants had a duty to disclose the omitted information, and Mr. Murayama had a right to rely on the Defendants' silence. Lastly, Murayama Trust contends that because it plans to rely on parol evidence to prove fraudulent inducement, the claim for fraudulent inducement is immune from demurrer.
Analysis
I. Demurrer Standard
A demurrer tests the legal sufficiency of a pleading and should be sustained if the pleading, considered in the light most favorable to the plaintiff, fails to state a valid cause of action. Va. Code §8,01-273; Welding, Inc. v. Bland County Serv. Auth., 261 Va. 218, 226, 541 S.E.2d 909, 914 (2001). A demurrer presents only a question of law to be decided by the court. Tazewell County Sch. Bd v. Snead, 198 Va. 100, 103, 92 S.E.2d 497, 500 (1956).
In ruling on a demurrer, the court must admit as true all of the material facts properly alleged, as well as those that may be fairly and justly inferred from those facts. Cox Cable Hampton Roads, Inc. v. City of Norfolk, 242 Va. 394, 397, 410 S.E.2d 652, 653 (1991). When a demurrant's motion craving oyer has been granted, the court in ruling on demurrer may consider the facts alleged as amplified by any written attachment added to the record on the motion. Hechler Chevrolet, Inc. v. Gen. Motors Corp., 230 Va. 396, 398, 337 S.E.2d 744, 746 (1985). Moreover, a court considering a demurrer may ignore a party's factual allegations contradicted by the terms of an authentic, unambiguous document admitted through craving oyer. Wards Equip. Inc. v. New Holland N.Am., Inc., 254 Va. 379, 382, 493 S.E.2d 516, 518 (1997).
II. Defendants' Demurrer
Defendants argue that Murayama Trust cannot state a valid cause of action in the Second Amended Complaint because Mr. Murayama released all claims against Defendants in the December 9, 2009 Settlement. In response, Murayama Trust argues that Count I of the Second Amended Complaint properly alleges NISC fraudulently induced the December 9, 2009 Settlement, and thus the Settlement, and release language contained therein, must be considered void by this Court on demurrer.
It is a well settled principle of Virginia law that a fraudulently induced contract, compromise, or settlement is voidable. See George Robberecht Seafood Inc. v. Maitland Bros. Co., 220 Va. 109, 112, 255 S.E.2d 682, 683 (1979); Nationwide Mut. Ins. Co. v. Martin, 210 Va. 354, 357-58, 171 S.E.2d 239, 242 (1969). Furthermore, when fraudulent inducement is properly pled, the Court must accept as true that the disputed contract or settlement is void on demurrer. See George Robberecht Seafood Inc., 220 Va. at 111-12, 255 S.E.2d at 683; Packard Norfolk, Inc. v. Miller, 198 Va. 557, 564, 95 S.E.2d 207, 212 (1956); VMC Satellite, Inc. v. Stevens & Assocs., 68 Va. Cir. 103, 107 (Va. Cir. Ct. 2005). Accordingly, if Murayama Trust properly pled that Defendants fraudulently induced the Settlement, the Court must accept that the Settlement and release language is void. Thus, before considering whether the release language entitles Defendants to a demurrer, the Court must determine whether Murayama Trust stated a valid claim for fraud in the inducement in Count I.
Count I — Fraud in the Inducement
Actionable fraud requires a defendant's intentional, knowing misrepresentation of a material fact upon which a plaintiff has relied to its detriment. Winn. v. Aleda Constr. Co., 227 Va. 304, 308, 315 S.E.2d 193, 195 (1984). Virginia also recognizes fraud by omission, sometimes called "concealment." Concealment of a material fact by one who knows that the other party is acting upon the assumption that the fact does not exist constitutes actionable fraud. Allen Realty Corp. v. Holbert, 227 Va. 441, 450, 318 S.E.2d 592, 597 (1984). Silence, however, does not constitute concealment in the absence of a duty to disclose. Bank of Montreal v. Signet Bank, 193 F.3d 818, 827 (4th Cir. 1999); see Norris v. Mitchell, 255 Va. 235, 240-41, 495 S.E.2d 809, 812-13 (1998) (claim for fraud by concealment rejected, in part, because of holding that defendants had no duty to disclose)..
Defendants claim that Murayama Trust cannot allege fraud by omission because they voluntarily negotiated and executed the Settlement which contains the release language. According to Defendants, a party that voluntarily enters into a global release of all known and unknown claims cannot later complain that he was fraudulently induced because material information was not disclosed.
This argument sweeps too broadly. Virginia law is clear that while lawsuits may be settled, a mutual release memorializing a compromise and settlement can be rescinded for fraud in its procurement. See Metrocall of Del. v. Continental Cellular, 246 Va. 365, 374, 437 S.E.2d 189, 193-94 (1993); Nationwide Mut. Ins. Co., 210 Va. at 357-58, 171 S.E.2d at 242; Packard Norfolk, Inc., 198 Va. at 564, 95 S.E.2d at 212. This is true even if the settlement and release was fraudulently procured through the omission of material facts.
The only noted exception to this rule is highlighted in Metrocall of Delaware v. Continental Cellular, where the Virginia Supreme Court held that a plaintiff attempting to settle an existing controversy over fraud, dishonesty, and self-dealing cannot later claim fraud in the procurement of the settlement through concealment by the defendant. 246 Va. at 374, 437 S.E.2d at 193-94. In other words, Metrocall found that a litigant cannot rely on the representation or omissions of the allegedly dishonest party when negotiating a settlement and release.
The exception highlighted in Metrocall does not apply in this case because the Settlement did not resolve claims of fraud or dishonesty against Defendants. In fact, there were no allegations of fraud or dishonesty made by Murayama Trust in the Hawaii 5-0 lawsuit. Accordingly, Murayama Trust is not foreclosed from pleading fraud through omission merely because they voluntarily executed the Settlement and release.
Crucially, however, although Murayama Trust's acquiescence to the Settlement does not bar a claim for fraud, Murayama Trust was still required to adequately plead each element. In all cases of fraud, the plaintiff must prove, among other things, that he acted in actual and justifiable reliance on the defendant's misrepresentation. Am. Sur. Co. v. Hannah, 143 Va. 291, 301, 130 S.E. 411, 414 (1925). Moreover, the reliance alleged must be objectively reasonable. Mizell v. Sara lee Corp., 2:05cvl29, 2005 U.S. Dist. LEXIS 36988, at *17 (E.D. Va. June 9, 2005).
In this case, Murayama Trust has alleged that during the settlement negotiations Defendants affirmatively misrepresented the value of Murayama Trust's shares. Murayama Trust also claims Defendants omitted material facts that they should have disclosed, such as the status of any sale of NISC and the value of NISCs shares.
Assuming all the allegations made are true, the Court finds that Murayama Trust's decision to rely on Defendants' misrepresentations and silence was not reasonable. First, the parties' relationship had clearly developed into an adversarial one at the time of the settlement negotiations. Indeed, Defendants specifically alleged in the Hawaii 5-0 complaint that Mr. Murayama deceitfully conspired against NISC to steal their business, and they had threatened to joint Mr. Murayama in the suit. Moreover, Murayama Trust had retained counsel and made demands of its own. Given the adversarial nature of the negotiations, Murayama Trust should have known that NISC would not be eager to volunteer information throughout the negotiations. Second, the Settlement contains an explicit no reliance clause.2 This clause clearly states that Murayama Trust had fully informed itself through counsel and advisors, and that they would not rely on any statements made by Defendants. Moreover, Murayama Trust agreed to this no reliance term with the advice and consent of counsel. Finally, the Settlement provides that NISC was considering a range of options, including a stock sale, that could ultimately lead to a different valuation of Murayama Trust's shares. Consideration of these facts inescapably leads to the conclusion that Murayama Trust was not justified in its re reliance and had every reason to question the Defendants silence and statements regarding any sale of NISC and the value of Murayama Trust's shares.
Moreover, if a party claiming fraud was given information that would arouse the suspicions of an ordinary person, he is under a duty to investigate and cannot reasonably rely on the representations or silence of the other party.3 Unity Farm Constr., Inc. v. Slabtown L.P., 24 Va. Cir. 242, 245-46 (Va. Cir. Ct. 1991). In essence, a contracting party must exercise ordinary care and prudence, and where a prudent person would have investigated, so too should all others. Elliott v. Great Point Partners, LLC, l:10cvl019, 2011 U.S. Dist. LEXIS 827, at *14-16 (E.D. Va. Jan. 5, 2011); See Virginia Natural Gas Co, Inc. v. Hamilton, 249 Va. 449, 456, 457 S.E.2d 17, 21 (1995) (the requirement of reasonable reliance requires that a contracting party exercise ordinary care and prudence).
Here, Murayama Trust was given information that would arouse the suspicions of an ordinary person. First, the Settlement contains a provision that the value of Murayama Trust's shares could change in the future due to a sale of NISC. In fact, the Settlement specifically states that "NISC is considering and pursuing a range of strategic alternatives, mcluding a sale of the company ... that could ultimately result in a different valuation" of the Class A shares. The Settlement also contains a provision whereby Murayama Trust promised not to rely on any representations made by Defendants. Considering these provisions, and that Defendants had just initiated a lawsuit alleging Mr, Murayama conspired to injure NISC, Murayama Trust should have investigated the value of its shares as opposed to relying on the representations and silence of Defendants. Furthermore, Mr. Murayama had an avenue to access information regarding NISC as a member of the board. Murayama Trust, however, saw fit to trust itself in the hands of the Defendants instead of demanding information and investigating as a reasonable person would have. Thus, the Court finds that Murayama Trust's decision to rely on Defendants' silence and misrepresentations without any investigation was unreasonable.
Accordingly, it is the Court's opinion that Murayama Trust is unable, as a matter of law, to show that it reasonably relied upon Defendants' alleged misrepresentations or silence. Thus, Murayama Trust is incapable of pleading fraudulent inducement in Count I and this claim must be dismissed.
Murayama Trust has one additional argument that the Court must address before moving to the remaining counts. Murayama Trust contends that a claim for fraud in the inducement is not demurrable when a party intends to rely on parol evidence. Thus, because Murayama Trust intends to rely on parol evidence to prove fraud in this case, Count I is immune from demurrer.
This argument is unpersuasive. The cases cited by Murayama Trust indicate that relying on parol evidence itself is not a basis for demurrer, not that relying on parol evidence immunizes a claim from demurrer. See George Robberecht Seafood, Inc., 220 Va. at 111-12, 225 S.E.2d at 683 ("the fact that such a pleading shows that a party intends to rely upon such evidence would not rending the [pleading] demurrable") (emphasis added). Moreover, Murayama Trust's argument is inconsistent with Virginia's policy favoring the finality of settlements. Snyder-Falkinham v. Stockburger, 249 Va. 376, 381, 457 S.E.2d 36, 39 (1995); see Richardson v. Richardson, 10 Va. App. 391, 399, 392 S.E.2d 688, 692 (Va. Ct. App. 1990) (noting that settlement agreements are designed to put an end to litigation and are favored by the law), overruled in part on other grounds, Flanary v. Milton, 263 Va. 20, 556 S.E.2d 767 (2002). Indeed, Murayama Trust's argument, when taken to its logical end, would eviscerate the finahty of settlement agreements because a party to a settlement who felt they received an inferior result could always pursue litigation and avoid demurrer by alleging fraud in the inducement through parol evidence. This threat of litigation would enable a plaintiff to refuse compliance with their settlement and demand additional compensation, which the defendant would pay knowing they could not avoid litigation costs and attain a dismissal on demurrer. Accordingly, courts in this jurisdiction are not precluded from upholding settlement agreements merely because the plaintiff asserts that he intends to rely on parol evidence to demonstrate fraud in the inducement. Any litigant claiming fraud in the inducement must adequately plead each element, and if they cannot do so, as in this case, the Court should dismiss the claim and give finality to the settlement.
Given Count I must be dismissed because Murayama Trust is incapable of pleading fraudulent inducement, the Court can now consider whether the release language set forth in the Settlement entitles Defendants to a demurrer as to the remaining counts.
Counts II-V
Virginia law is clear that parties can freely contract for the release of all claims, both known and unknown. See, e.g., Richfood, Inc. v. Jennings, 255 Va. 588, 591, 499 S.E.2d 272, 274-75 (1998); Metrocall, 246 Va. at 376, 437 S.E.2d at 195. A valid release completely bars litigation of the waived claims. See id.
In this case, the December 9, 2009 Settlement contains a release provision waiving all claims known and unknown against Defendants arising from "or in any way ... connected" to Murayama Trusts's ownership of NISC stock. Based on the record, it is undisputable that the Settlement constitutes a valid release. See Pennsylvania Life Ins. Co. v. Bumbrey, 665 F. Supp. 1190, 1194 (E.D. Va. 1987) (to show the initial validity of a release, a party must show that there was some dispute between the parties, that the release was signed and executed settling the dispute, and that consideration was given in return for the release). Accordingly, Murayama Trust is barred from htigating all claims arising from or connected to its ownership of NISC stock.
In each of the g Counts (II-V), Murayama Trust alleges misconduct that is derivative of or attributable to its ownership of NISC stock. The Settlement release indisputably covers these remaining claims. Therefore, Murayama Trust is barred from litigating these Counts.
Furthermore, Murayama Trust has failed to advance a valid defense to set aside the Settlement release. See Nationwide Mut. Ins. Co. v. Muncy, 217 Va. 916, 919, 234 S.E.2d 70, 72 (1977) (a valid release can be set aside due to fraud or mistake, but the burden is on the releasor to show that a valid release should be set aside). Although Murayama Trust argues that the Settlement is void due to fraud in the inducement, this Court has already determined that Murayama Trust is precluded from pleading fraudulent inducement in this case.
Accordingly, the Court finds that Counts II-V are barred as a matter of law because the Settlement release clearly covers these remaining claims and Murayama Trust did not provide a valid defense to set aside the Settlement.
Conclusion
For the reasons set forth above, Defendants' Demurrer is sustained with prejudice as to all counts. An order is enclosed.
Sincerely, Circuit Court Judge, Fairfax County
ORDER
THIS MATTER came to be heard on Defendants' Demurrer to the Second Amended Complaint; and
IT APPEARING to the Court for the reasons stated in the Court's Letter Opinion of February 14, 2011 that the Demurrer should be sustained; it is therefore
ORDERED that the Court's Letter Opinion of February 14, 2011 is incorporated into this Order; it is further
ORDERED that Defendants' Demurrer is SUSTAINED as to all counts with prejudice.
ENTERED this 14th day of February, 2011. __________
Judge Jonathan C. Thacher
In order to expedite the disposition of this matter, endorsement of this Order by counsel of record for the parties is waived in the discretion of the Court pursuant to Rule 1:13 of the
Rules of the Supreme Court of Virgina. _______________________________________________ 1 This Court can consider the Settlement on demurrer because Defendants properly admitted it through a motion craving oyer granted on July 27, 2010.
3
2 Although fraud in the inducement makes a contract voidable, it does not make the contract terms irrelevant. Fraud in the inducement is a tort-based remedy; it is not grounded in contract law. The provisions of a fraudulently induced contract can still affect the tort concept of whether a contracting party's reliance was reasonable. See Bank of Montreal, 3 This is not the same thing as negligence in failing to iearn the truth, which is no defense to fraud. See, e.g., Boykin v. Hermitage Realty,