Filed: Aug. 05, 2008
Latest Update: Mar. 02, 2020
Summary: United States Court of Appeals FOR THE EIGHTH CIRCUIT _ No. 07-2764 _ Peter B. Dunning, for himself and as * representative and attorney-in-fact * for his grandchildren; David B. * Dunning; Claire Baker, Rachael * Baker; Timothy Baker; Meghan E. * Dunning; Charles B. Dunning; * Bailey W. Dunning; Corey Steven * Sheehan; Hazel R. Dunning, * * Appeal from the United States Plaintiffs-Appellants, * District Court for the Southern * District of Iowa. v. * * Gregory J. Bush; Lawrence P. Bush; * Josep
Summary: United States Court of Appeals FOR THE EIGHTH CIRCUIT _ No. 07-2764 _ Peter B. Dunning, for himself and as * representative and attorney-in-fact * for his grandchildren; David B. * Dunning; Claire Baker, Rachael * Baker; Timothy Baker; Meghan E. * Dunning; Charles B. Dunning; * Bailey W. Dunning; Corey Steven * Sheehan; Hazel R. Dunning, * * Appeal from the United States Plaintiffs-Appellants, * District Court for the Southern * District of Iowa. v. * * Gregory J. Bush; Lawrence P. Bush; * Joseph..
More
United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 07-2764
___________
Peter B. Dunning, for himself and as *
representative and attorney-in-fact *
for his grandchildren; David B. *
Dunning; Claire Baker, Rachael *
Baker; Timothy Baker; Meghan E. *
Dunning; Charles B. Dunning; *
Bailey W. Dunning; Corey Steven *
Sheehan; Hazel R. Dunning, *
* Appeal from the United States
Plaintiffs-Appellants, * District Court for the Southern
* District of Iowa.
v. *
*
Gregory J. Bush; Lawrence P. Bush; *
Joseph D. Bush; Barbara S. Johnson; *
Thomas M. Bush; Peter A. Bush; *
Mary P. Walsh; Francis P. McCarthy, *
*
Defendants-Appellees. *
___________
Submitted: March 13, 2008
Filed: August 5, 2008
___________
Before MURPHY, BRIGHT and BENTON, Circuit Judges.
___________
BRIGHT, Circuit Judge.
This lawsuit arises from the sale of a 50% interest in a holding company, Twin
City Mineral Corp. (“Twin City”), by Appellants, Peter Dunning and various family
members (collectively “Dunning”) to the owners of the other 50% interest, Appellees
Gregory Bush, Francis McCarthy and others (collectively “Defendants”). Dunning,
dissatisfied with the amount he received in connection with the sale of his interest,
seeks damages or avoidance of the contract or certain contract terms by asserting the
following claims of fraud and other improper conduct against Defendants: fraudulent
concealment, affirmative misrepresentation, rescission, breach of fiduciary duty,
securities fraud, insider trading, and breach of contract. The district court granted
summary judgment in favor of Defendants on all of Dunning’s claims. In doing so,
the district court also struck the Dunning supplemental report by expert witness,
William Allen (“Supplemental Allen Report”). Dunning appeals.
We have jurisdiction pursuant to 28 U.S.C. § 1291 and affirm in part, reverse
in part, and remand for further proceedings consistent with this opinion. Specifically,
we affirm the dismissal of Dunning’s common law fraud and securities fraud claims.
We, however, reverse the dismissal of the remainder of Dunning’s claims. We also
reverse the district court’s order striking the Supplemental Allen Report by an expert
witness.
I. Facts and Procedural History
We adopt, with minor changes, the statement of facts and procedural history as
stated by the district court in its unpublished order and opinion dated July 26, 2007.1
Twin City Mineral Corp. (“Twin City”) is a holding company that
owned 50 percent of the outstanding membership interests in Superior
Minerals Company, L.L.C. (“Superior”), a Colorado limited liability
1
Dunning, et al. v. Bush, et al., No. 3:05-cv-00050-JAJ-RAW (S.D. Ia. July 26,
2007).
-2-
company. Plaintiff Peter Dunning started Twin City in 1987 and ran its
day-to-day operations until 2002. The directors of Twin City during
2003 were Peter Dunning, David Dunning, Gregory Bush and Francis
McCarthy, until the Dunnings resigned as directors in August of 2003.
Prior to December 8, 2003, Twin City owned 50 percent of the
outstanding membership interests in Superior. Twin City is a Minnesota
corporation.
Between June 1991 and August 2003, Aggregate Industries North
Central Region, Inc., a subsidiary of Aggregate Industries, Inc. (referred
to collectively as “Aggregate”), a publicly traded company
headquartered in London, England, owned the remaining 50 percent
interest in Superior. Prior to August 8, 2003, plaintiffs owned 50 percent
(30,000 shares) of Twin City and defendants (along with Jack Bush and
Charlie Burke) owned the other 50 percent (30,000 shares). Each
shareholder group had two directors. Certain shareholders were actively
involved in business operations.
Twin City’s principal business operations were conducted by
Superior. Superior was engaged in the business of processing calcium
carbonate into products necessary for various manufacturers in the
roofing materials, animal feed, plastic and other industries in the upper
Midwest and Canada. The calcium carbonate was purchased from
Linwood Mining & Materials Corp. (“Linwood”), which was also owned
by defendants. Superior also processed steel mill slag into slag cement
for various Portland cement companies. Superior had successfully
exploited these markets since the early 1990s. During the calendar year
of 2000, as a result of the economic downturn it[sic] the United States
economy, the financial results of Superior began to deteriorate and
Superior did not earn profits during 2001 and 2002. Superior’s losses in
2001 and 2002 were also due in part to a joint venture between Superior
and Lehigh, which resulted in significant losses to Superior.
Consequentially, the economic circumstances of Twin City deteriorated
as well. Further, Superior’s banking arrangement was tenuous during the
last half of 2002 and first part of 2003. Significant capital contributions
to Superior were required from Peter Dunning, defendants and
Aggregate in order for Superior to maintain its banking relationship with
-3-
U.S. Bank during 2002 and 2003. Peter Dunning did not participate in
the capital contributions in 2003.
Superior was operated by a management committee having the
effective duties and responsibilities of a board of directors. For several
years prior to August 2003, the membership of this committee consisted
of eight members – four from Twin City and four from Aggregate. Peter
Dunning was on the management committee of Superior until the time
he signed the Stock Purchase Agreement. However, Peter Dunning
attended no meetings of the management committee in 2003. David
Dunning attended a management committee meeting on February 19,
2003. Other Twin City members of the Superior management committee
were David Dunning, Gregory Bush and Francis McCarthy.
Rather than make these capital contributions, Peter Dunning
decided to sell his family’s interest in Twin City. Further, Peter Dunning
wished to retire from Superior and move to Vail, Colorado. Peter
Dunning was also aware that Superior’s financing would be coming due
in September 2003. Defendant Greg Bush encouraged Peter Dunning to
stay in the business and not sell his interest. Defendants offered to sell
their interest in Twin City to Peter Dunning. Peter Dunning felt such
discussions were not serious and, therefore, the parties began
negotiations to sell plaintiffs’ interest in Twin City. Dunning’s
replacement, Don Vry, was hired and trained. Dunning became inactive
in the day-to-day management of Superior prior to January 2003.
In January 2003, discussions began between Peter Dunning and
representatives of the McCarthy-Bush defendants regarding the potential
sale of the plaintiffs’ shares of stock in Twin City. Plaintiffs were
represented in the negotiations by attorney Michael Giudicessi of the
Faegre & Benson law firm, who negotiated the terms and conditions of
the Stock Purchase Agreement on plaintiffs’ behalf. Defendants were
represented by attorney James Mezvinsky. Eventually, the parties
entered into a Stock Purchase Agreement, under which plaintiffs sold
their interest in Twin City. Peter Dunning reviewed the entire Stock
Purchase Agreement with his attorney before he signed it, and was not
aware of anything that was left out of the Agreement that he requested
-4-
his attorney to include. The Stock Purchase Agreement was specifically
tailored to the particular transaction between the parties.
The Stock Purchase Agreement contains an integration clause that
states that it “constitutes the entire agreement among the parties with
respect to the matters covered hereby and supersedes all previous
written, oral or implied understandings among them with respect to such
matters.” The clause continues, “[n]o representation, warranty, promise
or understanding shall be binding against a party unless set forth herein.”
During a telephone conference on or about July 29, 2003, between
and among Peter Dunning, Greg Bush, Frank McCarthy and their
respective attorneys, a general discussion of the business affairs and
contract provisions of the Stock Purchase Agreement took place.
Subsequently, Section 1.4 of the Stock Purchase Agreement was first
mentioned around the end of July 2003, and was first drafted by
defendants’ attorneys on July 30, 2003. Peter Dunning discussed
Section 1.4 of the Stock Purchase Agreement with his attorney and read
the Stock Purchase Agreement before he signed it. Section 1.4 was
discussed and included in the Stock Purchase Agreement as a result of
Peter Dunning’s desire to protect his earning stream in the event that
defendants or one of their companies purchased Aggregate’s interest in
Superior.
At about this same time, representatives of Aggregate were
negotiating a resolution of the Superior/Lehigh joint venture. By July
20, 2003, Aggregate had notified the defendants of the essential terms of
a potential resolution whereby Lehigh would cancel Superior’s debt.
Lehigh would retain assets used in the joint venture, Superior would
receive 5,500 tons of cement per year for five years, and Aggregate
would receive a guaranteed supply of cement at market price for a term
of years. Peter Dunning knew that a resolution was being negotiated and
that Superior’s relationship with Lehigh was affecting Superior’s
financial position in a negative fashion. Defendants did not disclose the
status of the negotiations between Aggregate and Lehigh to Peter
Dunning and Dunning did not inquire further about it. Negotiations
continued throughout the fall of 2003 and were finalized in a settlement
-5-
agreement dated November 17, 2003. The cement due to Superior under
the agreement was assigned to Aggregate as part of Superior’s
redemption of Aggregate’s stock in Superior. Using GAAP, Aggregate
valued the cement at $1,582,767. Superior purchased Aggregate’s
interest in Superior by way of a redemption on December 8, 2003. The
Superior Redemption Agreement defined Superior as the “Buyer” and
Aggregate as the “Seller” and provides that Aggregate “wishes to sell”
its interest in Superior.
Section 1.1 of the Superior Redemption Agreement states:
1.1 Redemption and Sale of Interests. Upon
the terms and conditions, for the
consideration specified in Section 1.2
below, and subject to the conditions of this
Agreement, Buyer agrees to purchase from
the Seller, and Seller agrees to sell,
transfer, convey and deliver to the Buyer,
or its nominee, all of the Interests, which
as of the Closing Date shall be free and
clear of all liens or encumbrances of any
nature.
Section 1.2 of the Superior Redemption Agreement states:
1.2 Purchase Price. The total consideration for
the Interests shall be Nine Hundred Fifty
Thousand Dollars ($950,000), plus
assignment of the Cement Supply
Agreement dated September 15, 2003
(“Cement Supply Agreement”) attached
hereto as Exhibit 1.2. The money portion
of the Purchase Price for the Interests shall
be payable at Closing, as herein defined,
by wire transfer or in certified funds.
-6-
One week after the plaintiffs signed the Stock Purchase
Agreement and before closing, defendant Frank McCarthy told U.S.
Bank that Superior intended to pay off its loans and terminate its
relationship with U.S. Bank. Superior’s loan application with its new
lender, THE National Bank, was prepared on August 26, 2003, approved
on September 11, 2003, and closed on September 15, 2003.
The common stock of Twin City owned by the plaintiffs were
securities within the meaning of Section 502.102(19) of the Iowa
Securities Act. The purchase of the plaintiffs’ stock by the defendants
was consummated in the state of Iowa.
Defendants notified Peter Dunning of the transaction between
Aggregate and Superior shortly after it was complete, and defendants
claimed that this transaction triggered Section 1.4 of the Stock Purchase
Agreement. Based upon this, plaintiffs’ shares would be re-priced at
approximately $1,266,000. Aggregate valued the Free Cement Contract
at $2,346,000 using accounting standards used in the United Kingdom,
which do not require that the value be discounted to a present value.2
Dunning, learning of the low value paid to Aggregate by Superior’s redemption
of Aggregate’s stock and contesting that section 1.4 of the Stock Purchase Agreement
(“SPA”) applied to that transaction, filed this action claiming fraud and breach of
contract on the part of Defendants. Specifically, Dunning makes the following claims:
one claim of fraudulent misrepresentation and three claims of fraudulent concealment
(Count I); equitable rescission based on the fraudulent misrepresentation (Count II);
breach of fiduciary duty (Count III); and violation of Iowa Securities Statutes (Counts
IV and V). In the alternative, Dunning asserts claims for breach of contract, alleging
entitlement to additional money as part of the contract of sale of Dunning’s 50%
interest in Twin City (Counts VI and VII).
2
Other facts are related in this opinion.
-7-
As damages, Dunning claims that Defendants failed to make payments due to
him under section 1.2 of the SPA, which provides for a fixed payment of $1,110,000
and a performance payment equal to 10% of Superior’s annual gross profits for ten
years following the execution of the SPA.3 Defendants claim that Dunning was no
longer entitled to payment under section 1.2 of the SPA because the Aggregate
redemption triggered section 1.4 of the SPA.4 And therefore under section 1.4,
Dunning was only entitled to a lump sum equal to an amount as calculated under
section 1.3 of the SPA. As a result, Dunning received substantially less for his shares
in Twin City than he expected under the SPA.
The district court granted summary judgment in favor of Defendants on all of
Dunning’s claims. In granting summary judgment on Dunning’s breach of contract
claim, the district court also struck the Supplemental Allen Report regarding the value
3
The text of section 1.2 as pertinent here reads:
1.2 Purchase Price. The total consideration for the Shares shall be
One Million One Hundred Ten Thousand Dollars ($1,110,000) (“Fixed
Payment”), plus: an amount calculated based on 10% of Superior’s
annual gross profits (calculated as set forth in Section 1.2(b) below) for
the 10-year period from Closing until December 31, 2012, subject to any
adjustment set forth in Sections 1.3 or 1.4 below (if applicable).
4
The text of section 1.4 as pertinent reads:
1.4 Purchase of Aggregate Industries Shares. In the event, prior
to December 31, 2012, Buyers or a related or affiliated entity, purchase
substantially all of the shares in Superior owned by Aggregate Industries
or an affiliate of Aggregate Industries, the purchase price per share
hereunder shall be recalculated in a manner similar to the method set
forth in Section 1.3 hereunder. Such share price shall supercede and be
in lieu of the Fixed Payment and Performance Payment (“New Share
Price”).
-8-
of a Cement Supply Agreement Superior assigned to Aggregate. This appeal
followed.
On appeal, Dunning asserts the following issues:
1. Did the district court err by granting summary judgment:
A. On plaintiffs’ claims regarding fraudulent concealment?
B. On plaintiffs’ claim of affirmative misrepresentation?
C. On plaintiffs’ rescission claim?
D. On plaintiffs’ fiduciary duty claim because defendants breached
no fiduciary duties?
E. On plaintiffs’ securities fraud claims?
F. On plaintiffs’ breach of contract claim?
G. On plaintiffs’ second breach of contract claim by failing to
consider damage evidence?
2. Did the district court abuse its discretion by striking the second report of
plaintiffs’ expert witness?
We address each issue.
II. Standard of Review
We review the district court’s grant of summary judgment de novo, viewing the
evidence in the light most favorable to the non-moving party. See R.D. Offutt Co. v.
Lexington Ins. Co., 494 F.3d 668, 672 (8th Cir. 2007). We review the district court’s
order to strike an expert witness’s supplemental report for abuse of discretion. See
Heartland Bank v. Heartland Home Finance, Inc.,
335 F.3d 810, 815 (8th Cir. 2003).
-9-
III. Common Law Fraud – Counts I and II
The district court summarized Dunning’s fraud claims as follows:
Plaintiffs [Dunning] make one claim of fraudulent
misrepresentation and three claims of fraudulent concealment. First,
plaintiffs allege that defendant Greg Bush fraudulently misrepresented
to the plaintiffs that Aggregate would not sell its interest in Superior to
Twin City for less than five million dollars. Second, plaintiffs assert that
the defendants concealed the fact that they had commenced negotiations
to purchase Aggregate’s interest in Superior prior to the time plaintiffs
sold their stock in Twin City. Third, plaintiffs assert that defendants
fraudulently concealed their knowledge of the essential terms of the
settlement between Superior and Lehigh. Fourth, plaintiffs assert that
defendants fraudulently concealed information that Aggregate had
withdrawn its financial support and that refinancing was necessary.
Although the district court discussed other aspects of the fraud claims, the key
to its rulings denying the several claims of fraud rests on a record, which is absent of
evidence that Gregory Bush, representing all Defendants, intended to deceive the
Plaintiff Peter B. Dunning, representing all Plaintiffs, in the making of the contract to
purchase the Dunning stock (50%) in Twin City.
Although in its brief Dunning refers to other false statements and failures to
disclose matters relating to Lehigh and discussions of the purchase of Aggregate’s
interest in Superior, none of that evidence shows the scienter, intent to deceive,
necessary to support the fraud claims against Defendants Bush-McCarthy. Thus, we
affirm on the rejection of all the fraud claims including rescission of the contract
based on fraud (Counts I and II) and the securities fraud claim (Count IV) based on
the Iowa Uniform Securities Act.
We turn to other issues where we reverse.
-10-
IV. Fiduciary Duty – Count III
Dunning’s fiduciary duty claim rests upon essentially the same allegations
underlying his fraud claims. Dunning claims that a fiduciary relationship existed
between himself and Defendants requiring Defendants to disclose (1) their discussion
relating to a buyout from Aggregate; (2) the status of the Lehigh settlement; and (3)
developments regarding the state of Superior’s financing, including its favorable
financing arrangements with U.S. Bank.
Dunning also asserts that Defendant Gregory Bush made misleading statements
to him regarding Aggregate’s desire to sell its interest in Superior. According to
Dunning, Bush told him that Aggregate would not sell its interest cheaply, and not for
less than $5,000,000. Dunning also claims that Bush told him to “trust me” when
negotiating section 1.4.5
Pursuant to section 1.4, if Defendants acquired Aggregate’s interest in Superior
at a low figure, Dunning would get less than if no such acquisition had been made.
If the acquisition price was high, on the other hand, Dunning might receive more than
or equal to the total purchase price stated in section 1.2 of the SPA. Dunning claims
that full disclosure was required from Defendants, who occupied a fiduciary position
in the proposed purchase of Dunning’s stock in Twin City. According to Dunning,
Defendants breached their fiduciary duty by failing to disclose the status of the Lehigh
settlement, Superior’s bank financing prior to executing the SPA, and, more
importantly, Defendants withheld information about discussions with Aggregate
preliminary to the buyout of Aggregate’s interest in Superior.
5
These statements and failure to disclose could be of importance in Dunning’s
acceptance of the so-called “up and down” provision (section 1.4) proposed by
Defendants at a late date, to which Dunning agreed.
-11-
The district court found that the Defendants owed Dunning a fiduciary duty but
did not breach it because Aggregate and the Defendants had not yet entered into actual
negotiations by the time that Dunning executed the SPA. This analysis misstates the
issue. The question is whether the Defendants breached their fiduciary duty to
Dunning by failing to disclose their initial discussions with Aggregate. The
Defendants do not answer this argument in their brief.
Fiduciary duties of directors and shareholders are governed by the state of
incorporation, in this case Minnesota (Twin City is a Minnesota corporation). Potter
v. Pohlad, 560 N.W.2d 389, 391 (Minn. Ct. App. 1997). Minnesota law recognizes
that shareholders of closely held corporations, such as one comparable to Twin City,
owe fiduciary duties to each other. Gunderson v. Alliance of Computer Prof’ls, Inc.,
628 N.W.2d 173, 185-86 (Minn. Ct. App. 2001); Berreman v. West Publ’g Co.,
615
N.W.2d 362, 367 (Minn. Ct. App. 2000). Minnesota courts have required that
shareholders of a closely held corporation have a duty to deal “‘openly, honestly, and
fairly with other shareholders.’”
Berreman, 615 N.W.2d at 371 (quoting Pedro v.
Pedro,
489 N.W.2d 798, 801 (Minn. Ct. App. 1992)). The fiduciary duties of a
shareholder in a closely held corporation also include “the duty to disclose material
information about the corporation.” Id.;
Gunderson, 628 N.W.2d at 186 (“Likewise,
close-corporation shareholders owe each other a duty of loyalty, which encompasses
an obligation to act with complete candor in their negotiations with each other.”).
This duty “does not extend to obvious matters.”
Gunderson, 628 N.W.2d at 188.
Fiduciaries also may not usurp business opportunities for their own benefit. Triple
Five of Minn., Inc. v. Simon,
404 F.3d 1088, 1096-97 (8th Cir. 2005) (citing Miller
v. Miller,
222 N.W.2d 71, 78 (Minn. 1974)). In addition, directors of a closely held
corporation owe fiduciary duties to individual shareholders. See Regan v. Natural
Res. Group, Inc.,
345 F. Supp. 2d 1000, 1011-12 (D. Minn. 2004). It is clear that
Defendants, as both directors and shareholders of Twin City, a close corporation,
owed a fiduciary duty to Dunning, who was also a shareholder and director of Twin
City.
-12-
Initially, we note that the duty of a fiduciary does not require the intent to
deceive necessary to prevail under a fraud theory. In rejecting Dunning’s fiduciary
duty claim, the district court concluded that matters relating to Defendants’
discussions with Aggregate for the sale of Aggregate’s interest in Superior, never
disclosed to Dunning, were not material. In addition, the district court concluded that
Dunning received notice of other matters, which Dunning claims the Defendants also
failed to disclose.
These conclusions, however, are not supported by the record. Indeed, the
record indicates that during much of 2003, Dunning was no longer actively engaged
in Twin City’s and Superior’s businesses. Therefore, the question of materiality and
obviousness of the information not disclosed to Dunning remains a disputed issue of
fact. Accordingly, we reverse the district court’s entry of summary judgment on
Dunning’s fiduciary duty claim.
V. Securities Fraud and Insider Trading – Counts IV and V
Dunning bases his securities fraud claim, Count IV, on Iowa’s Uniform
Securities Act and relies on the same factual allegations underlying his common law
fraud claims set out in Counts I and II. The elements needed to prevail on an action
for securities fraud under Iowa Code § 502.401 (Iowa’s counterpart to Rule 10b-5) are
essentially the same as those required to prevail on a fraud claim. As discussed above,
Dunning’s fraud claims fail as a matter of law. Accordingly, the district court
properly granted summary judgment in favor of Defendants on Count IV.
Dunning’s insider trading claim, however, is based on Iowa Code § 502.402.6
Dunning claims that summary judgment was not proper because Defendants never
6
This provision was amended in 2004 and now governs agent registration.
Neither party cites to the current provision governing insider trading.
-13-
addressed the issue in their briefs below. Defendants respond that they specifically
moved for summary judgment on this count.
Section 502.402 provides:
It is unlawful for any person who is or was an officer, director or affiliate
of an issuer whose relationship to the issuer or to any of the foregoing
persons gives or gave such person access, directly or indirectly, to
material information which is of decisive importance about the issuer or
the security not generally available to the public, to purchase or sell any
security of the issuer in this state at a time when that person knows such
information about issuer or the security gained from such relationship,
which information:
1. Would significantly affect the market price of that security;
2. Is not generally available to the public;
3. Such person knows is not intended to be so available, unless that
person has reason to believe that the other party to such transaction is
also in possession of such information.
Dunning contends, and Defendants do not disagree, that Defendants, as
directors of Twin City, are covered by this provision. Dunning asserts that
Defendants knew of the Lehigh settlement, knew of Aggregate’s decision to stop
capital contributions on behalf of Superior, and knew that Aggregate intended to exit
Superior. According to Dunning, Defendants should have communicated this
information to him because such information materially affected the value of
Dunning’s stock in Twin City. Furthermore, Dunning claims that Defendants
withheld this information from Dunning and the public when Dunning sold his shares
in Twin City to Defendants.
-14-
The district court premised its grant of summary judgment on the basis that
Dunning was aware that (1) a resolution of the Lehigh dispute was being negotiated,
(2) Superior had a September 2003 refinancing deadline, and (3) Aggregate was
interested in selling its interest in Superior. While the record shows that Dunning was
aware that talks about the Lehigh dispute were in progress, the record provides no
support for the district court’s other factual findings. The record lacks evidence that
Dunning knew about Aggregate’s decision to stop capital contributions. Indeed, only
Defendants were aware that Aggregate had decided to stop making capital
contributions. Also, the record lacks evidence to support the finding that Dunning
knew Aggregate was interested in selling its stake in Superior; all the evidence is to
the contrary.
In any event, the inferences of knowledge regarding these matters and their
materiality are in dispute. Accordingly, we reverse the district court’s grant of
summary judgment with respect to Dunning’s insider trading claim, Count V.
VI. Breach of Contract– Count VI
Dunning asserts that section 1.4 of the SPA does not apply to Superior’s
redemption of Aggregate’s stock (50%), in which Twin City became sole owner of
Superior. By Defendants owning all stock in Twin City, Defendants indirectly could
be considered owners of Superior.7
7
We reiterate the pertinent provisions of section 1.4:
In the event, . . . Buyers [Defendants] or a related or affiliated entity,
purchase substantially all of the shares in Superior owned by Aggregate
Industries, . . . the purchase price per share hereunder shall be
recalculated . . . Such share price shall supercede and be in lieu of the
Fixed Payment and Performance Payment (“New Share Price”)
(emphasis added).
-15-
In addressing Dunning’s breach of contract claim with respect to section 1.4 of
the SPA, the district court stated:
Twin City is undeniably a ‘related or affiliated entity’ of Superior. Twin
City purchased Aggregate’s interest in Superior in exchange for
$950,000 cash, plus the assignment of the Lehigh free cement contract,
and other consideration. Thus, the provision for recalculating ‘The New
Share Price’ was triggered and became effective. Unfortunately for
plaintiffs, it decreased the amount due them under the Stock Purchase
Agreement.
This statement is incorrect. The buyout of Aggregate included a redemption of
Aggregate’s stock in Superior and additional consideration, but not a “purchase” by
Twin City.
The question then becomes whether the actual transaction, a redemption by
Superior of Aggregate’s stock in Superior, satisfied the contract language that
Superior had become a “related or affiliated entity” of the Buyers, within the meaning
of section 1.4. Here, Defendants did not directly own any part of Superior. They only
possessed an indirect interest in Superior by their ownership of Twin City. Until
Defendants bought out Dunning’s interest in Twin City, Defendants owned only 50%
of Twin City and thus only 25% of Superior.
Section 1.4, read in light of actual developments, is ambiguous. Therefore, we
reverse the district court’s entry of summary judgment on the breach of contract claim
set forth in Count VI. On remand, the parties should have the opportunity to present
extrinsic evidence to explain the intent and reach of this provision.
VII. Breach of Contract–Count VII–Sanction, Expert Opinion Disallowed
-16-
In connection with Dunning’s second contract claim asserting that Defendants
breached the SPA by undervaluing the Superior Redemption Agreement, Count VII,
the district court also struck the Supplemental Allen Report regarding the value of the
Cement Supply Agreement Superior assigned to Aggregate. Specifically, Dunning
takes issue with the $1,582,767 value placed on the free cement component of the
Superior Redemption Agreement. On May 18, 2007, for the first time, Dunning’s
expert valued the free cement at $2,300,000, which Dunning argues is consistent with
Aggregate’s valuation and materially exceeds Defendants’ valuation.
The district court struck the report because: (1) it was not a supplemental report
within the meaning of Federal Rule of Civil Procedure 26(e); (2) Dunning’s claim that
Allen could not formulate an opinion on the value of the Cement Supply Agreement
without discovery from Aggregate was untenable because “[t]he [district] court . . .
believe[d] that there [we]re ample experts and independent sources of information that
would have told [Dunning] what 5,500 tons of cement was worth in 2003”; and (3)
Defendants would be prejudiced by Dunning’s attempt to “interject[] a brand new,
previously undisclosed opinion” less than three months before trial and one month
after Defendants moved for summary judgment.
Dunning argues that the district court abused its discretion by striking the
Supplemental Allen Report because it was a timely filed supplement to Allen’s initial
report. And even if it was not a timely filed supplemental report, it should have been
accepted as an untimely disclosure because its introduction did not prejudice
Defendants and was essential to one of Dunning’s contract claims. Based on the
record, we reverse the sanction disallowing the Supplemental Allen Report.
Allen’s initial report only stated that the value of the Cement Supply Agreement
was undervalued due to an excessive discount rate and the failure to reflect cement
price increases. His report noted, however, that a precise value for the Cement Supply
-17-
Agreement would be determined when more information was available (Defendants
had not included price information in their valuation schedule).
The record shows that the necessary information came from an Aggregate
employee following his May 3, 2007 deposition. Allen thereafter valued the Cement
Supply Agreement at $2.3 million in a report dated May 18, 2007, which Dunning
produced to Defendants before the close of discovery and three months prior to
scheduled trial but a month after Defendants moved for summary judgment.
In rejecting the district court’s decision to strike the Supplemental Allen Report,
we note first that the district court’s observation that the report’s lateness was
“prejudicial to defendants” lacks factual support in the record. Second, the district
court’s action resulted in a dismissal of one of Dunning’s contract claims. Finally, a
dismissal sanction is not warranted, except in cases of egregious conduct. And such
conduct was absent here.
The district court should have considered a lesser sanction, if any, before
imposing one that resulted in the dismissal of a claim. See Heartland Bank v.
Heartland Home Finance, Inc., 335 F.3d 810, 817 (8th Cir. 2003). Here, Defendants
do not and cannot claim any surprise or real prejudice from Allen’s later detailed
report regarding cement valuation.
If the district court’s observation that there are “ample experts and independent
sources of information that would have told the plaintiffs [or anyone else] what 5,500
tons of cement was worth in 2003 without the need for discovery from Aggregate[,]”
then clearly Defendants suffered no prejudice. Those Defendants would be able to
verify or challenge Allen’s opinion with ease.
In sum, the sanction of dismissal of Count VII is reversed. Obviously, in light
of this reversal, Defendants will in no way suffer prejudice from the disclosure of the
-18-
May 18, 2007 Allen report. On remand, the Supplemental Allen Report may be
admitted into evidence with proper identification.8
VIII. Conclusion
We affirm dismissal of all fraud claims (Counts I, II and IV), but reverse and
reinstate counts for breach of fiduciary duty (Count III), violation of Iowa’s insider
trading statute (Count V), and breach of contract claims (Counts VI and VII).
Accordingly, we remand these claims for further proceedings consistent with
this opinion.
______________________________
8
Whether or not there may be a lesser sanction relating to the timing of the
Supplemental Allen Report is a matter for the district court on remand.
-19-
