Case Information
*1 Before: MERRITT, COLE and SUTTON, Circuit Judges.
SUTTON, Circuit Judge. Gerald Gresh claims that Waste Services of America (“WSA”), two of its corporate officers and an affiliated company fraudulently induced him to refrain from exercising an option to buy WSA stock until after most of the corporation’s assets had been sold or transferred. The district court rejected all of his claims as a matter of law. We affirm in part and reverse in part.
I.
In 1995, Bruce Addington and Todd Skaggs created WSA, a landfill-development company. Addington owned 55% of the stock, and Skaggs owned the bаlance. Because neither Addington nor *2 Skaggs had extensive experience developing landfills, they invited Gerald Gresh, who had such experience, to join them in the venture. To encourage Gresh, they offered him a stock-option agreement: In exchange for becoming an at-will employee, Gresh would receive an option to purchase up to 50 shares of WSA stock (5% of all authorized shares) for $1,000 per share. Gresh accepted the offer and became a vice president of the company.
Addington eventually left WSA and conveyed all of his stock to Skaggs, making him the corporation’s sole shareholder. Soon after Addington’s departure, Skaggs began negotiations to sell many of WSA’s assets. On June 22, 1998, Skaggs told Gresh that he intended to sell WSA’s landfills and that he must discharge Gresh as a result. Skaggs at the same time presented Gresh with a proposed “Agreement and Release,” offering to buy Gresh’s stock option for $250,000. Gresh rejected the offer and tried to negotiate a better deal. Over thе next several months, Gresh and WSA (through Jim Dalton, a vice president with the corporation) tried to negotiate a buyout of Gresh’s option. The parties never reached an agreement, and by February 1999 Gresh still had his WSA stock option, unsold and unexercised.
In the midst of these discussions, WSA (apparently unbeknownst to Gresh) negotiated with Liberty Waste Services to sell some of its landfills. WSA and Liberty signed a non-binding letter of intent on June 8, 1998, and after further negotiations the parties signed a binding letter of intent on October 6, 1998. By January 1999, Skaggs had sold several WSA-developed landfills to Liberty and transferred most of the others to affiliated companies he controlled. When Gresh learned in *3 February 1999 of the sale to Liberty, Skaggs told him that WSA had one remaining asset—a single landfill of little value—making Gresh’s option effectively worthless.
Invoking the diversity jurisdiction of the federal courts, Gresh brought six state-law claims against Skaggs, Dalton, WSA and River Cities Disposal, LLC (one of the affiliated companies Skaggs controlled): (1) breach of fiduciary duty, (2) fraudulent nondisclosure, (3) fraudulent misrepresentation, (4) breach of the implied duty of good faith and fair dealing, (5) tortious interference with existing contractual relations and (6) tortious interference with prospective contractual relations. The defendants moved for summary judgment on all six claims, and the magistrate judge recommended that the motion be granted. Over Gresh’s objections, the district court adopted the magistrate judge’s report and recommendation.
II.
In addressing Gresh’s appeal, we give fresh review to the district court’s summary-judgmеnt
decision, drawing all reasonable inferences in Gresh’s favor
. See Med. Mut. of Ohio v. K. Amalia
Enters., Inc.
,
A.
Gresh first argues that Skaggs breached his fiduciary duties when he sold WSA’s landfills
without giving Gresh notice and when he transferred other assets to affiliated companies that Skaggs
controlled. Yet under Kentucky law, which (the parties agree) governs this case, Skaggs did not owe
*4
Gresh a fiduciary duty. There is no lockstep recipe for ascertaining when a fiduciary relationship
exists.
See Abney v. Amgen, Inc.
,
The relationship between Gresh and Skaggs falls on the “оrdinary business relationship” side
of the line. Gresh cannot ground his fiduciary-breach claim on his status as an employee of WSA
or on his status as a stock-option holder. Corporate officers generally do not owe fiduciary duties
to at-will employees,
see, e.g.
,
Grappo v. Alitalia Linee Aeree Italiane, S.P.A.
,
Nor has Gresh established a cognizable basis for concluding that his relationship with Skaggs
and WSA went beyond the at-will-employee status described in his stock-option agreement. Yes,
an affidavit signed by Addington says that he, Skaggs and Gresh orally agreed that they were
“еssentially partners, or co-owners,” JA 795, that they would work in each other’s best interests and
that they would resist pursuing any landfill opportunity to the exclusion of the other two. Yet
whatever oral arrangements the parties may have had, the parol-evidence rule prohibits Gresh from
using (and bars us from considering) Addington’s affidavit to establish the existence of a “broader,
oral agreement,” Reply Br. at 26, that overrides the terms of the stock-option agreement. In signing
the stock-option agreement, Gresh “acknоwledge[d] that he [was] an at-will employee of [WSA]”
and agreed that his option did nothing to “alter, add to, or change” his at-will-employment status.
JA 597 (internal quotation marks omitted). No less importantly, the agreement included an
integration clause, which said that the contract “constitute[d] the entire agreement of the parties,”
and that no “oral or implied agreement or representations” other than those set out in the agreement
could bind WSA or Gresh. JA 598. Gresh’s efforts to elevate the relationship to а de facto
partnership thus directly conflict with the agreed-upon terms of the stock-option agreement and the
integration clause, precluding us (or a jury) from invoking the Addington affidavit to establish the
existence of a “broader, oral agreement.”
See Akins v. City of Covington
,
The collateral-contract exception to the parol-evidence rule offers Gresh no refuge either. A party to a written agreement, sure enough, may rely on parol evidence to prove the existence of *6 a separate contract—one “independent of, collateral to, and not inconsistent with, the written contract,” Tex. Gas Transmission Corp. v. Kinslow , 461 S.W.2d 69, 71 (Ky. 1970) (internal quotation marks omitted). But that is not what is going on. Gresh seeks to establish the existence of a “broader, oral agreement” by which he was “essentially [a] partner[] or co-owner[]” in WSA—an agreement in other words that contradicts the stock-option contract. JA 795. The district court correctly rejected Gresh’s fiduciary-breach claim as a matter of law.
B.
Gresh next argues that WSA and Skаggs fraudulently failed to disclose several facts to him:
(1) the full details concerning the sale of WSA assets to Liberty, including the timing, price and
terms of the deal, (2) Skaggs’ intent to transfer a WSA-developed landfill to another company that
he controlled and (3) Skaggs’ assumption of over $6 million in debt WSA owed to Addington. In
alleging fraud by omission, Gresh must do more than show that, as a matter of best-business
practices, Skaggs should have disclosed this information—true though that may be. He must show
that Skaggs (or WSA) owed him a duty to disclose it: (1) because Skaggs owed a fiduciary duty to
Gresh, (2) because a statute imposed such a duty, (3) because Skaggs had superior knowledge about
facts essential to the transaction and Gresh reasonably relied upon him to disclose that knowledge
or (4) because Skaggs partially disclosed relevant facts, making what was said and left unsaid
materially misleading.
See Rivermont Inn, Inc. v. Bass Hotels & Resorts, Inc.
,
The first two grounds do not apply. Skaggs and Gresh did not have a fiduciary relationship, as we have explained, and Gresh does not maintain that any statute created a duty to disclose.
A superior-knowledge duty of disclosure also does not apply. In “particular circumstances,”
the Kentucky courts have recognized that a seller may be obligated to disclose known risks or defects
that a reasonable buyer would want to know and that he сould not discover through ordinary
diligence.
Smith
,
Neither Skaggs’ nor Dalton’s actions rise to that level or to the level of the cited cases. At the June 22 meeting, Skaggs discharged Gresh, told him that he was going to sell WSA, then made an offer to buy Gresh’s stock option. Dalton tried to negotiate an appropriate price for the option with Gresh оver the next several months—at one point raising the offer by $65,000—and several times presented him with proposed contracts stating that WSA “has been discussing . . . the possible sale of the assets or stock of WSA,” JA 621, 627, 923, 936.
The key information that Gresh needed to protect himself thus was disclosed at the June 22 meeting. And while Skaggs possessed other information that he did not disclose, Gresh has not shown that he lacked sufficient information and time to protect his interests in the option, which by definition has a value that may go up or down frоm day to day. It is the rare commercial relationship that does not involve one party with some knowledge advantage over the other, and in many business transactions each party will believe it has superior knowledge of what the commercial future will bring, which is frequently what motivates the deal, be it the sale of a business or the purchase of a share of stock. Cf. Restatement (Second) of Torts § 551 cmt. k (“To a considerable extent, sanctioned by the customs and mores of the community, superior information and better business acumen are legitimatе advantages, which lead to no liability.”); id . § 551 illus. 8 (seller who is aware that chattel is worth far less than the buyer thinks it is worth is not obligated to disclose that knowledge to the buyer).
Skaggs’ disclosures to Gresh during the June 22 meeting—that WSA planned to sell its
landfills and that Gresh’s option was worth $250,000—also did not trigger a duty to disclose
additional information about these topics. Speaking about a particular topic during a business
negotiation does not, by itself, obligate the speaker to disclose everything else he knows about the
topic. Only whеn a partial disclosure makes the spoken words materially misleading does the
omission become actionable.
See Restatement (Second) of Torts
§§ 529, 551(2)(b);
United Parcel
Serv.
,
Skaggs’ statement that he intended to sell WSA did not give rise to a duty to disclose the details of the Liberty deal (or his intent to transfer a WSA-developed landfill into another corporate entity) because the omission of those details did not make Skaggs’ statement to Gresh misleading. Skaggs truthfully told Gresh that he was going to sell WSA, and he did. The statement itself was not a half-truth likely to lead Gresh astray but rather a direct and honest expression of what Skaggs intended to do: sell the corporation.
A similar conclusion applies to Skaggs’ representations about the value of Gresh’s option.
While Gresh does not develop the argument, devoting less than a full sentence to it, the idea appears
to be that Skaggs’ representation that the option was worth $250,000 contained an actionable
omission—that Skaggs’ assumption of WSA’s debt to Addington effectively increased the value of
the option. The prоblem with this argument, as we explain in more detail below in addressing a
related fraudulent-misrepresentation claim, is the absence of reasonable reliance.
See United Parcel
*10
Serv.
,
C.
Gresh next argues that Skaggs and Dalton made six fraudulent misrepresentations to him in
the course of the negotiations. To establish fraud, Gresh must establish with clear and convincing
evidence that, in taking or refraining from taking an action, he reasonably relied on a representation
that was material, false, known to be false or made recklessly, and made with the intent of inducing
him to act or refrain from acting.
See Moore, Owen, Thomas & Co. v. Coffey
,
First , at some point in early October 1998—in the midst of ongoing negotiations with WSA regarding the option buyout—Gresh asked Dalton about the status of Skaggs’ plans to sell WSA. Yet, in October 1998, Dalton—whom Skaggs had given the responsibility of negotiating the buyout of Gresh’s option—told Gresh that “nothing . . . had crossed [his] desk” concerning plans to sell the corporation. JA 687 (internal quotation marks omitted). Whether Dalton made that statement in his individual capacity, in his capacity as a representative of WSA or as an agent of Skaggs, a jury reasonably could conclude that the representation was fraudulent.
WSA entered into a non-binding letter of intent with Liberty on June 8, 1998, and it entered into a binding letter of intent on October 6, 1998. Skaggs executed both documents on behalf of WSA. Having negotiated with Liberty for nearly four months, Skaggs could not represent truthfully to Gresh in early October 1998 that there were no plans to sell the corporation. And Dalton, the treasurer and vice president of WSA, cannot show that he had no knowledge of Skaggs’ plans to sell most of WSA’s assets to Liberty. The record shows that, on September 18, 1998, Dalton faxed information about four WSA-developed landfills to a corporate officer at Liberty, and by at least October 5 Dalton was aware that Liberty was conducting due-diligence investigations at WSA’s landfills.
Resisting this conclusion, the defendants argue—and the district court held—that it was unreasonable as a matter of law for Gresh to rely on Dalton’s representation that he was unaware of any plans to sell the company. Not truе. As vice president and treasurer, Dalton was the second highest-ranking officer at WSA. And as the corporate officer tasked with negotiating the buyout *12 of Gresh’s stock option, Dalton gave Gresh a reasonable basis for believing that he spoke for WSA. Gresh and Dalton had been in continual communication for several months regarding the buyout of the option, and each time Gresh called WSA during the negotiations the company referred him to Dalton. A jury could fairly conclude that Gresh reasonably relied on Dalton’s representation.
Kentucky’s five-year statute of limitations for fraud claims also does not defeat this claim.
See
Ky. Rev. Stat. Ann. § 413.120(12). The statute of limitations began to run when Gresh
discovered the fraud or reasonably should have discovered it.
See id
. § 413.130(3);
Madison County
v. Arnett
,
Second , at the June 22 meeting, Skaggs told Gresh that he had discussed the sale of WSA with “a number of parties.” JA 947. Gresh argues that this representation was fraudulent because Skaggs had talked to one potential buyer—Liberty—and had entered into a non-binding letter of intent that prevented WSA from negotiating with other entities. But in fact Skaggs testified that over the relevant period of time he did talk to several different entities about the possible sale of WSA, and Gresh points to no record evidence contradicting that account.
Even if Gresh could produce such evidence, he has not shown that Skaggs made these statements to induce Gresh to hold tight in exercising his option. Gresh’s theory is that, by *13 misrepresenting the seriousness of the Liberty negotiations—by telling Gresh that WSA was talking to several potential buyers when it was in serious negotiations with just one—Skaggs sought to dissuade Gresh from exercising his stock option until most of WSA’s assets had been sold. But if that were Skaggs’ intent, why would he tell Gresh anything about his intention to sell the corporation? By telling Gresh of his plans to sell WSA’s assets, Skaggs put Gresh on notice of the key fact that could affect the value of his option: a sale of some or all of the assets.
Third , Gresh argues that Skaggs’ representation that WSA was “worth $13 million” was fraudulent because WSA was worth far more than that. Yet Gresh has not come forth with evidence showing that Skaggs’ representation was false. Gresh points to the non-binding letter of intent in which Liberty proposed to buy WSA for $29 million. But, as Skaggs explained, the $13 million figure represented only а portion of the deal with Liberty. Some of the other assets involved in the sale were owned by Skaggs’ other companies. Indeed, when the parties completed the sale in January 1999, WSA received just over $13 million for the assets it sold to Liberty.
Even if Gresh could show that the representation was false, he has not presented any evidence
that he relied on Skaggs’ approximation of WSA’s value in choosing not to exercise his stock option.
The “essence” of a fraud claim is “the belief in and reliаnce upon the statements of the party who
seeks to perpetrate the fraud.”
Wilson v. Henry
,
Fourth , Gresh cannot base a fraud claim on Skaggs’ representation that Gresh’s stock option was worth approximately $250,000. Gresh’s entire coursе of conduct after the June 22 meeting flowed from his belief that his stock option was worth more than the $250,000 WSA initially offered him. As his actions confirm, he never viewed WSA’s $250,000 offer as an authoritative appraisal of its value but merely as an opening offer in a negotiation, an offer that he anticipated would go up, an offer that did go up but an offer that apparently did not go up enough.
Fifth , in December 1998, Dalton told Gresh that Skaggs “wanted to wait” before continuing negotiations for the sale of Gresh’s option. JA 701. With the closing of the Liberty sale only a month away, Gresh argues, that statement was materially misleading. This claim runs aground because this statement, too, was not false. Even if Dalton and Skaggs were trying to keep Gresh in the dark about the Liberty sale in the hopes that he would not exercise his option prior to the sale, that proves that Dalton’s statement that Skaggs “wanted to wait” before continuing negotiations was true: Skaggs indeed “wanted to wait” until the Liberty sale was completed.
Sixth , in February 1999, Skaggs told Gresh that “all the landfills were sold on January 1, 1999,” save for one that had no significant value. JA 721. That statement was fraudulent, Gresh argues, because two of the landfills developed by WSA were not “sold” but transferred into two separate entities controlled by Skaggs. This claim fails because Gresh does not identify any relevant action he took (or refrained from taking) in reliance on Skaggs’ representation. Gresh, true enough, did not exercise his stock option, but this statement was hardly the reason. That WSA’s assets had been sold—as opposed to transferred to other corporate entities—should have encouraged Gresh to exercise his option, for presumably WSA would have received something of value in return.
D.
Gresh next argues that WSA breached an implied duty of good faith and fair dealing. To
recover on this theory, Gresh had to show that WSA acted in bad faith in denying him the benefits
intended by the agreement, without regard to whether WSA violated the agreement.
See Farmers
Bank & Trust Co. of Georgetown v. Willmott Hardwoods, Inc.
,
In many respects, it is true, WSA dealt fairly with Gresh: Skaggs told him at the June 22
meeting that he was going to sell WSA, he offered a price for the option, and every contract that
WSA sent to Gresh offering him a buyout of his option referred to the fact that WSA had been
*16
discussing the sale of some or all of the corporation’s assets. But Dalton’s false assurance that no
sale was imminent prevented Gresh from protecting his interest in the value of the option and did
so at the one point when Gresh seemеd to be aware of the impact such a sale could have on its value.
Even though WSA had been negotiating with Liberty for nearly four months and had executed a
binding letter of intent with Liberty in early October—calling for a December 1998 closing
date—WSA falsely led Gresh to believe that a sale of the corporation was not imminent and that he
could safely continue to negotiate the buyout of his option without fear of losing everything. Some
businesses, we appreciate, wield sharp elbows, and sometimes thеre is nothing the courts can do
about it except to invoke the timeless (and frequently ignored) warning of caveat emptor. But when
Gresh, an option holder, asked about the status of Skaggs’ plans to sell WSA, the common-law duty
of good faith required WSA either to be straight with Gresh or to say nothing at all. By telling Gresh
that a sale was not imminent, WSA deprived Gresh of the benefit for which he bargained: the
chance to exercise his option while it was worth something.
Cf
.
Ligon
,
E.
Gresh next argues that Skaggs and Dalton tortiously interfered with the contract between him
and WSA. The district court properly granted summary judgment on this claim for one basic (and
good) reason: Gresh has not identified a contract between him and WSA that WSA breached, and
Kentucky law requires a breach in order to bring such a claim.
See Indus. Equip. Co. v. Emerson
Elec. Co.
, 554 F.2d 276, 289 (6th Cir. 1977) (“Two of the necessary elements of [the tort of
intentional interference with an existing contractual relationship] are the existence of a contract
*17
between the plaintiff and a third party and a subsequent breach of the contract by the third party.”);
Harrodsburg Indus. Warehousing, Inc. v. MIGS
,
LLC
,
F.
Also unavailing is Gresh’s tortious-interference-with-
prospective
-contractual-relations claim.
To succeed, Gresh must (1) identify a prospective contractual relation (2) that defendants interfered
with and (3) establish that the interference was “intentional[] and improper[].”
Restatement (Second)
of Torts
§ 766B;
see also Nat’l Collegiate Athletic Ass’n v. Hornung
,
III.
For these reasons, we affirm in part, reverse in part and remand for further proceedings.