Unpublished Disposition, 935 F.2d 273 (9th Cir. 1987)Annotate this Case
Haruyo D'ELIA, Plaintiff-Appellant-Cross-Appellee,v.Serge M. D'ELIA, Defendant-Appellee-Cross-Appellant.
Nos. 89-56032, 89-56075.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted Nov. 7, 1990.Decided June 13, 1991.
Before WILLIAM A. NORRIS, CYNTHIA HOLCOMB HALL and RYMER, Circuit Judges.
Plaintiff Haruyo d'Elia ("Haruyo") appeals an order of summary judgment in favor of defendant Serge d'Elia ("Serge"). Defendant Serge cross-appeals, claiming that the district court should have granted summary judgment on additional claims. Haruyo sued her former husband in federal court, alleging a violation of section 10(b) of the Securities Exchange Act of 1934. Haruyo also alleged a number of state-law grounds for relief. Specifically, Haruyo alleged that Serge committed actual and constructive fraud, breached his fiduciary duty to her, and violated certain state securities laws. All of Haruyo's claims arise from the same factual event, Serge and Haruyo's execution of a Marital Settlement Agreement incident to their divorce. The district court granted Serge summary judgment on Haruyo's federal securities-law claim, and her state-law claims of actual and constructive fraud. However, the district court declined to exercise pendent jurisdiction over Haruyo's claims of breach of fiduciary duty and state securities-law violations, and accordingly dismissed these claims without prejudice for lack of subject matter jurisdiction. We reverse and remand.
* The District Court exercised subject matter jurisdiction under 15 U.S.C. § 78aa and the doctrine of pendent jurisdiction. We have jurisdiction over these appeals pursuant to 28 U.S.C. §§ 1291 & 1294, and Fed. R. App. P. 4(a).
The district court's finding that it had subject matter jurisdiction is subject to de novo review. Kruso v. International Tel. & Tel. Corp., 872 F.2d 1416, 1421 (9th Cir. 1989), cert. denied, 110 S. Ct. 3217 (1990). The district court's grant of summary judgment is also reviewed de novo, Ford v. Manufacturers Hanover Corp., 831 F.2d 1520 (9th Cir. 1987), as is the district court's interpretation of California state law. Id.; Matter of McLinn, 739 F.2d 1395 (9th Cir. 1984) (en banc). Because this case comes before us after a grant of summary judgment, we view the factual record in the light most favorable to the nonmoving party, Haruyo. Tzung v. State Farm Fire and Casualty Co., 873 F.2d 1338, 1339-40 (9th Cir. 1989).
Haruyo is from Japan and speaks English as a second language. During the course of their marriage, Serge and Haruyo purchased stock in the Van Doren Rubber Company ("Vans"). Serge was one of the initial investors in Vans, and was a director of the company from its inception until early 1988. Serge was also a vice president of Vans, until he resigned in June 1987. Haruyo, in contrast, does not know how to read a corporate income statement.
Serge and Haruyo separated in February 1981, but despite their separation the couple remained in contact. In 1982, Serge's mother became ill. Serge asked Haruyo to visit his mother, but not to mention the separation. Haruyo did as Serge requested. In 1983, after approximately 22 years of marriage, Haruyo initiated divorce proceedings and hired an attorney. Her attorney, Robert Kaufman, recommended an appraisal of Vans to Haruyo, and subsequently visited Vans with an appraiser. Kaufman's visit upset Serge. Serge called Haruyo and told her that an appraisal was a waste of his time and money, that he knew the value of the company better than any appraiser, and that he had already indicated the fair market value for their community stock. Serge valued the community stock at $1,000,000. When Vans filed for bankruptcy in 1984, Serge requested that Haruyo put aside the divorce proceedings so that he could devote his energy to the company. Haruyo did as Serge requested, and Serge subsequently thanked Haruyo repeatedly for postponing the divorce.
After Vans emerged from bankruptcy, Serge called Haruyo and asked her to come to his office. At this meeting Serge told her that he wanted to settle their property rights, and was tired of dealing with so many lawyers. Serge told Haruyo that if she would not hire an attorney or appraiser, he would be very fair to her in the settlement. Haruyo did as Serge requested; she fired her attorney, Mr. Kaufman, and refrained from appraising Vans.
Serge suggested at the meeting that Haruyo go and see Frank Schmehr on her way home. Mr. Schmehr was at the time a corporate attorney for Vans. Serge claims that Mr. Schmehr advised Haruyo to retain an attorney at their initial meeting. However, this assertion cannot be credited since Haruyo says that, far from recommending that she retain independent counsel during the negotiations, Mr. Schmehr inquired as to whether she had dismissed Mr. Kaufman as Serge instructed.
During negotiations, Serge made a number of representations to Haruyo. He valued her interest in Vans at $525,000, payable over three years without interest. When Haruyo questioned Serge about a newspaper article that indicated a higher value for the company, Serge assured her that the newspaper was wrong and that he knew the value of the company far better than the reporter. Serge also told Haruyo the following: Their community stock constituted 37.5% of Vans' stock; if Haruyo chose to keep her share of the community stock, she would not be allowed to vote her stock because none of the wives could vote; Vans had never paid any dividends, and never would; there were no plans to sell the company; a corporate agreement would require Haruyo to offer her stock to Serge before offering it to anyone else, and if he refused to buy it, she could offer the stock only to the other two private stockholders; since the other two shareholders would never be able to afford to buy Haruyo's stock, "the only thing [Haruyo] could do with [the stock] would be to hand it on the wall and look at it or use it for toilet paper...."
After the "negotiations" were completed, Mr. Schmehr drew up a draft agreement. Schmehr advised Haruyo to retain an attorney to review the form of the agreement, but not the asset values. Haruyo acted in accord with these instructions. She retained attorneys to review the form of the agreement, but would not permit them to conduct an independent appraisal of asset values, despite their advice to the contrary.
On July 23, 1986, Haruyo signed a marital settlement agreement which valued her share of the Vans stock at $525,000, payable over three years without interest. A provision of this agreement stated: "Neither of us has relied upon representations, statements of fact or opinions of the other in determining the values utilized in arriving at this Marital Settlement Agreement." However, the agreement continued:
We have each fairly and with candor represented all of the property in which each of us has a claim or interest, whether or not the claim or interest is separate or joint property. We have each fully disclosed to the other the nature and extent of all property and its valuation is to the best knowledge of each of us a fair and candid valuation.1
On June 29, 1987, the Vans Board decided to vigorously pursue an opportunity to sell the company through Prudential-Bache Capital Funding for $75,000,000. The decision was the result of the board members' sentiments, which had originated at the time of the bankruptcy, that running Vans was consuming their lives. Serge indicated that the timing of the sale was truly propitious, since he had decided to resign his position as a director and slow down a bit. The sale of the company was eventually concluded, after the 1987 stock market crash, for $58,000,000 in cash, plus assorted securities. At the time of the sale Serge owned roughly 42% of Vans.
The district court granted summary judgment on Haruyo's state-law claims of intentional and negligent misrepresentation on the grounds that Haruyo could not establish the necessary element of justifiable reliance. The district court failed to evaluate the reasonableness of Haruyo's reliance under state-law precedents, but instead referred to its earlier discussion of section 10(b) reliance. Due to this error summary judgment was improperly granted.
California distinguishes between "extrinsic" and "intrinsic" fraud. However, we need not address the significance, if any, of this distinction, since the instant marital settlement agreement is subject to attack even under the theoretically more stringent showing that is required to establish "extrinsic" fraud.2
The California Supreme Court has provided standards by which claims of fraud that arise from the execution of a marital settlement agreement are to be judged. In Vai v. Bank of America, 56 Cal. 2d 329, 15 Cal. Rptr. 71, 364 P.2d 247 (1961),3 the wife sued defendant, who was the coexecutor of her ex-husband's estate, on the grounds of fraud.4 The wife's complaint alleged that the husband had committed both actual fraud and "constructive fraud" by undervaluing community assets. Although the wife was represented by counsel throughout the negotiations that led to the agreement, the California Supreme Court held that the wife had established a claim of constructive fraud as a matter of law. 56 Cal. 2d at 344.
The Vai decision is significant in three respects. First, the court held that a stipulation in the marital settlement agreement, which provided that the parties freely entered into the agreement without reliance on any representations not contained in the agreement itself, did not prevent the wife from suing for fraud. The court reasoned that if an agreement is procured by fraud, a disclaimer in the agreement can have no effect. Vai thus precludes a finding that the disclaimer in Serge and Haruyo's agreement disposes of Haruyo's claim.
Second, the Vai court imposed a fiduciary duty on the husband based at least in part on the de facto management control exercised over community property assets by the husband. A husband's de facto control of community assets may provide him with superior information about the assets. Thus, such control may be a significant factor when evaluating a claim of fraud. See also Modnick, 33 Cal. 3d at 905-06 (limiting the duty of the controlling spouse to a duty to disclose the existence of community property and refrain from misrepresentation). Serge was far more involved with Vans and had considerably more knowledge about the company than Haruyo.
The most significant aspect of the Vai court's reasoning for present purposes is the manner in which the Vai court distinguished a prior California Supreme Court case, Collins v. Collins, 48 Cal. 2d 325, 309 P.2d 420 (1957). In Collins the wife moved to Nevada, where she instituted divorce proceedings and began to investigate her husband's assets. Suddenly, the wife moved back to California, ceased her investigation, and signed a settlement agreement against the advice of her attorneys. The Collins court held that the wife could not set aside this agreement, though it was inequitable. Vai distinguished Collins factually, highlighting that in Collins there was no indication the wife had acted on anything other than her own initiative. Thus, Vai turned on the fact that the husband in Vai induced his wife through affirmative actions to forego adversary procedures. 56 Cal. 2d at 336. Similarly, Haruyo claims that Serge convinced her to drop her adversary stance and rely on him.
The California Supreme Court again paid a great deal of attention to whether one spouse had induced the other to forego adversary procedures, this time when evaluating a claim of actual fraud, in In re Marriage of Connolly, 23 Cal. 3d 590, 153 Cal. Rptr. 423, 591 P.2d 911 (1979). During the course of trial the husband took the stand and testified as to the value of a certain computer company stock held by the community. A public offering of this company's stock was imminent, and this fact had been reported in both BusinessWeek and the Wall Street Journal. The husband did not volunteer any information about the public offering, and the wife and her attorney did not inquire into the matter on cross-examination. The husband was awarded the stock in the divorce judgment. Shortly after judgment was entered, the computer company went public and the husband's stock leaped in value. The wife claimed that the husband's failure to bring up the imminent public offering constituted fraud.5
The Connolly court held that the wife could not justifiably rely on her husband's silence. 23 Cal. 3d at 601. The Connolly court's treatment of Vai in the course of reaching this conclusion is informative. The Vai holding was respected, but Vai was distinguished on its facts. The Connolly court reasoned, echoing the means by which the Vai court distinguished Collins, that in Vai the wife had been persuaded not to investigate or pursue her adversary options by the affirmative actions of the husband himself, while in Connolly the husband had merely failed to volunteer certain information in the course of a full-blown adversary proceeding. Id; see also Baltins, 260 Cal. Rptr. at 416-17 (holding that no duty of independent investigation arises when husband elects not to deal at arms length, and instead "repeatedly thwart [s] the complaining spouse in obtaining independent advice by ... intentional acts....").
The California courts' focus on the question whether one spouse has induced the other to forego adversary proceedings is very sensible. In a divorce proceeding a party must ordinarily be allowed to act in his own interest, particularly if the divorce is conducted in an adversary setting. See Connolly, 23 Cal.3d at 600-01; Boeseke v. Boeseke, 10 Cal. 3d 844, 849-50, 112 Cal. Rptr. 401, 403-04, 519 P.2d 161 (1974). Accordingly, mere representations of value made by one spouse to another in settlement negotiations when both sides are represented by attorneys cannot, without more, support a claim of extrinsic fraud. See Boeseke, 10 Cal. 3d at 849-50. However, neither can one spouse be allowed to trade on the couples' prior relationship to lead the other spouse into misplaced trust. See Vai, 56 Cal. 2d at 336; Connolly, 23 Cal. 3d at 601; Baltins, 260 Cal. Rptr. at 416-17.
Haruyo has raised a material question of fact on the issue of constructive fraud. Haruyo has asserted facts from which a reasonable person could conclude that Serge had much more information about Vans than did she. Moreover, Haruyo has asserted facts from which a reasonable person could conclude that Serge induced her to forego adversary proceedings, then took advantage of her. If Haruyo's version of events proves true at trial, then under Vai she has established constructive fraud.
Haruyo has also raised a material question of fact on the justifiable reliance element of her actual fraud claim.6 For under Vai and Connolly, Haruyo's reliance on Serge was justifiable if Serge induced her to rely by his own affirmative acts. And Haruyo has alleged facts from which a reasonable person could find that Serge did induce Haruyo's reliance. Summary judgment for Serge was therefore improper.
As a threshold matter, we find that Haruyo's section 10(b) claim did raise a "substantial" federal question. See Mackey v. Pioneer Nat'l Bank, 867 F.2d 520, 523 (9th Cir. 1989). Thus, we must determine both whether the district court possessed the power to exercise pendent jurisdiction, and whether the district court exercised its power in an acceptable manner.
In order for a district court to have power to exercise pendent jurisdiction the federal and state claims in issue must derive from a "common nucleus of operative fact" and be so related that a plaintiff "would ordinarily be expected to try them all in one judicial proceeding." Republic of Philippines v. Marcos, 862 F.2d 1355, 1359 (9th Cir. 1988) (en banc) (citing United Mine Workers v. Gibbs, 383 U.S. 715, 725 (1966)), cert. denied, 490 U.S. 1035 (1989). We have held that a district court has the power to proceed to state-law claims after dismissing the federal claims at summary judgment if the Gibbs standards are met. See id.; Mackey, 867 F.2d at 523. In the instant case Haruyo's state claims and her federal section 10(b) claim derive from "a common nucleus of operative fact," since Haruyo's claims all arise from the negotiation and execution of the property settlement agreement. Haruyo's claims would ordinarily be tried in one proceeding. Thus, the district court had the power to decide Haruyo's claims of intentional and negligent misrepresentation.
District courts have discretion in exercising their power of pendent jurisdiction, and they may in many circumstances decline to reach pendent state-law claims. See Carnegie-Mellon University v. Cohill, 484 U.S. 343, 350-51 (1988); Gibbs, 383 U.S. at 725. The Supreme Court has instructed that district courts should consider the values of judicial economy, convenience, fairness to the parties, and federal-state comity when exercising their discretion over pendent state-law claims. See Carnegie-Mellon, 484 U.S. at 350-51; Gibbs, 383 U.S. at 726. We have also recently given the district courts guidance regarding the exercise of their discretion:
At "every stage of the proceeding" the district court must exercise discretion as to the pendent claims.... [T]he district judge may conclude that some or all of the pendent claims should be dismissed [even though] ... the district court has power to assert jurisdiction over these claims.
Republic of Philippines, 862 F.2d at 1360 (citations omitted).
The district court declined to address Haruyo's state securities-law claims. The decision of these state securities-law claims would involve the resolution of a novel question of state law: whether the transfer of stock pursuant to the settlement agreement constituted a "purchase or sale" for purposes of the California Corporations Code. Thus, considerations of federal-state comity support the district court's decision not to address Haruyo's state securities-law claim, and the district court's decision not to address this claim was not an abuse of discretion. See Carnegie-Mellon, 484 U.S. at 350-51.
The district court also declined to exercise pendent jurisdiction over Haruyo's breach of fiduciary duty claims. Yet the district court did exercise jurisdiction over Haruyo's state law misrepresentation claims. The district court's decision to address Haruyo's misrepresentation claims but not her breach of fiduciary duty claim seems a product of that court's erroneous belief that federal cases discussing section 10(b) reliance were appropriate authority by which to evaluate misrepresentation claims brought under California law. See Section II, supra. In actuality, the same California cases that control Haruyo's misrepresentation claims also control her fiduciary duty claim. See Baltins, 260 Cal. Rptr. at 416-17 (finding breach of fiduciary duty that constitutes "extrinsic fraud," discussing Collins) ; Alexander, 261 Cal. Rptr. at 11 (finding no breach of fiduciary duty sufficient to establish "extrinsic fraud"). Thus, the district court's decision to address the misrepresentation issue, but not the fiduciary duty issue, was without any reasoned foundation. The district court abused its discretion when it differentiated between identical issues.
On remand, the court must either address both the misrepresentation and fiduciary duty issues, or dismiss both issues. Considerations of judicial economy would support the exercise of pendent jurisdiction over the misrepresentation and fiduciary duty claims. Substantial time has been expended on these claims in federal court, and the legal standards have already been resolved on this appeal. See Mackey, 867 F.2d at 523 (upholding district court's decision to decide pendent state claims since substantial time had been spent on the pendent claims in federal court, though the federal claims were dismissed); Meyer v. California and Hawaiian Sugar Co., 662 F.2d 637, 640 (1981) (same). On the other hand, the district court would also appropriately exercise its discretion by dismissing the state misrepresentation claims along with the other state claims. See Carnegie-Mellon, 484 U.S. at 350-51 (district court should consider federal-state comity); McCarthy v. Mayo, 827 F.2d 1310, 1317 (9th Cir. 1987) (stating that it is generally better to dismiss pendent state claims after federal claims have been dismissed).
In short, the district court must treat Haruyo's misrepresentation and fiduciary duty claims similarly. However, after the district court considers this case in light of the Carnegie-Mellon factors, the court may exercise its discretion to either address both claims or dismiss both claims.
Reversed and Remanded.
This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3
The agreement further provided that it was not to be "filed with the court or made an attachment to the Judgment of Dissolution of Marriage." Instead, the judgment of divorce would simply indicate that the parties had divided their property
It has been suggested that the distinction between "intrinsic" fraud and "extrinsic" fraud is essentially specious, and that courts merely affix the label that they feel comports with equity. See In re Marriage of Stevenot, 154 Cal. App. 3d 1051, 1060-61, 202 Cal. Rptr. 116 (1984)
Contrary to the appellate court's belief in Stevenot, 154 Cal. App. 3d at 1063-64, Vai is clearly still quite valid. First, the case has never been overruled. Second, the case is frequently relied on by both the California Supreme Court and California appellate courts. See, e.g., Modnick, 33 Cal.3d at 905-06; Baltins, 260 Cal. Rptr. at 411-13
It is not entirely clear from the text of Vai whether the case involves "extrinsic" or "intrinsic" fraud. See 56 Cal. 2d at 333-334. However, the case has been viewed by the California courts as one involving "extrinsic" fraud. See Modnick, 33 Cal. 3d at 905; Stevenot, 154 Cal. App. 3d at 1063
The wife sued based on section 473 of the California Code of Civil Procedure, which provides relief from judgments taken through mistake or excusable neglect. Cal.Civ.Proc.Code Sec. 473. Since the wife sued under section 473, the trial court's decision on her motion was reviewed deferentially; the trial court would be reversed only if it clearly abused its discretion. 23 Cal. 3d at 598. Connolly has been viewed as a case involving extrinsic fraud. See Baltins, 260 Cal. Rptr. at 416-17
The elements of common-law intentional misrepresentation are:
(1) A misrepresentation of a material fact; (2) that is false and that is known to be false at the time it is made; (3) that is made with the intent to induce reliance; (4) actual and justifiable reliance; (5) resulting damages. Hilliard v. A.H. Robins Co., 148 Cal. App. 3d 374, 415, 196 Cal. Rptr. 117 (1983); Robinson v. Robinson, 187 Cal. App. 2d 677, 681-82, 10 Cal. Rptr. 130, 133 (1960). The elements of negligent misrepresentation are the same, except that the tortfeasor need have no actual knowledge of the misstatement's falsity, so long as he has no reasonable belief in the misstatement's truth. Fox v. Pollack, 181 Cal. App. 3d 954, 962, 226 Cal. Rptr. 532, 537 (1986). We decline to consider whether summary judgment might be predicated on an element aside from justifiable reliance. See Golden Nugget v. American Stock Exchange, 828 F.2d 586, 590 (9th Cir. 1987) (appellate court may in its discretion affirm district court on the basis of alternative reasoning, if the record is fully developed and purely legal questions are presented).