On Appeal from the United States District Court for the District of New Jersey. (D.C. Civil No. 85-04833)
Before: Sloviter, Chief Judge, Greenberg and Seitz, Circuit Judges
Plaintiffs are several individuals and a corporation who formed a 50-50 partnership with Holiday Inns, Inc. (Holiday) in 1979 to develop and operate Harrah's Marina Hotel and Casino in Atlantic City, New Jersey.*fn1 In 1981, plaintiffs sold their 49% interest in the partnership to Holiday. In 1983, plaintiffs sold their remaining 1% interest to Holiday. In 1985, four years after the first sale, by which time the hotel/casino complex had become highly profitable, they filed this suit claiming that in the buy-out transaction Holiday committed common law fraud, violated federal securities laws, and breached the fiduciary duty it owed to plaintiffs. After plaintiffs presented their case, the district court granted Holiday's motion for judgment as a matter of law on the breach of fiduciary duty claim. See Walter v. Holiday Inns, Inc., 784 F. Supp. 1159 (D.N.J. 1992). At the Conclusion of the trial, the jury decided for Holiday on the remaining claims. Plaintiffs appeal.
FACTS AND PROCEDURAL HISTORY
In August 1978, shortly after New Jersey legalized gambling, the plaintiffs purchased a tract of land with the intent of developing a hotel and casino complex at a marina in Atlantic City. Plaintiffs then created two New Jersey corporations (L & M Walter Enterprises, Inc. and Bayfield Enterprises, Inc.) and had both entities form a general partnership known as Marina Associates. After looking for a suitable partner to develop the casino, plaintiffs sold Bayfield Enterprises to Holiday on January 30, 1979 and entered into a 50-50 Partnership Agreement with the hotel chain. Both parties agreed to make an initial capital contribution of $2 million each to the partnership business.
The partners successfully obtained a $75 million loan for the project from Midlantic National Bank, which later advanced an additional $20 million to the partnership. Construction commenced in early 1980 and proceeded at a rapid pace.
While the construction of the casino was progressing, the partners executed several documents that defined the nature of their relationship. Pursuant to a Memorandum of Understanding dated June 6, 1980, the partners agreed to advance in equal shares additional capital to the casino on an as-needed basis to cover project development (pre-opening) or operating (post-opening) cash shortfalls. If one partner was unable to meet its share, the other could advance the funds and then serve a written "cash call" letter on the non-contributing partner. The Memorandum provided that a failure to comply with a strict timetable for repayment of the cash call would result in a dilution of the non-contributing partner's interest in the casino, with the degree of dilution linked to the total amount of the cash call. The conditions for relief from dilution because of failure to meet a project development cash call were more formidable than those for an operating cash call.
A second Memorandum of Understanding dated June 20, 1980 set forth how the casino was to be managed. The day-to-day operations were turned over to Harrah's, Inc., a subsidiary of Holiday. The more important management and financing decisions remained with the partnership's Executive Committee, which was composed of two Holiday executives and two of the plaintiffs, Louis Walter and Lance Walter. The Executive Committee's decision-making power included, inter alia, overseeing the completion of the casino's construction and development, approving capital expenditures for replacement and expansion that exceeded 4% of total revenues for any year, the creation of long-term debt, and the creation of short-term debt for working capital in excess of $2 million.
The hotel and casino complex opened its doors to the public on November 22, 1980, before all of the construction was completed. However, construction costs rose substantially over budget, and financial concerns mounted. At a meeting of the Executive Committee in January 1981, the plaintiffs were presented with financial projections for the casino. Walter Haybert, the Chief Financial Officer of Marina Associates, presented "a 'worst case' projection of profit and loss for 1981 with related projections of monthly cash flow." Minutes of meeting, App. at 28007. He explained the need to substantially supplement working capital in the project development budget.
Shortly thereafter, two separate cash call letters were issued formally demanding that plaintiffs make equity contributions to the project. The first letter advised that an equity contribution of $18.8 million was required to cover expenditures in connection with the project development budget (plaintiffs' half being $9.4 million). The second letter, which cited Marina Associates' negative cash flow, was a call for cash increments due from November 1980 to May 1981 totaling $15.7 million (plaintiffs' share being $7.85) to cover operating shortfalls for the project.
Plaintiffs determined not to supply their share of the funds requested, allegedly relying on Holiday's pessimistic predictions about the financial prospects of the Marina. As a result, Holiday advanced its own funds to cover the shortfalls, and plaintiffs' partnership interest was diluted pursuant to the formula specified in the partners' prior agreements.
At the same January 1981 Executive Committee meeting, the partners also approved an Information Flow Agreement that specified the items of partnership financial data, such as financial statements and internal audit reports, that would be provided to the plaintiffs.
The financial situation presented at the January 1981 Executive Committee Meeting apparently precipitated plaintiffs' efforts to sell their interest in the casino to outside investors. However, there is some evidence in the record that in 1980, plaintiffs had approached Holiday and others to purchase plaintiffs' partnership interest. After the January 1981 meeting, negotiations with Holiday resumed at plaintiffs' request. They continued until the parties agreed on the terms of a buy-out on May 9, 1981, whereby Holiday agreed to acquire plaintiffs' 49% interest in the partnership for payments to plaintiffs of $1.75 million per year for twenty years, which plaintiffs calculate had a present value of $10.9 million. In July 1983, plaintiffs sold their remaining 1% interest to Holiday for an additional $1.8 million.
Sometime after the 1981 buy-out, the casino became a profitable enterprise. Under New Jersey law, the casino's profits and losses were a matter of public record and plaintiffs implicitly concede that they were aware of the highly profitable operations of Marina from 1982 to 1984. Nevertheless, plaintiffs did not challenge the buy-out transaction until this suit was brought in 1985. In that period, they sold their remaining 1% interest to Holiday and continued to do business with Holiday elsewhere. Louis Walter claims he was prompted to file this action by a newspaper article in which Donald Trump, the owner of another casino, suggested that Holiday had taken advantage of the plaintiffs in connection with the 1981 buy-out.
Plaintiffs filed this suit against Holiday on October 7, 1985. Although the complaint refers to "defendants fraudulent misrepresentations and concealment of material facts and . . . breach of fiduciary duties owed to plaintiffs," the essence of plaintiffs' claims is that Holiday failed to provide them with certain information that they needed to negotiate the buy-out transaction from an equal position with Holiday. They also assert that Holiday had designed a "cash call strategy" to force the buy-out on terms unfavorable to plaintiffs.
Nearly six years of pre-trial discovery followed the filing of the complaint. Some of that time was spent on motions relating to the production of almost 200 documents that Holiday claimed were protected by the attorney-client or work-product doctrine privilege. Inexplicably, Holiday's motion for a protective order was under submission to the Magistrate Judge for three and one half years, and plaintiffs did not receive the documents until the spring of 1991.
A jury was empaneled in September 1991. After plaintiffs rested their case-in-chief, Holiday moved for judgment as a matter of law on all claims. The district court granted Holiday's motion with respect to the claims for breach of fiduciary duty, rescission, and punitive damages. The court first rejected Holiday's attempt to shield itself behind the corporate veil. The court held such a defense would be an inJustice. The court then determined that rescission was unavailable not only because the status quo could not be restored in light of the lapse of time and Holiday's infusion of $24.8 million of capital and $215 million for maintenance and upgrading of the facility, but because an adequate remedy of damages was available. 784 F. Supp. at 1166. As to the fiduciary duty claim, the district court noted the "tense, if not hostile, environment between the parties," id. at 1168, and concluded based on dictum in Fravega v. Security Savings & Loan Ass'n, 192 N.J. Super. 213, 469 A.2d 531 (N.J. Super. Ch. Div. 1983), questioning the application of a fiduciary standard "to transactions where the relationship between the parties is, by nature, adversarial," id. at 536, that New Jersey would apply a limited "adverse interest" exception when "partners are dealing with one another at arms length." Walter, 784 F. Supp. at 1170. The court thus concluded that "given the environment in which the parties were operating, it seems clear that traditional notions of fiduciary duty were inapplicable." Id. at 1168.
The court held, however, that even assuming arguendo that a fiduciary duty existed and was breached, judgment as a matter of law for Holiday was appropriate because plaintiffs had failed to prove that the alleged misstatements and omissions would have been material to their decision to sell their partnership interest or that they would have relied on the non-disclosed information. Id. at 1172. This Conclusion notwithstanding, the court denied Holiday's motion for judgment with respect to plaintiffs' common law and securities fraud claims. Id. at 1180.
Holiday rested without presenting any evidence. The matter was submitted to the jury in the form of special interrogatories. The jury found every issue in favor of Holiday: that it made no material misrepresentations prior to the buy-out; that it did not have any intent to defraud plaintiffs; that there was no reasonable reliance by plaintiffs; that at the time of the buy-out, plaintiffs received fair value; that plaintiffs failed to exercise due diligence; and that plaintiffs assumed the transaction was valid after they discovered the truth about Holiday's alleged misrepresentations.*fn2
The district court entered final judgment on January 27, 1992 for Holiday based on the jury's verdict. We have jurisdiction under 28 U.S.C. § 1291 (1988).*fn3
Plaintiffs raise a plethora of issues on appeal, many going to the details of trial and pre-trial management. We have determined that these contentions do not require extended Discussion, and focus instead on the heart of this case -- the nature of the obligations, if any, owed by Holiday to plaintiffs in connection with the negotiations leading to Holiday's buy-out of plaintiffs' interest.*fn4
Plaintiffs contend that the district court erred in granting judgment for Holiday as a matter of law on plaintiffs' claim of breach of a fiduciary duty because the court interpreted New Jersey law as recognizing an "adverse-interest" exception to the fiduciary duty between partners in the buy-out context. We exercise plenary review of the district court's grant of a motion for judgment as a matter of law (formerly a directed verdict). Tait v. Armor Elevator Co., 958 F.2d 563, 569 (3d Cir. 1992). Such a motion should be granted only if, "viewing all the evidence which has been tendered and should have been admitted in the light most favorable to the party opposing the motion, no jury could decide in that party's favor." Indian Coffee Corp. v. Procter & Gamble Co., 752 F.2d 891, 894 (3d Cir.), cert. denied, 474 U.S. 863, 88 L. Ed. 2d 150 , 106 S. Ct. 180 (1985).
Although judgment as a matter of law should be granted sparingly, "federal courts do not follow the rule that a scintilla of evidence is enough. The question is not whether there is literally no evidence supporting the party against whom the motion is directed but whether there is evidence upon which the jury could properly find a verdict for that party." Patzig v. O'Neil, 577 F.2d 841, 846 (3d Cir. 1978) (citation omitted) (quotation omitted).
Plaintiffs argue that the majority of state courts, including New Jersey, have held that fiduciary principles apply with full force during partnership buy-out transactions. See, e.g., Hansen v. Janitschek, 57 N.J. Super. 418, 154 A.2d 855, 857 (N.J. Super. App. Div. 1959), rev'd on other grounds, 31 N.J. 545, 158 A.2d 329 (N.J. 1960); Gilbert & O'Callighan v. Anderson, 73 N.J. Eq. 243, 66 A. 926, 926 (N.J. Ch. 1907); Nicholson v. Janeway, 16 N.J. Eq. 285, 288 (N.J. Ch. 1863); see generally Jeffrey F. Ghent, Annotation, Partner's Breach of Fiduciary Duty to Copartner on Sale of Partnership Interest to Another Partner, 4 A.L.R. 4th 1122 (1981) (collecting cases recognizing fiduciary relationship). Plaintiffs ask us to predict that the Supreme Court of New Jersey would reject the dictum in Fravega and would align itself with this majority rule. Plaintiffs also ask us to decide which party bears the burden of proof when such inter-partner transactions are alleged to be infected by fraud, another unsettled issue in New Jersey. Compare Farrington v. Harrison, 44 N.J. Eq. 234, 15 A. 8, 9 (N.J. 1888) (administrator of estate of deceased partner who sold partnership interest to surviving partner bears burden of proof) with Gilbert, 66 A. at 926 ("burden is upon the defendant to establish the fact that he performed his full duty" by "making a full and complete disclosure of the condition of the business" to purchasing partner).
Although the existence of persuasive authority supporting the application of fiduciary principles even when partners act as adversaries makes it likely that Fravega was too slender a reed on which to decide this case, we need not engage in the difficult predictive function of state law that diversity jurisdiction would require if we can base our ruling on a more settled ground.
Since the mid-19th century, New Jersey courts have recognized that in order to set aside the sale of a partnership interest on the ground of breach of fiduciary duty, "it is essential ...