Court: Court of Appeals for the Sixth Circuit; January 8, 2004; Federal Appellate Court
Wally Langley appeals the district court's dismissal of his breach of contract claims based on Kentucky's parol evidence rule and the denial of his request to file a third amended complaint, along with the granting of summary judgment to Prudential Securities, Inc. The court's decisions from May 22, 2001, and June 13, 2002, are affirmed. Langley, an investor and member of the Lexington Group, which consists of thirteen original shareholders of PurchasePro.com, Inc., participated in the company’s IPO on September 15, 1999, during which he acquired 300,000 shares. Following the IPO, the Lexington Group agreed to a 'lock-up' period, prohibiting the sale of shares until March 13, 2000, to stabilize the market price. In December 1999, Langley and the group were offered a secondary public offering (SPO) that allowed them to sell some shares in exchange for extending the lock-up period by 90 days. Langley signed a Statement of Election and Waiver, agreeing not to sell or dispose of his shares for 90 days after the SPO's prospectus date, except under specific conditions. This agreement remains binding on Langley and his successors, with stop-transfer instructions to be enacted by PurchasePro’s transfer agent to enforce this provision.
On December 6, 1999, attorney Charles J. Lisle, representing the Lexington Group, informed PurchasePro and its underwriters that the Lexington Group would not accept the proposed extended lock-up for a secondary offering (SPO). During a conference call, attorney Patrick Devine, speaking for PurchasePro and its underwriters, confirmed that the Lexington Group would not be subject to the extended lock-up as a condition for participating in the SPO. Lisle subsequently communicated to the Lexington Group that no additional lock-up would be required for their investor share sales in the SPO. He advised investors to modify the Waiver Statement by striking out a specific paragraph and provided a sample of the revised document.
Langley claims he executed a modified Waiver Statement in December 1999 that omitted the lock-up provision, but neither he nor any involved parties possess this document. In January 2000, as PurchasePro prepared for the SPO, they realized they did not have Langley’s Waiver Statement. A secretary from PurchasePro contacted Langley, requesting him to resend the form. Langley filled out a blank Waiver Statement, writing the number of shares (50,000) he intended to sell but did not modify paragraph 3 as previously instructed.
In February 2000, Langley sold 50,000 shares in the SPO for approximately $3.7 million and planned to sell an additional 230,000 shares on March 13, 2000, the end of the initial lock-up period. On March 20, 2000, after directing Prudential Securities to sell his shares, Langley learned that the stock was locked up due to his signature on the Waiver Statement. PurchasePro indicated that the lead underwriter, Credit Suisse First Boston, insisted on maintaining the lock-up. Langley claims this situation caused him to lose millions of dollars.
On November 15, 2000, Langley filed a complaint against First Boston and Prudential in district court, alleging two counts of breach of contract for preventing him from selling his PurchasePro stock on March 20, 2000. The complaint contended that there was an oral agreement exempting Langley from the lock-up provision of the Waiver Statement.
Defendants moved to dismiss Langley's original complaint for failure to state a claim, but on February 22, 2001, Langley filed an amended complaint re-alleging breach of contract claims against First Boston and Prudential while adding a fraud claim. Langley asserted that Defendants misrepresented the Waiver Statement as a replacement for a modified version he had previously sent, which removed a lock-up provision. On May 22, 2001, the district court dismissed the breach of contract claims with prejudice under Kentucky's parol evidence rule but allowed the fraud claim to proceed.
In October 2001, Langley sought to file a second amended complaint, adding PurchasePro as a defendant and including claims for reformation of the Waiver Statement, breach of contract, rescission, breach of brokerage duties, conversion, tortious interference, and fraud. Defendants opposed the amendment, and Langley later attempted to withdraw the fraud claim and certain other claims. The district court granted summary judgment on the fraud claim with prejudice while allowing Langley to file the second amended complaint, which was limited to the first four counts due to his withdrawals and the summary judgment ruling.
Subsequently, all Defendants moved for summary judgment on the second amended complaint. On February 21, 2002, Langley requested to file a third amended complaint, asserting new information from discovery indicating Defendants had knowledge of his agreement with PurchasePro regarding lock-up terms. This motion proposed 13 new causes of action but lacked legal justification. On June 13, 2002, the district court denied Langley’s request to file the third amended complaint, citing prejudice to the defendants, a dilatory motive, and the futility of the proposed claims.
Langley's motion for leave to file a third amended complaint was deemed 'procedurally improper' by the district court, which found his one-page memorandum confusing and misleading as it relied heavily on previously presented arguments without adequately addressing why new claims were not included in earlier complaints. The court noted that the new information did not enhance the factual record and expressed concern that Langley only sought to amend after Defendants filed for summary judgment. Consequently, the court granted summary judgment in favor of Defendants on the second amended complaint.
Langley appealed the dismissal of breach of contract claims and the denial to file the third amended complaint. The litigation was subsequently stayed regarding one defendant due to bankruptcy, and another defendant was dismissed from the appeal, leaving Prudential as the sole remaining defendant.
Under Federal Rule of Civil Procedure 15(a), parties may amend complaints only with court permission or written consent from the opposing party, and such leave should be granted liberally unless it would lead to prejudice or be futile. The district court denied Langley’s request based on findings that amendment would prejudice the defendants, was motivated by a dilatory tactic, and would ultimately be futile. The court's assessment of Langley’s delay in presenting new claims indicated a pattern of amending in response to dismissal threats without adequate justification, apart from blaming prior legal representation. The appeal raises the question of whether the district court abused its discretion in denying the amendment and whether the proposed changes would have been futile.
The district court abused its discretion by denying the plaintiff's request to amend the complaint, as the defendants would not have faced significant prejudice from the amendment. In the referenced Moore case, the court found that mere delay by the plaintiff was insufficient to deny amendment when there was no substantial showing of prejudice to the defendants. The current situation mirrors Moore, as the district court's assertion of prejudice was vague and did not specify any concrete harm to the defendants. The fact that the factual basis of the plaintiff's complaint remained largely unchanged further diminished claims of prejudice. The district court had previously indicated the possibility of the plaintiff filing an amended complaint following a recommendation to dismiss without prejudice, suggesting that any inconvenience to the defendants from additional motion practice did not constitute adequate grounds for denying the amendment.
Additionally, the district court claimed that allowing the amendment would be futile due to the introduction of new legal theories, including securities law and UCC violations, which were not part of prior complaints. However, the plaintiff provided only a brief legal memorandum that referenced previous arguments without adequately explaining why the new claims would not be futile. Consequently, the court's reasoning for denying leave to amend was flawed both in terms of prejudice and the potential futility of the proposed amendment.
Langley references his opposition to the Defendants' summary judgment motions, asserting that none of the new claims are precluded by the parol evidence rule. His primary argument concerns an alleged breach of contract related to a Waiver Statement he signed, which he claims wrongfully prevented Prudential from waiving a lock-up provision. However, he has waived any challenge to the dismissal of all but one claim in his proposed third amended complaint due to a lack of developed argumentation. The district court found that allowing Langley to amend his complaint would be futile, as the Waiver Statement explicitly restricted his ability to sell his shares without Prudential’s consent and did not limit Prudential's discretion in granting such consent. Langley’s attempt to invoke a prior oral agreement to override the written Waiver Statement is inconsistent with Kentucky’s parol evidence rule, which does not permit altering written contracts with prior oral statements. Langley failed to contest the district court’s ruling on the breach of contract claims based on this rule, thus affirming the denial of his motion to file a third amended complaint. Additionally, Langley conceded that the district court rightly dismissed his rescission claim, leading to the Court affirming the summary judgment for the Defendants on that issue. The standard for granting summary judgment requires that no genuine issues of material fact exist, with the moving party needing only to demonstrate the absence of supporting evidence from the nonmoving party.
Reformation of a contract requires the party seeking reform, here Langley, to meet a heavy burden of proof demonstrating mutual mistake or fraud. In Kentucky, individuals are presumed to understand the contracts they sign, and they are bound by those terms unless misled or defrauded. Langley must provide clear and convincing evidence to support his claim, which the district court found he could not meet. Key points include that Langley signed the Waiver Statement and had the opportunity to read it, and he is barred from claiming fraud since his fraud claim was dismissed without appeal. Furthermore, there is no evidence of misleading conduct by PurchasePro in the process of "redoing" the Waiver Statement, as Langley failed to delete a specific paragraph that would have removed the lock-up restriction despite being advised to do so. The absence of evidence for mutual mistake or inequitable conduct means that his reformation claim fails, which also undermines his breach of contract claim since it depended on the viability of the reformation.
Additionally, Langley’s stockbroker liability claim against Prudential is based on the assertion that Prudential wrongfully failed to authorize the sale of his shares under the Waiver Statement, allegedly knowing of an oral agreement exempting him from the lock-up provision.
Langley's stockbroker liability claim is fundamentally based on an agreement that the district court found to be barred by the parol evidence rule, a determination Langley did not contest on appeal. Consequently, the claim fails legally. Furthermore, the Waiver Statement's language did not mandate Prudential to authorize the sale of Langley’s Purchase-Pro shares, as Paragraph 3 did not limit Prudential’s discretion. The duties of an agent to their principal are defined by their agreement, taking into account the circumstances of its formation, unless altered by factors such as fraud or duress, none of which Langley has proven against Prudential. Therefore, Prudential's refusal to authorize the sale, while detrimental to Langley, is irrelevant. An agent may prioritize their own interests over those of the principal, even if it contradicts the principal's orders. As a result, the district court's decisions from May 22, 2001, and June 13, 2002, are affirmed.
