In the

United States Court of Appeals
               For the Seventh Circuit

No. 08-2804

JACK V. S MITH,
                                                  Plaintiff-Appellant,
                                  v.

JOHN M. D UFFEY, et al.,
                                               Defendants-Appellees.


             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
               No. 07 C 5238—John W. Darrah, Judge.



       A RGUED M AY 11, 2009—D ECIDED A UGUST 3, 2009




  Before C UDAHY, P OSNER and K ANNE, Circuit Judges.
  P OSNER , Circuit Judge. The plaintiff, Jack Smith, appeals
from the dismissal, for failure to state a claim, of his
diversity suit for fraud. Fed. R. Civ. P. 12(b)(6). The parties
disagree on whether Illinois or North Carolina law
governs the substantive issues, but as nothing turns on the
dispute, because there is no material difference between
the relevant laws of the two states, we ignore it.
  In 1999 Smith sold a controlling interest in his medical-
testing company, together with patents and other intellec-
2                                               No. 08-2804

tual property, to Dade Behring, Inc., a closely held corpora-
tion. As part of the consideration for the sale Smith re-
ceived options, valid for ten years, to purchase 20,000
shares of Dade Behring’s common stock at $60 a share.
He also became an employee of the company. But the
relationship soon soured and on May 3, 2002, he signed
an agreement ending his employment. By the terms of
the agreement he received $1.4 million in cash and
retained his stock options with their $60 exercise price,
although the appraised value of the stock was only $11.
  Three months later the company declared bankruptcy
under Chapter 11 of the Bankruptcy Code, and as part of
the ensuing reorganization of the company Smith’s stock
options were extinguished. He sued three officers of
Dade Behring (including its chief financial officer), who
had negotiated the termination agreement with him and
who he says knew that the company was planning to
declare bankruptcy in a pre-packaged bankruptcy filing
that would propose cancellation of the stock options.
He contends that the defendants had a duty to disclose
these facts to him. The reorganization was successful,
and stock and stock options in the reorganized company
were issued to the defendants, but of course not to Smith.
  Smith argues that had they told him the company was
planning to declare bankruptcy and that as a result his
20,000 stock options would be cancelled, he would have
refused to sign the termination agreement unless he had
been given more than $1.4 million to do so. He argues
in the alternative that he should be entitled to the value of
the shares in the reorganized company ($76 when he
No. 08-2804                                               3

sued) that he would have owned had he been issued (and
exercised) stock options in the company on the same
terms as the options he had owned before the reorganiza-
tion. This alternative theory of damages is preposterous.
Smith does not claim that the Chapter 11 reorganization
was fraudulent (though he contends that the defendants
hoped to profit from it by obtaining stock and stock
options in the reorganized company), or otherwise
invalid and so should not be deemed to have extin-
guished existing stock and stock options. The company
was broke, and the extinction of equity interests is the
usual consequence of bankruptcy. Smith could not have
enforced his options once bankruptcy was declared, and
he had no right to receive stock and options in the reorga-
nized company and would not have had the right even
if he had continued as an employee. Even if it’s true, as he
argues, that “if Smith had the ability to exercise the
options he was granted under the [termination agreement],
he would now realize a gain of approximately $10.9
million,” the premise cannot be satisfied; he could not
exercise the options because they were eliminated in a
valid bankruptcy proceeding.
  His complaint is not about the bankruptcy, but about the
failure of the defendants, who for all we know were not
acting with the company’s knowledge or authorization, to
tell him that the company would be declaring bankruptcy.
The bankruptcy is not in issue in this case, which is why
the defendants do not argue that the judgment in the
bankruptcy case bars the plaintiff’s claim.
  Smith’s only remotely plausible argument is that had the
defendants told him the company was about to file for
4                                               No. 08-2804

bankruptcy he would have demanded and received
more cash, in lieu of the stock options that were about to
disappear. But how likely is that? And how could such
pressure have been effective? Had the defendants told
him the company was about to declare bankruptcy, he
would have realized, if he didn’t already, that his bar-
gaining position was weak, because in bankruptcy he
probably would get nothing at all. When two parties are
trying to negotiate a contract, the one who if the contract
is made will be the paying party will generally try to give
the impression that he cannot afford to pay a very high
price and that the other party therefore has little bargain-
ing power. The defendants didn’t try to do that, as they
could have done by telling the plaintiff that the
company was going to declare bankruptcy.
  Nor is it argued that they would have been authorized
by the company to increase the amount of cash that Smith
would receive under the termination agreement had
he expressed dissatisfaction with the $1.4 million cash
settlement upon learning that the stock options had no
value. Since, as he emphasizes, the defendants and their
superiors in the company foresaw that all existing stock
and stock options in the company would be extin-
guished in bankruptcy because it was a pre-packaged
bankruptcy and extinction was part of the package, they
would not have paid him anything to relinquish his
stock in the termination agreement. Had he said to the
defendants, “Well, since the options have no value, I am
willing to relinquish them, but I want to be compensated
for surrendering this valueless asset,” they would have
scratched their heads in puzzlement.
No. 08-2804                                                  5

  Thus the likeliest explanation of why the defendants did
not tell Smith about the bankruptcy is that they assumed,
and assumed he assumed, that the parlous state of the
company—known to all and symbolized by the disparity
between the appraised value of the stock ($11) and the
exercise price of the stock options ($60)—made his re-
tention of the stock options of no conceivable significance.
   He does argue that the defendants expected the
company to emerge from bankruptcy in fine shape; and
indeed by the time he sued the value of the stock of the
reorganized company had soared. But they were not
required to share their hopes or expectations with him.
When an alleged fraud consists of failing to tell the
alleged victim something (in this case that the defendants’
employer was about to declare bankruptcy) rather than
telling him something that is untrue, he must show that
there was a duty to tell him that something. Such a
duty—call it the duty of candor—is sometimes imposed
as a matter of law, as in the case of a fiduciary relation-
ship. See, e.g., Chiarella v. United States, 

, 227-
28 (1980); United States v. Holzer, 

, 307 (7th
Cir. 1987); In re Tallant, 

, 65 (9th Cir. BAP 1998);
W. Page Keeton et al., Prosser & Keeton on the Law of Torts
§ 106, pp. 738-39 (5th ed. 1984); Restatement (Second) of Torts
§ 551(2)(a) and comment f (1977). But often it arises in
the absence of any special relationship—arises just
because the defendant’s silence would mislead the plain-
tiff because of something else that the defendant had said,

Union Pacific Resources Group, Inc. v. Rhone-
Poulenc, Inc., 

, 584-86 (5th Cir. 2001); Okland Oil
Co. v. Conoco Inc., 

, 1324 (10th Cir. 1998);
6                                                   No. 08-2804

V.S.H. Realty, Inc. v. Texaco, Inc., 

, 414-15 (1st
Cir. 1985), or because of other circumstances, as in Mathias
v. Accor Economy Lodging, Inc., 

, 675 (7th Cir.
2003). We held in that case that it was a fraud for a
motel not to warn customers that their room was
infested with bed bugs, since the customers would in
the absence of warning have assumed it was not infested.
  The case of a special relationship, such as the lawyer’s
fiduciary obligation to his client, is really just a special case
of the general proposition that context can create a duty
of candor. The lawyer’s specialized knowledge invites
the client to repose trust in what the lawyer tells him, and
the client’s expectation would be shattered if the lawyer
could be uncandid with impunity, as is normal in arm’s
length dealings between buyers and sellers.
  Had the defendants (or the company) told Smith that
the company was doing great, so that he should be
happy that the consideration he would receive under his
termination agreement included stock options and so he
should not ask for more cash, this would have put out
of his mind any concern that the company might go broke
and therefore his stock options become valueless. The
defendants would then have been duty-bound to
disabuse him of the misleading impression that they
had created. But not only did they not say anything to
lull him into thinking bankruptcy not in the cards; when
they sent him the initial draft of the termination agree-
ment they didn’t bother to provide in it that he would
retain his stock options—implying that they were worth
too little to warrant mentioning. Rather than puffing up
No. 08-2804                                                 7

the value of the options to make him reduce his demand
for cash, they told him the company was in trouble and
was seeking an “exit strategy”—of which bankruptcy is
a common type—and that the stock options might indeed
be worthless.
  Smith places mysterious emphasis on the fact that shortly
before the bankruptcy the company announced a 4 for 1
stock split. He says that this made the options worth
more. What is true is that the exercise price of the options
fell from $60 a share to $15 a share. But by the same
token, since nothing had happened to make the
company more valuable, the value of the underlying
shares presumably fell by the same 75 percent. Smith’s
lawyer told us at argument that when a stock is split, the
price of the new shares is the same as the price of the
old. By this reasoning, when Dade Behring split each one
of its shares into four shares the market capitalization of
the company increased fourfold. No basis for such a
strange theory of investor behavior is suggested.
  He says he was told that the share price would be unaf-
fected by the split. But no businessman in his right mind
(and Smith is a businessman in his right mind) could
believe this, and a false statement that the person to
whom it is made could not believe, because its falsity
was obvious to him given what else he knew, is not
actionable as a fraud. Field v. Mans, 

, 70-72
(1995); Sanford Institution for Savings v. Gallo, 

,
74-75 (1st Cir. 1998); Wittekamp v. Gulf & Western, Inc., 

, 1145 (3d Cir. 1993); Schmidt v. Landfield, 

, 231-32 (Ill. 1960); Chicago Title & Trust Co. v.
8                                                 No. 08-2804

First Arlington National Bank, 

, 729 (Ill. App.
1983); Restatement, supra, § 541; Keeton et al., supra, § 108,
p. 752 (“where, under the circumstances, the facts
should be apparent to one of his knowledge and intelli-
gence from a cursory glance, or he has discovered some-
thing which should serve as a warning that he is being
deceived, . . . he is required to make an investigation of
his own”). This rule is a check on phony claims; if a
businessman claims that he bought the Brooklyn Bridge
in response to a solicitation from someone who claimed
to own the bridge, we know the claim is false.
  Smith points to a promise in the agreement that no
fact known to the company and not disclosed in writing
to Smith “adversely affects or could reasonably be antici-
pated to adversely affect [the company’s] performance”
under the agreement or related documents. But the de-
fendants are not parties to the agreement and therefore
cannot be held liable for having violated it.
   So the judgment of the district court must be affirmed. In
our initial thinking about the case, however, we were
reluctant to endorse the district court’s citation of the
Supreme Court’s decision in Bell Atlantic Corp. v. Twombly,

(2007), fast becoming the citation du jour in
Rule 12(b)(6) cases, as authority for the dismissal of this
suit. The Court held that in complex litigation (the case
itself was an antitrust suit) the defendant is not to be put to
the cost of pretrial discovery—a cost that in complex
litigation can be so steep as to coerce a settlement on terms
favorable to the plaintiff even when his claim is very
weak—unless the complaint says enough about the case
No. 08-2804                                                9

to permit an inference that it may well have real merit. The
present case, however, is not complex. Were this suit to
survive dismissal and proceed to the summary judgment
stage, it would be unlikely to place on the defendants
a heavy burden of compliance with demands for pretrial
discovery. The parties did not negotiate face to face over
the termination agreement, and though some of the
negotiations were over the telephone rather than in
letters or emails, Smith recorded those and the
transcripts are attached to his complaint. So almost all the
potentially relevant evidence is already in the record.
  But Bell Atlantic was extended, a week after we heard
oral argument in the present case, in Ashcroft v. Iqbal, 

(2009)—over the dissent of Justice Souter, the
author of the majority opinion in Bell Atlantic—to all cases,
even a case (Iqbal itself) in which the court of appeals
had “promise[d] petitioners minimally intrusive dis-
covery.” 

Yet Iqbal is special in its own way,
because the defendants had pleaded a defense of official
immunity and the Court said that the promise of
minimally intrusive discovery “provides especially cold
comfort in this pleading context, where we are impelled
to give real content to the concept of qualified immunity
for high-level officials who must be neither deterred
nor detracted from the vigorous performance of their
duties.” 

  So maybe neither Bell Atlantic nor Iqbal governs here. It
doesn’t matter. It is apparent from the complaint and
the plaintiff’s arguments, without reference to anything
else, that his case has no merit. That is enough to justify,
10                                        No. 08-2804

under any reasonable interpretation of Rule 12(b)(6),
the dismissal of the suit.
                                           A FFIRMED.




                        8-3-09