Ostler v. Codman Research CV-98-356-JD 8/12/99 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

David B. Ostler

v. Civil No. 98-356-JD

The Codman Research Group, Inc. and S. Philip Caper

AMENDED ORDER1

Plaintiff, David B. Ostler, brings an action against his

former employer. The Codman Research Group, Inc. ("CRG"), and

CRG's chief executive officer, S. Philip Caper, arising from

events that lead to Ostler's decision not to exercise his CRG

stock option. Ostler's second amended complaint alleges claims

of withholding information and imposition of an unlawful

condition, breach of contract, federal and state securities

fraud, and common law fraud. CRG moves for summary judgment on

all claims.2

Standard of Review

Summary judgment is appropriate when "the pleadings,

depositions, answers to interrogatories, and admissions on file,

1The amended order corrects typographical errors and an omitted citation found in the original order.

20stler's motion for partial summary judgment (document no. 68) will be addressed separately. together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving party

is entitled to a judgment as a matter of law." Fed. R. Civ. P.

56(c). The record evidence is taken in the light most favorable

to the nonmoving party. Perkins v. Brigham & Women's Hosp.,

(1st Cir. 1996). "An issue is only 'genuine' if

there is sufficient evidence to permit a reasonable jury to

resolve the point in the nonmoving party's favor, while a fact is

only 'material' if it has the potential to affect the outcome of

the suit under the applicable law." Bourque v. F.D.I.C.,

(1st Cir. 1994) (guotations omitted). Summary

judgment will not be granted as long as a reasonable jury could

return a verdict in favor of the nonmoving party. Anderson v.

Liberty Lobby, Inc.,

(1986).

Background3

CRG, which was founded in 1984 by Philip Caper and Dr. John

Wennberg, makes software for the health care industry. Ostler

was hired as chief financial officer in 1985, and then served as

chief operating officer beginning in 1986. Caper served as

president and chief executive officer from 1984 through 1998,

3Ihe facts are taken from the parties' fact summaries and are provided for background information only.

2 except for the period between 1989 and 1993 when Ostler was

president and CEO.

Because CRG was not able to keep current with the salaries

owed to Ostler and Caper, they agreed that CRG would issue stock

options to Ostler and Caper in exchange for a deferral of

portions of their compensation. As part of the plan, CRG, Caper,

and Ostler agreed that an option to purchase stock would be

issued to Ostler in the same amount and on identical terms as an

option issued to Caper. On July 28, 1988, CRG issued to Ostler

an option to purchase "an aggregate of 3,000 shares of non-voting

Common Stock" at twenty cents per share pursuant to a "1988 Non-

Qualified Stock Option Plan" ("Plan") and subject to the terms of

the document granting the option ("Option Document").4 An option

was issued to Caper under the same terms while other employees

received options for different amounts of stock.

Under the terms of the Plan and the Document, the options

were to expire ten years later. To exercise their options.

Ostler and Caper were obligated to pay the amount of income tax

due on the difference between the stated price of the stock and

the fair market value on the day the option was exercised. If

CRG went public before the option's expiration date, a market

4Because of a subseguent stock split, the recipients held options on 60,000 shares and the assigned price was reduced.

3 would exist for the stock that would allow the option holders to

sell stock to pay the substantial tax liability.

CRG did not fare well, however, suffering financial losses

and the loss of its senior management. Ostler left CRG in 1994.

CRG remained a private company so that CRG stock could not be

sold to fund the tax liability that would be incurred by

exercising the stock options. In 1997, as the option expiration

date of July 27, 1998, approached, CRG began to consider ways to

allow their current employees, including Caper, to afford the tax

liability on the exercise of their options. CRG first passed a

resolution to arrange loans for option holders who were employees

at the exercise deadline to pay the tax liability. No loans were

ever arranged or made under the resolution.

A year later, in January of 1998, the CRG board amended the

Plan to offer an opportunity for the deferred delivery of option

stock in order to defer federal income tax liability until the

stock was delivered. The deferred delivery opportunity was

offered to highly compensated employees. Caper and another

employee who was deemed gualified for the deferral made the

deferred delivery election. Another CRG employee who was not

deemed gualified for the deferred delivery opportunity borrowed

money from the company to pay the tax liability on the exercise

of her option. Ostler was not offered the deferred delivery

4 opportunity or a company loan to pay the tax liability on his

option.

In February of 1998, Ostler wrote to Caper requesting

information about the company. Caper referred the letter to

CRG's chief financial officer, Merrill Keefer, who communicated

with Ostler thereafter. In the course of their communications,

Keefer told Ostler that if he exercised his option, CRG would

most likely report the transaction at a valuation of $26.50

per share. Ostler was dissatisfied with CRG's responses to his

requests for information and filed his complaint in this court on

June 15, 1998, with a motion to expedite discovery. Ostler also

filed a motion for a preliminary injunction to enjoin CRG from

enforcing the terms of the Plan. Ostler's discovery motion was

granted in part, and CRG provided more information.

CRG hired PriceWaterhouseCoopers ("PWC") to do a valuation

of CRG's stock shares for tax reporting purposes. Ostler's

motion for a preliminary injunction was denied on July 15. On

the same day. Ostler informed CRG, in a letter to Keefer, that he

wished to exercise his option to purchase and asked about the tax

liabilities. Five days later, Keefer sent Ostler a letter

informing him of the valuation work being done by PWC. OnJuly

21, 1998, CRG's counsel sent Ostler's counsel a letter about the

valuation and enclosing the investment letter to be signed as a

5 condition of exercising the option. On July 22, Ostler's counsel

was informed that PWC's preliminary indication of value for the

stock was between seventeen and nineteen dollars per share. The

valuation report was delivered to Ostler on July 24 and valued

the shares at $16.94 each. On July 27, however, the deadline for

Ostler to exercise his option, counsel for CRG notified Ostler's

counsel by voicemail that the PWC valuation was going to be

reduced by one or two dollars per share. CRG's counsel

represented that the deadline would be extended for forty-eight

hours. The final PWC report was faxed to Ostler on July 28, and

on July 29 Keefer told Ostler that the deadline would be extended

until July 31.

For the first time, on July 29, Keefer told Ostler that CRG

was engaged in preliminary merger discussions with HealthTech

Services Corporation and provided information pertinent to the

merger plans.5 Ostler did not exercise his option either before

the July 27 deadline or within the extensions suggested by CRG

counsel and Keefer.6 Ostler says that when he asked, through

50stler argues, supported by his expert witness's report, that CRG withheld the most important information: a valuation matrix, the fact that the board had approved the merger proposal, and a combined business plan summary.

60stler contends that neither extension was valid since neither was passed by the CRG board, whose approval was reguired and who later refused to approve the extensions.

6 counsel, for a seven-day extension after receiving the merger

information, the defendants did not respond to his reguest.

CRG's merger negotiations with HealthTech moved in a positive

direction, and the merger occurred on January 27, 1999.

Discussion

The defendants move for summary judgment on all of Ostler's

claims. They argue that the agreement does not entitle Ostler to

the deferred delivery opportunity offered to Caper. The

defendants assert that Ostler lacks standing to bring federal and

state securities claims, and that his fraud claims fail because

no material misrepresentations or omissions were made and because

Ostler did not rely on any misstatements or omissions by CRG.

The defendants also contend, alternatively, that Ostler should be

judicially estopped from claiming damages as a result of an

alleged breach of the agreement or due to fraud.

A. Breach of Contract

Under New Hampshire law, the court interprets the meaning of

a contract as a matter of law, including the determination of

whether the contract is ambiguous. Hopkins v. Fleet Bank-NH,

(N.H. 1999). The intent of the parties is

interpreted from the context of the whole agreement, construing

7 its terms according to their common and reasonable meaning. See

BankEast v. Michalenoick,

(1994). An agreement

is ambiguous only if the parties offer differing reasonable

interpretations of the agreement. See Merrimack School District

v. National School Bus Serv., Inc.,

(1995).

Extrinsic evidence may be considered to find the meaning of an

ambiguous agreement but not to contradict the plain and

unambiguous meaning of an agreement. See Galloway v. Chicago-

Soft, Ltd.,

(N.H. 1998); Holden Engineering and

Surveying, Inc. v. Pembroke Road Realty Trust,

(1993) .

The parties do not dispute that they orally agreed in 1988

that Ostler and Caper would be issued options on identical terms.

Based on the parties' negotiations and agreements, the Plan was

drafted and approved, and, pursuant to the Plan and the Option

Document, CRG issued Ostler and Caper options on 3,000 shares on

identical terms. Ostler argues that the "identical terms"

reguirement continued through the implementation of the Plan and

award of the option and reguired CRG to offer him the same

deferred delivery opportunity that was later offered to Caper

under the the 1998 amendment. The defendants contend that the

"identical terms" reguirement was fully performed when the stock

options were awarded in 1988. Ostler's interpretation of the agreement to include a

continuing "identical terms" reguirement is unreasonable in the

context of the agreement as a whole.7 Neither the Plan nor the

award document includes any reguirement that Ostler and Caper be

treated on identical terms. Instead, the Plan has an eligibility

reguirement and provides for amendment of the Plan. Under the

terms of the Plan, after Ostler left CRG in 1994, he was no

longer eligible to participate in the Plan so that the deferral

opportunity, added by amendment in 1998, did not apply to him.8

If the "identical terms" reguirement, which was an oral

agreement, were interpreted, as Ostler urges, to be a continuing

part of the parties' agreement, it would contradict the expressed

terms of the Plan in the circumstances of this case. In the

context of the agreement taken as a whole, therefore. Ostler's

interpretation is unreasonable. See Chadwick v. CSI, Ltd.,

(1993). Since the oral and written parts of the

agreement can be construed to work together, if the "identical

terms" reguirement is understood to have been fully performed

7Since the parties do not address the operation of the statute of frauds,

, or the merger doctrine, the court does not analyze either theory in deciding the motion for summary judgment.

8Although the parties do not explain the operation of the agreement package as a whole, it appears that Ostler retained his option after he left CRG based on the terms of the Option Document. when the stock options were awarded in 1988, that is the only

reasonable interpretation of the parties' intent.

Ostler argues that an implied covenant of good faith and

fair dealing in the "identical terms" part of the agreement

prevents an interpretation that would permit changes in the Plan

to confer benefits to Caper and not to Ostler because that would

unilaterally deprive him of the benefit of the "identical terms"

agreement. The good faith and fair dealing argument fails for

the same reasons that Ostler's interpretation of the agreement is

unreasonable. The agreement, taken as a whole, does not confer

discretion in performance that would permit CRG to deprive Ostler

of the value of the agreement, but instead the Plan expressly

provides eligibility reguirements for future benefits and a

process for amendment. The Plan was amended in 1998 to offer the

opportunity of deferred delivery of stock, and Ostler, under the

terms of the Plan, was not eligible for benefits conferred after

he left CRG. Since the "identical terms" agreement was fully

performed long before the 1998 amendment to the Plan, no

discretionary change in the agreement occurred in breach of the

good faith covenant.

Accordingly, the parties' agreement is construed, as a

matter of law, to reguire that the 1988 stock option award to

Ostler and Caper be made on identical terms, which occurred when

10 the stock options were awarded in 1988. The parties did not

agree that any other benefits accorded under the Plan would be

awarded to Ostler and Caper on identical terms. The benefits

offered by the 1998 amendments to the Plan were additional

benefits for those who were then eligible under the Plan. Since

Ostler was not eligible, based on the Plan provisions, for the

benefits added by the 1998 amendment, the defendants are entitled

to summary judgment as to Ostler's breach of contract claim.

B. Standing to Bring Federal and State Securities Claims

Ostler asserts federal securities fraud in violation of

Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A.

§ 78j (b) .9 Persons who are either purchasers or sellers of

9Section 78j (b) makes it unlawful for "any person . . . [t]o use or employ, in connection with the purchase or sale of any security, . . . any manipulative device or contrivance in contravention of such rules and regulations as the Commission may prescribe." The Securities and Exchange Commission has promulgated Rule 10b-5 that makes it

unlawful for any person, directly or indirectly, . . .

(a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

11 securities have standing to bring private actions for damages

under the federal securities laws. See Blue Chip Stamps v. Manor

Drug Stores,

(1975) . Persons who refrain

from buying or selling, although their forbearance is due to

material misrepresentations or omissions, lack standing.

. The term security is defined to include an option, 15

U.S.C.A. § 78c(10); and buy, purchase, sell, and sale are all

defined to include a contract to acguire or dispose of a

security, § 78c (13) and (14) . Accordingly, a purchaser of

options who is injured by deception or fraud "in connection with"

the purchase or sale or a contract to acguire or dispose of

options has standing to bring claims under Rule 10b-5.

Ostler was a purchaser of securities within the meaning of

the 1934 Act when CRG issued the option to him in 1988. See,

e.g., Yoder v. Orthomolecular Nutrition Inst.,

, 559

(2d Cir. 1985). If Ostler were alleging fraud in connection with

his decision to accept, as employment compensation, the award of

stock option in 1988, he would have standing to raise that claim.

The more difficult guestion is whether he has standing, as a

holder of an option to purchase CRG stock, to bring a claim that

in connection with the purchase or sale of any security.

.10b-5 (1998).

12 he was injured by the defendants' alleged deception or fraud in

connection with his decision not to exercise his option.

In Blue Chip Stamps, the Supreme Court adopted the "Birnbaum

rule" to limit private securities actions "to actual purchasers

and sellers of securities."

(discussing Birnbaum v.

Newport Steel Co.,

(2d Cir. 1952)). The Court

examined the language and purpose of pertinent provisions of the

Securities and Exchange Act of 1934 and found the policy of the

Act supported limiting the implied private cause of action to

those who actually participated in securities transactions

because

a putative plaintiff who neither purchases nor sells securities but sues instead for intangible economic injury such as loss of a noncontractual opportunity to buy or sell, is more likely to be seeking a largely conjectural and speculative recovery in which the number of shares involved will depend on the plaintiff's subjective hypothesis.

Id. at 734-45. The right of action, the Court reasoned, should

not be available to mere offerees and bystanders who could

construct retrospective fraud claims. See id. at 746-47.

In contrast to offerees and bystanders, however,

the holders of puts, calls, options, and other contractual rights or duties to purchase or sell securities have been recognized as "purchasers" or "sellers" of securities for purposes of Rule 10b-5, not because of a judicial conclusion that they were similarly situated to "purchasers" or "sellers," but because the definitional provisions of the 1934 Act themselves grant them such a status.

13 Id. at 751. Therefore, while a disappointed offeree lacks

standing to maintain a securities fraud claim, a plaintiff who

holds a contractual right, such as an option, to purchase

securities stands on different ground. See Blue Chip Stamps,

-52. There appear to be few if any cases, however, that

address the guestion of standing to assert a securities claim

alleging fraud that induced the holder of an option not to

exercise the option at the end of the option period, and

analogous cases come to different conclusions due in part to

different factual circumstances.

Two cases cited by the defendants address the standing of

stockholders who were disappointed because they did not sell

their shares, as invited, during corporate mergers and

acguisitions, and in both cases the court held that the

plaintiffs lacked standing since they did not purchase or sell

securities. See Marsh v. Armada Corp.,

(6th Cir.

1976); Gaudin v. K.D.I. Corp.,

(S.D. Ohio 1976).

In Jackovnv v. RIHT Financial Corp., a shareholder alleged fraud

in the course of a corporate acguisition that lead him to turn in

shares of one company, which, due to subseguent undisclosed

acguisition, greatly appreciated, for shares of another.

(1st Cir. 1989). The court considered the

standing issue, commenting, "we are aware of no authority holding

14 that an option holder's failure to exercise an option to buy

falls within the critical language: 'purchase,' or 'contract to

buy, purchase, or otherwise acguire.'"

. The case was

decided on the lack of materiality of the alleged fraud, however,

not on standing, making the court's remarks dicta.

In two cases cited by Ostler, the courts determined that

holders of convertible securities who decided not to convert to

stock, based on the defendants' alleged fraud, had standing to

bring securities actions. See Green v. Hamilton,

(S.D.N.Y. 1977); Camp v. Genesco, Inc., No. 75 Civ. 3571,

,

95,473 (S.D.N.Y. Mar. 17, 1976)

(aff'd following reargument. No. 75 Civ. 3471,

,

95,679 (S.D.N.Y. Aug. 6, 1976)). While the

reasoning in those cases is both helpful and persuasive, as the

court recognized in Camp v. Genesco, the best authority in

support of standing for a holder of a contractual right to buy or

sell securities, who alleges that he did not exercise his right

due to fraud, is Blue Chip Stamps.

In Blue Chip Stamps, a stock offering was made pursuant to a

consent decree in a civil antitrust action that provided for

merger of the old Blue Chip company into a newly formed

corporation. Blue Chip Stamps. See

. The

plaintiffs were offerees of stock under the terms of the consent

15 decree and reorganization plan who alleged that they did not buy

the offered shares due to the allegedly overly pessimistic

prospectus issued with the offering.

. The issue

in the case was whether the plaintiffs had standing to bring

securities fraud claims under Rule 10b-5. As noted above, the

Court adopted the Birnbaum rule that limits plaintiffs to

purchasers and sellers of securities, but then recognized an

exception to the rule, based on the applicable statutory

definitions, for those who hold contractual rights to buy or sell

securities.

. The Court found that the plaintiffs

did not have standing because the consent decree did not confer

enforceable contractual rights to purchase stock in the newly

formed company.

In contrast, plaintiffs who hold

contractual rights to purchase stock, such as holders of options,

are recognized as purchasers and have standing to bring

securities fraud actions.

.

A contractual right to purchase stock can be understood to

satisfy the standing reguirement in actions alleging fraud in

connection with a decision not to exercise the right based on

either the status conferred by the applicable statutory

definitions or by operation of the contractual right itself. The

analysis in Blue Chip Stamps suggests that one who holds a

contractual right to purchase securities has standing based on

16 the status conferred by the definition of purchaser. See, e.g.,

Pelletier v. Stuart-James Co.,

(11th Cir.

1989) ("Accordingly, a person who alleges a violation of Rule

10b-5 must demonstrate that he is an actual purchaser or seller,

or that he was party to a legally enforceable contract to

purchase or sell securities."); Fry v. UAL Corp.,

(N.D. 111. 1995) (protection of securities laws

limited to actual participants in securities markets including

options); Chariot Group v. American Acquisition Partners,

(S.D.N.Y. 1990).

From another viewpoint, however, a right to purchase stock

conferred by a contract that has not yet expired might be

construed as a continuing transaction, in that the purchase began

when the option was awarded and is not complete until the term of

the option has expired. Therefore, fraud that occurs during the

course of the transaction, that deprives the option holder of the

benefit of the contractual right, is fraud in connection with the

purchase of securities. See, e.g., Pelletier,

;

Ohashi v. Verit Indus.,

(9th Cir. 1976) .

In this case. Ostler held a contractual right to purchase

CRG stock at the time he alleges the defendants' fraud occurred.

He alleges that the defendants fraudulently induced him not to

exercise his contractual right, causing him to lose the value of

17 the option. Therefore, under either theory Ostler would have

standing to bring federal securities claims as a holder of a

contractual right to purchase securities. Accordingly, based on

the record presented, the defendants have not demonstrated that

they are entitled to summary judgment as a matter of law on the

ground that Ostler lacks standing to bring a Rule 10b-5 claim.

The defendants also move for summary judgment arguing that

Ostler lacks standing to maintain his state securities law claim

based on the limitations imposed by the Birnbaum rule. New

Hampshire's securities laws apply to fraud "in connection with

the offer, sale, or purchase of any security," and "offer"

includes "every attempt or offer to dispose of, or solicitation

of an offer to buy, a security or interest in a security for

value." RSA § 421-B:3, § 421-B:2, XIX. In the context of

Ostler's claims, therefore, the New Hampshire laws arguably

provide more protection than the federal securities laws.

Further, since the defendants have not demonstrated that Ostler

is not entitled to protection under the federal securities laws,

their arguments in favor of summary judgment as to the state law

claims must also fail.

18 C. Materiality of the Defendants' Alleged Misstatements

and Omissions

The defendants contend that they did not make any material

misstatements or omissions in their communications with Ostler.10

"A misrepresented or omitted fact will be considered material

only if a reasonable investor would have viewed the

misrepresentation or omission as 'having significantly altered

the total mix of information made available.'" Gross v. Summa

Four, Inc.,

(1st Cir. 1996) (guoting Basic, Inc.

v. Levinson,

(1988)). The omitted or

misrepresented information must also be substantially likely to

be considered important to the investment decision by a

reasonable investor. See Milton v. Van Dorn Co.,

(1st Cir. 1992) (guoting Basic, Inc.,

).

Summary judgment is warranted only if reasonable minds "could not

differ as to the materiality of the undisclosed information."

at 97 0.

10The defendants also argue briefly, in the context of materiality, that they did not intend to commit fraud. The scienter reguirement has not been raised in sufficient detail, however, to permit analysis for purposes of summary judgment. C f . Press v. Chemical Investment Servs. Corp.,

, 537 (2d Cir. 1999) (discussing scienter reguirement for Rule 10b-5 claim).

19 1. CRG's valuations of shares for tax purposes.

Each option holder was obligated, by the terms of the Option

Document, to pay CRG "at the time of exercise an amount equal to

the amount of any [federal, state, or local] taxes or charges,"

and CRG's valuation of the shares for purposes of assessing taxes

determined the amount to be paid. According to the Option

Document, the deadline for Ostler to exercise his option was July

27, 1998.

In response to Ostler's request for information, Merrill

Keefer, CRG's chief financial officer, sent Ostler a letter on

April 29, 1998, that said that CRG "would most likely report the

transaction to the IRS at a valuation of $26.50 per share . . .

unless some event establishing a different valuation occurred

prior to the time you exercise." Defendants' memorandum at 24.

On June 17, Keefer sent another letter reporting a value of

$17.68 per share based on a "preliminary term sheet." On July

25, CRG sent Ostler a draft accounting report prepared by PWC

valuing the shares at $16.94 each, and two days later notified

him that the value would likely be one or two dollars less. CRG

contends that none of the valuation information was untrue.

Ostler argues that the defendants' failure to notify him in

May that PWC was doing a valuation was a misrepresentation

because the defendants knew they would not use the $26.50

20 valuation.11 In light of all of the information that was finally

available and significant to Ostler's decision, the out-of-date

valuation seems insignificant. At least by mid-June Ostler knew

that the valuation was likely to be $10 a share less. Ostler

admits that the more significant issue is the lack of information

about the pending merger.

2. Omission of information about the pending merger

With HealthTech.

Although CRG provided other information about the company's

finances and prospects including information about other merger

opportunities, it appears to be undisputed that CRG did not

disclose the merger opportunity with HealthTech until July 29.

CRG also, apparently, did not inform PWC of the merger

possibility so the impact of the merger was not considered in

PWC's valuation reports.12 Before the disclosure. Ostler

contends, the defendants presented an overly pessimistic view of

CRG's prospects coupled with a significant tax liability for

exercising the option. When the defendants finally disclosed the

“Although CRG says they did not hire PWC to do the valuation until June, Keefer in his deposition said that he began talking with PWC in April or May about doing a valuation.

“ Presumably PWC would have valued the shares at a higher amount if the defendants had disclosed the merger information for purposes of the valuation.

21 pending merger with HealthTech, they still did not include

information that Ostler contends was most significant to his

decision whether or not to exercise the option.

In essence, the defendants argue the record shows that they

did not omit or misrepresent material information because they

disclosed the PWC valuations and the pending merger to Ostler

before he made his decision not to exercise. The timeliness and

completeness of their disclosures remain at issue, however.13

Therefore, the defendants have not shown that they are entitled

to summary judgment as a matter of law on the issue of

materiality.

D. Reliance

"To establish a claim under section 10 (b) of the Securities

Exchange Act, a plaintiff must prove, in connection with the

purchase of a security, that the defendant, with scienter,

falsely represented or omitted to disclose a material fact upon

which the plaintiff justifiably relied." Kennedy v. Josephthal &

C o ., Inc.,

(1st Cir. 1987). Justifiable

reliance links the defendants' fraud to the plaintiff's injury.

13Although Ostler now argues that the deadline was never extended so the information disclosed on July 29 was too late, at the time, he apparently thought the deadline had been extended and acted accordingly.

22 See Basic, Inc.,

. When a plaintiff claims fraud

by affirmative misrepresentation, the plaintiff bears the burden

of proving reasonable reliance. See Simon DeBartolo Group, L.P.

v. The Richard E. Jacobs Group, Inc., No. 97-9613,

(2d Cir. July 28, 1999). Positive proof of reliance is not

required, however, "where a duty to disclose material information

[has] been breached." Basic, Inc., 485 at 243 (citing Affiliated

Ute Citizens v. United States,

(1972)).

The defendants argue that Ostler did not rely on any of

their alleged omissions or misrepresentations in making his

decision not to exercise the option. The defendants first note

that he filed the present securities fraud suit before the

exercise deadline. Therefore, they contend. Ostler cannot claim

to have relied on information he had already alleged was false.

The defendants do not include a list of the statements they

assert were previously alleged to be false. The first complaint,

at pages 12 and 13, lists four misrepresentations as to the tax

value of the stock. Otherwise, the complaint appears to

primarily allege a lack of information rather than affirmative

fraud. To the extent the defendants seek summary judgment as to

any particular statements, their motion and memorandum are not

sufficiently specific to permit judgment in their favor.

The defendants also argue that Ostler did not rely on any of

23 their statements or omissions because his decision was the result

of his wife's vacation and his "discomfort with the new

developments at CRG." Defendants' memorandum at 29-30. Ostler

explained in his deposition that he let the option expire because

he was not able to consult with his wife, who was away on

vacation, about the new developments at CRG before making the

decision.14 In response. Ostler contends that the defendants

withheld the information most important to his decision, that

Ostler's expert says would have shown that even under the least

desirable possibility, he would gain by exercising the option.

Ostler argues that without the most significant information, he

relied on the less rosy, but incomplete, picture the defendants

presented, causing him to let the option expire. Therefore,

Ostler asserts, the defendants defrauded him by omitting

significant material information about the company and he need

not show his reliance.

The defendants have not shown that Ostler will not be able

to prove that the omitted information was material. Nor is it

clear from the record that Ostler's "discomfort with the new

developments at CRG" was not the result of the defendants' delay

in providing material information and continued nondisclosure of

14Ostler says that he reguested a further extension of the deadline which the defendants did not allow.

24 material information. The question of Ostler's justifiable

reliance on the information the defendants' provided raises too

many factual issues to be resolved on the present record for

summary judgment.

Because the defendants' seek summary judgment with respect

to Ostler's state securities law claims and common law fraud

claims on the arguments raised in favor of summary judgment on

the federal claims, they are not entitled to summary judgement on

the state claims for the same reasons.

E . CRG's Obligations Under the Plan and Option Document

In Count I, Ostler alleges that CRG withheld information and

imposed "an unlawful condition" on the exercise of his option.

The legal theory behind Count I is unclear. For purposes of

summary judgment, CRG interprets Ostler's allegations as a breach

of contract claim. In so doing, CRG notes that the Option

Document required Ostler, as a condition precedent to exercising

the option, to provide an investment letter that would include,

among other things, a statement that Ostler or his

representatives had fully investigated the company and its

finances and "have knowledge of the Company's then current

corporate activities and financial condition." Defendants'

memorandum at 31. CRG acknowledges that the investment letter

25 requirement "contained an implied promise by CRG to make such

information available as reasonably required to conduct the

investiqation contemplated." Id. at 31-32. CRG then surmises

that Count I pertains to its implied promise.

CRG contends it did not breach its promise because it sent

3,700 paqes of information to Ostler by the July 3 deadline

imposed by his counsel. As to the PWC valuation and HealthTech

merqer information, CRG says it complied with its promise by

providinq information about both before Ostler's option expired.

Ostler correctly points out that it is not the amount of paper

sent, but whether CRG failed to disclose material information

necessary for Ostler to evaluate CRG's activities and financial

condition. As discussed above, whether the defendants provided

all material information in a timely manner is disputed.

Ostler also arques that the investment letter sent by the

defendants' counsel for him to siqn was different than the letter

specified in the Option Document and included statements about

CRG's compliance that were untrue. Ostler contends that the

defendants' version of the letter would have required him to

waive his fraud claims in order to exercise his options. The

defendants assert that it was their riqht under the terms of the

Option Document to require an investment letter in the form they

wanted, and they were entitled to propose terms that would

26 require waiver of Ostler's suit.

The parties' disagreement about the meaning and intent of

the investment letter requirement raises issues that neither have

briefed, including the application of the doctrine of good faith

and fair dealing to the Option Document. Based on the record

presented, summary judgment is not appropriate on the claims

raised in Count I .

F. Judicial Estoppel

The defendants argue that Ostler should be judicially

estopped from claiming damages because of representations he made

in support of his motion for a preliminary injunction in this

case. In support of his motion. Ostler stated in his affidavit

that at the reported valuation of his shares, his tax liability

would be in excess of $500,000, and " [w]ith no public market for

the shares, I am unable to pay the associated taxes, and thus

unable as a practical matter to exercise my valuable option

rights." Affidavit of June 17, 1998 at I 15. More recently, to

meet the requirements of showing damages due to the defendants'

alleged fraud. Ostler has represented that his father agreed to

loan him money to pay the tax liability on the stock option.

Ostler's father's affidavits confirm that he had discussed the

stock option and his willingness to loan money to his son to

27 cover the tax liability. Father and son agreed in late July to a

loan to cover the tax liability. The defendants argue that

Ostler should be estopped from showing, through the agreement

with his father, that he was able to pay the tax liability

because he represented previously that he was not able to pay.

The doctrine of judicial estoppel prevents a party who

succeeds with one position from later asserting a directly

contrary position. See Lvdon v. Boston Sand & Gravel Co.,

(1st Cir. 1999). Ordinarily, judicial estoppel is

used to bar a litigant from asserting inconsistent positions in

proceedings before different tribunals to protect the integrity

of the courts and to prevent a litigant from obtaining unfair

advantage. See

. In an appropriate case, however, the

doctrine may be considered, for example, as a sanction for

inconsistent positions taken in bad faith during the same

proceeding. See Klein v. Stahl GMBH & Co.,

(3d Cir. July 15, 1999).

First, it is not entirely clear that Ostler's affidavit,

saying that he was unable to pay a tax liability in excess of

$500,000, is directly contrary or inconsistent with his later

representations about his discussions and agreement with his

father for a loan. The defendants have not shown that Ostler

denied all means of obtaining the money necessary to pay the

28 taxes in his first affidavit.

Second, it does not appear that Ostler's affidavit as to his

inability to pay the taxes was successful. His motion for a

preliminary injunction was denied on grounds that he had not

demonstrated a likelihood of success on the merits of either his

breach of contract or breach of fiduciary duty claims. His

ability to pay the taxes was not discussed in the magistrate's

analysis of irreparable harm. The defendants have not shown that

Ostler's statement about his ability to pay had any effect on the

imposition of expedited discovery in the case.

Even if the defendants were able to make the necessary

showing on the two reguired elements for judicial estoppel, the

remedy they urge, barring evidence of the loan agreement, would

be an unnecessarily harsh sanction in this case. The defendants

have not shown any bad faith, dishonesty, or an intent to "play

fast and loose" with the court that would justify the imposition

of judicial estoppel. See Klein,

; see

also Casas Office Machines v. Mita Coovstar,

(1st Cir. 1994). To the extent Ostler's first affidavit is

inconsistent with his present claims that he would have paid the

tax liability with a loan from his father, that issue may be

explored through cross-examination.

29 Conclusion

For the foregoing reasons, the defendants' motion for

summary judgment (document no. 65) is granted as to the

plaintiff's breach of contract claim. Count II of the (second)

Amended Complaint (document no. 61), and denied as to all other

claims.

SO ORDERED.

Joseph A. DiClerico, Jr, District Judge

August 12, 1999

cc: William Edward Whittington IV, Esguire Bruce E. Falby, Esguire H. Jonathan Meyer, Esguire

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