Jeff MacHarg and Alexandra Hirsch   

Prevailing at summary judgment is rare. Prevailing when there are competing motions on the same issue (fraud) is even rarer.  In this opinion, Judge Davis granted the Defendants’ motion and denied the Plaintiff’s, ending the lawsuit.  It includes good lessons on the importance of pleadings, the need to present admissible evidence at summary judgment, and, at least to this observer, the importance of maintaining credibility.   

The plaintiff, B&D, alleged it was defrauded by Defendants (Infobelt and its founder, Mr. Mannava) into buying a 30% stake in Infobelt.  By the time the parties reached summary judgment, B&D had developed two theories of fraud, but only one was in the complaint.  First, B&D claimed that Defendants never disclosed their supposed systematic practice of over-charging Infobelt’s biggest customer. This overstated revenues used to value Infobelt at the time B&D agreed to buy in. As a result, B&D says it overpaid.  This is in the complaint. 

Second, B&D argued that the Defendants never disclosed that Infobelt’s biggest customer always planned to take Infobelt’s work in house.  This meant Infobelt’s largest source of revenue was not only fragile, it would end.  Had this been disclosed, B&D says it never would have invested.  This theory of fraud is not in the complaint and was revealed for the first time in B&D’s offensive motion for summary judgment. 

Defendants’ MSJ challenged the over-charging theory with undisputed and admissible evidence about Infobelt’s actual business practices. Defendants presented testimony from two witnesses, both with personal knowledge of Infobelt operations.  They explained how billing worked, that customers were not over-billed, and that B&D’s allegations were flat wrong. To try to keep the theory alive, B&D presented testimony of a former Infobelt employee who believed customers were being overbilled because he saw his name on bills even though this employee never did billable work. Fictitious names on bills was, B&D argued, evidence of fraudulent billing. But beliefs are not facts, and assumptions are not evidence. Since B&D’s witness had no personal knowledge of Infobelt’s actual billing practices, his beliefs about the import of names on bills did not create a disputed issue of material fact.  Judge Davis held that Defendants’ witnesses provided the only competent evidence of Infobelt’s actual billing practices, and he entered Judgement for Defendants on this issue.

Defendants challenged the bringing work in house theory on very different grounds: rules violations.  Since this theory wasn’t pled at all (let alone with particularity required by Rule 9(b)), Defendants argued they did not have fair notice and could not fairly defend against it.  B&D countered that this issue was always in the case.  Judge Davis resoundingly sided with the Defendants.  He held that the complaint is “utterly devoid of any” allegations regarding this theory, and the theory isn’t mentioned in B&D’s interrogatory responses either. Further, B&D never sought leave to amend its pleading or discovery responses to mention this theory – not by motion and not when questioned about this during the summary judgment hearing.  (Order, n. 5). For all of these reasons, Judge Davis barred this theory of recovery from the case. 

This observer certainly sensed some frustration by the Court at B&D’s apparent litigation tactics.  Judge Davis mentioned two of thm. First, there was a pump-fake regarding the deposition of the supposedly defrauded customer. Although not critical to Judge Davis’ ruling, he noted that B&D was granted leave to depose the customer after the close of discovery, but B&D cancelled the deposition at the last minute and instead submitted testimony by affidavit. Obviously, this put Defendants in a tough spot. To cross examine the customer, they’d have to involve the Court. Since, as Judge Davis put it, the affidavit was most remarkable for what it did not say (e.g., it had no complaints of fraud or overbilling), Defendants opted to simply point out what was done and move on.  Secon, was of course, B&D’s decision to file an offensive motion for summary judgment in the first place. It was based on a fraud theory that was never pleaded or identified in discovery responses.

Ultimately, all of B&D’s claims depended on the viability of B&D’s fraud claims. And with those claims now out of the case, Judge Davis entered judgment in Defendants’ favor on the remaining claims.

Takeaways:

Pleadings matter.  Newsflash: Pleadings matter, especially in cases involving fraud. Rule 9(b) is a powerful tool to challenge fraud claims, and the Rule is being invoked with greater frequency (and success) at the summary judgment phase. If you’re a plaintiff, make sure your complaint includes particularity and always seek leave to amend if something new is discovered. If you’re a defendant, maybe save that early motion to dismiss and raise the Rule 9(b)-particularity issue at summary judgment.

Evidence matters.  We’ve noted this in prior posts, but it bears repeating: evidence at summary judgment must be admissible.  Here, B&D presented testimony as “evidence,” but that testimony was not based on personal knowledge, so it was not competent admissible evidence. 

Credibility matters. To recap, at the end of discovery B&D sought leave to conduct a nonparty deposition, only to cancel it in favor of an affidavit. Whether tactical to make it harder for Defendants to get helpful testimony or something else, it was important enough for Judge Davis to comment about the two orders the Court had issued to allow the deposition to go forward only to get an affidavit.  And, of course, there is B&D’s aggressive, but unsuccessful effort to interject a new theory of fraud into the case via an offensive motion for summary judgment. This prompted Judge Davis to comment that B&D failed to provide “any meaningful answer” to the Court’s persistent questions about why B&D never sought leave to amend to mention its second theory of fraud.  Although Judge Davis did not directly impugn these maneuvers, he certainly didn’t ratify them. One wonders whether they impacted B&D’s overall credibility before the Court.