Walter v. Holiday Inns, Inc.
985 F.2d 1232, 1993 U.S. App. LEXIS 2370, 1993 WL 35359 (1993)
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Rule of Law:
A partner does not breach a fiduciary duty by failing to disclose internal financial projections during a buyout negotiation when the other partner is a sophisticated investor with full and unrestricted access to the partnership's books and the underlying data from which to form their own projections.
Facts:
- Plaintiffs (Walter, et al.) and Holiday Inns, Inc. (Holiday) formed a 50-50 partnership to develop and operate Harrah's Marina Hotel and Casino in Atlantic City.
- The partnership agreement stipulated that if one partner failed to contribute required capital (a 'cash call'), their ownership interest would be diluted.
- After the casino opened in late 1980, construction costs exceeded the budget, and Holiday presented pessimistic financial projections to the partners.
- In early 1981, Holiday issued two large cash calls to cover project development and operating shortfalls, totaling over $34 million (plaintiffs' share was over $17 million).
- Plaintiffs, believing the casino had poor financial prospects, chose not to contribute their share and instead began negotiations to sell their interest to Holiday.
- In May 1981, Holiday purchased plaintiffs' 49% interest for a series of payments valued at $10.9 million; plaintiffs sold their final 1% in 1983.
- Shortly after the 1981 buyout, the casino became highly profitable.
- Plaintiffs stipulated that they were highly sophisticated and experienced investors.
Procedural Posture:
- Plaintiffs filed suit against Holiday in the U.S. District Court for the District of New Jersey, alleging common law fraud, federal securities law violations, and breach of fiduciary duty.
- At the close of the plaintiffs' case-in-chief at trial, Holiday moved for judgment as a matter of law on all claims.
- The district court granted Holiday's motion on the breach of fiduciary duty claim, finding that traditional fiduciary duties were inapplicable in the adversarial context of the buyout.
- The common law fraud and securities fraud claims were submitted to the jury.
- The jury returned a verdict in favor of Holiday on all the remaining claims.
- The district court entered a final judgment for Holiday, from which the plaintiffs appealed to the United States Court of Appeals for the Third Circuit.
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Issue:
Does a managing partner breach its fiduciary duty to its co-partner in a buyout transaction by not disclosing internal financial projections and other 'soft' information, when the co-partner is a sophisticated investor with full access to the partnership's financial records?
Opinions:
Majority - Sloviter, Chief Judge
No. Holiday did not breach a fiduciary duty because any alleged misrepresentations or omissions were not material under the circumstances. The court declined to rule on whether a fiduciary duty even exists between adversarial partners in a buyout, instead deciding the case on the issue of materiality. A fiduciary's duty to disclose is contextual and depends on the sophistication of the complaining partner and their degree of access to partnership records. Here, the plaintiffs were sophisticated investors who had a contractual right to access all partnership books and records, were explicitly invited to audit them, but failed to do so. Information such as internal financial projections (the 'Boxer Report') is not material when the other party has access to the raw data and can create its own projections. Because plaintiffs had unrestricted access to all the foundational financial data, Holiday had no duty to disclose its own speculative, forward-looking analyses of that same data.
Analysis:
This decision significantly qualifies the scope of fiduciary duties between partners during a buyout. It establishes that the duty of disclosure is not absolute and is heavily influenced by the characteristics of the partners and the nature of their access to information. The case creates a strong precedent that sophisticated parties in an adversarial negotiation, such as a partnership buyout, are expected to conduct their own due diligence. Courts are unlikely to find a breach of fiduciary duty for the non-disclosure of 'soft' information like internal projections if the complaining party had the means and opportunity to discover the underlying facts for themselves.
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