                             UNPUBLISHED

                    UNITED STATES COURT OF APPEALS
                        FOR THE FOURTH CIRCUIT


                             No. 06-1509



SHERWOOD BRANDS, INCORPORATED, To its own use
and to the use of Asher Candy, Inc.,

                                              Plaintiff - Appellant,

           versus


LEONARD LEVIE; ELEANOR LEVIE,

                                            Defendants - Appellees.



Appeal from the United States District Court for the District of
Maryland, at Greenbelt.    Richard D. Bennett, District Judge.
(8:03-cv-01544-RDB)


Argued:   October 30, 2007              Decided:     December 28, 2007


Before WILLIAMS, Chief Judge, TRAXLER, Circuit Judge, and Louise W.
FLANAGAN, Chief United States District Judge for the Eastern
District of North Carolina, sitting by designation.


Affirmed by unpublished per curiam opinion.


ARGUED: Albert David Brault, BRAULT GRAHAM, L.L.C., Rockville,
Maryland, for Appellant. Nathaniel Edmond Jones, Jr., Baltimore,
Maryland, for Appellees. ON BRIEF: Daniel Leonard Shea, Joan F.
Brault, BRAULT GRAHAM, L.L.C., Rockville, Maryland, for Appellant.
James H. Fields, JONES & ASSOCIATES, P.C., Baltimore, Maryland, for
Appellees.


Unpublished opinions are not binding precedent in this circuit.
PER CURIAM:

     This action arises out of a Merger and Acquisition Agreement

between Sherwood Brands, Inc. (“Sherwood”) and Asher Candy, Inc.

(“Asher”).    Sherwood asserts state law claims for securities

violations, fraud and declaratory relief against Leonard Levie

(“Leonard”), a member of Asher’s Board of Directors, and Leonard’s

sister Eleanor Levie (“Eleanor”), Asher’s majority shareholder.

Eleanor asserted counterclaims against Sherwood for breach of

contract and specific performance.1      After conducting a nonjury

trial, the district court entered judgment against Sherwood on its

claims and in favor of Eleanor on her counterclaims.    We affirm.



                                 I.

     In 1997, Leonard’s company American Industrial Acquisition

Corp. (“AIAC”) purchased Asher, a candy cane manufacturer, which

was in financial distress at the time.    Leonard transferred Asher

stock to Eleanor that gave her a 55% ownership interest in the

company; he gave the remaining shares to other individuals and

ultimately retained no ownership interest in Asher.     Both before

and after AIAC acquired Asher, James Spampinato served as Asher’s

President and CEO, and he held a significant ownership interest in

Asher.   Although Leonard retained no stake as a shareholder in the



     1
      Leonard also asserted counterclaims against Sherwood that are
not at issue on appeal.

                                 2
company and was not involved in its daily operations, he served on

Asher’s Board of Directors and eventually became Chairman, a

position he filled from 1997 to April 2002.

     In 2001, Asher again encountered financial difficulties in the

wake of a pre-tax loss of $800,000 that year, prompting Leonard and

Spampinato to seek a purchaser for the company. Through a business

broker, Asher identified Sherwood, a manufacturer of confectionary

products, as a natural fit.    In January 2002, representatives of

Sherwood, including its CFO Christopher Willi, traveled to Asher’s

New York plant to meet with Leonard and Spampinato.      Financial

materials presented to Sherwood projected a profit for Asher of $1

million for the fiscal year of 2002. Asher’s significant losses in

2001 were disclosed during the meeting as well.   After a number of

meetings, Sherwood and Asher agreed upon a purchase price for Asher

of $1.75 million, contingent upon the satisfactory completion of a

due diligence review of Asher’s financial condition by Sherwood.

     Willi was in charge of Sherwood’s due diligence review, and he

enlisted the assistance of tax accountants and outside legal

counsel.   Willi and other Sherwood representatives visited Asher’s

New York office, where they were given access to tax records and

insurance policies as well as other information about Asher.   The

information was provided by Asher employees who participated in the

day-to-day operations of Asher; Leonard was not involved in any

aspect of the due diligence process.


                                 3
     On April 25, 2002, Asher and Sherwood closed the transaction

by executing the Merger Agreement. The final purchase price was $2

million, consisting of a “stock for stock” exchange in which Asher

shareholders would receive a pro rata share of Sherwood stock in

the total amount of $1.75 million plus “warrants to acquire such

number of Sherwood shares as would have a fair market value of

$250,000.”     J.A. 111.     The Merger Agreement contained a “Post-

Closing Adjustments” provision directing that Spampinato assist

Willi “in the management of the Closing Date accounts payable and

accrued expenses,” and that representatives of Asher and Sherwood

“work together to prepare and deliver a balance sheet . . . of the

Closing Date Net Worth.”          J.A. 1734.    As security for the post-

closing adjustments anticipated by the parties, section 1.11 of the

Merger Agreement directed that $700,000 of the Sherwood stock (the

“Hold Back Shares”) be placed in escrow.

     Article    II   of    the    Merger    Agreement   set   forth   numerous

“Representations     and   Warranties”      that,   according    to   Sherwood,

turned out to be false.          Under the terms of the Merger Agreement,

however, Sherwood acknowledged and agreed that it “is an informed

and sophisticated participant in the transactions contemplated

herein, and has engaged advisors, experienced in the evaluation and

purchase of enterprises such as the corporation.”               J.A. 1753.

     Not long after closing, Sherwood learned information that

reflected negatively on Asher’s financial condition and potentially


                                        4
reduced Asher’s value.       For example, there was a $188,486 spike in

Asher’s accounts payable, purportedly resulting from incorrect data

entry    into    Asher’s    computer   system   relating    to    outstanding

invoices.       Asher’s accounts receivable decreased by $67,000 as a

result of customer deductions for quality problems.              Sherwood also

learned that Asher underpaid payroll taxes by about $67,000 and

that Leonard’s company, AIAC, paid certain health care premiums for

Asher in March 2002, and sought repayment of this “loan” in the

amount of $51,000.         And, Sherwood contended that there was an

undisclosed shortfall in Asher’s 401(k) plan funding.                   Willi

conceded that, except for the underpaid taxes which came to light

only after closing, Sherwood could have discovered all of the

adverse information prior to closing the merger during its due

diligence review.

        The parties experienced difficulty in preparing the Closing

Date Balance Sheet.        In November 2002, the parties entered into a

Purchase Price Adjustment Agreement (the “PPAA”), as contemplated

by the Merger Agreement, to address the disposition of the Hold

Back Shares in light of the information learned by Sherwood after

closing. The PPAA provided that Asher’s shareholders, the sellers,

would receive $300,000 of the Hold Back Shares and that Sherwood

would receive $200,000 of the Hold Back Shares.            The PPAA kept the

remaining Hold Back Shares, worth $200,000, in escrow.




                                       5
        Finally, shortly before the PPAA was fully executed, Eleanor

notified Sherwood that she intended to exercise her “Put Right”

under section 4.3 of the Merger Agreement, which afforded each

Asher shareholder, on the anniversary date of the Merger Agreement,

“the right to sell [back] to [Sherwood] one-half of the Purchase

Price Shares issued to him . . . at a price of $4.50 per share” if

the value of Sherwood stock fell below $4.50 per share at that

time.     J.A. 1754.     Additionally, section 4.3 provided that if

Sherwood, through no fault of the sellers, failed to obtain an

effective SEC registration statement for the purchase shares within

six months of the closing, the Put Right would commence at six

months rather than one year.

        When Sherwood failed to obtain the registration statement

within six months, Eleanor and other sellers gave notice of their

intent to exercise their Put Rights. Sherwood, however, refused to

honor Eleanor’s Put Right on the grounds that registration had been

prevented    by   the   shareholders’   failure   to   provide   necessary

information in a timely fashion as well as Asher’s delay in

providing a closing balance sheet.         On April 24, 2003, the day

before the sellers’ one-year Put Rights became effective, Sherwood

filed this action.       Shortly thereafter, and more than one year

after closing, Eleanor attempted to exercise her Put Right based on

the value of the stock.      Sherwood refused to honor the request.




                                    6
                                     II.

                                     A.

     Sherwood seeks relief under Maryland’s Blue Sky law, which

imposes civil liability upon any person selling a security “by

means of any untrue statement of a material fact or any omission to

state a material fact necessary in order to make the statements

made . . . not misleading.”     Md. Code Ann., Corps. & Ass’ns § 11-

703(a)(1)(ii). The statute also imposes “control person” liability

upon “[e]very person who directly or indirectly controls a person

liable under [§ 11-703(a)].”        Md. Code Ann., Corps. & Ass’ns § 11-

703(c)(1).   Because there was no evidence that Eleanor personally

made any representations to Sherwood, the district court concluded

that she could not be individually liable under the statute.           The

district court also rejected Sherwood’s securities fraud claim

against Leonard, concluding that Sherwood could not have reasonably

or justifiably relied on any of the defendants’ allegedly false

statements or omissions of fact.

     We   affirm   the   district    court’s   ultimate   conclusion   that

neither Eleanor nor Leonard is liable under the statute, although

we do so on alternative grounds with respect to Leonard.                The

Maryland Court of Appeals has yet to decide whether justifiable

reliance is an element of a securities fraud claim, cf. Lubin v.

Agora, Inc., 882 A.2d 833, 848 n.13 (Md. 2005) (reserving for

another day the question of “whether investor reliance must be


                                      7
proven in order to establish securities fraud under § 11-301”), and

we will not attempt to answer this question of Maryland law here.

      Nevertheless, we affirm the result reached by the district

court on the alternative basis that Leonard is not liable as a

“control person” under § 11-703(c). Control person liability rests

on the liability of the seller, i.e., the person being controlled,

under § 11-703(a).     See Baker, Watts & Co. v. Miles & Stockbridge,

620 A.2d 356, 369-70 (Md. Ct. Spec. App. 1993) (holding that action

could not proceed for contribution for joint and several liability

under § 11-703(c) where there was no judgment against the principal

seller).   Leonard can be liable only “to the same extent as the

person liable” under subsection (a).            Md. Code Ann., Corps. &

Ass’ns § 11-703(c)(1).         Sherwood contends that Leonard was a

“control person” based on his capacity as Chairman of Asher’s Board

of   Directors   and   his   lead   role   in   the   merger   negotiations.

Leonard’s liability under § 11-703(c) cannot rest on his alleged

control of Asher, however, because Asher was not the seller under

the terms of the Merger Agreement –- the shareholders were the

sellers. Thus, Sherwood’s only potentially viable “control person”

theory would be premised on Eleanor’s liability as a seller under

§ 11-703(a); however, this theory is flawed as well.                 Because

Eleanor was merely a passive shareholder who did not make any

representations or otherwise participate in the merger negotiations

in any way, the district court rejected Sherwood’s claim against


                                      8
Eleanor under § 11-703(a).     In light of these circumstances, we

hold that Leonard is not subject to liability under § 11-703(c).2



                                  B.

     Sherwood asserts a state law fraudulent inducement claim,

suggesting that it was induced to enter into the Merger Agreement

as a result of false representations made by the defendants.    See

Maryland Environmental Trust v. Gaynor, 803 A.2d 512, 516 (Md.

2002) (setting forth the elements of a fraudulent inducement

claim).     Each element of a fraudulent inducement claim under

Maryland law must be established by clear and convincing evidence.

See VF Corp. v. Wrexham Aviation Corp., 715 A.2d 188, 193 (Md.

1998).    The district court found that Sherwood failed to provide

clear and convincing evidence that “it had the right to rely on any

of the alleged misrepresentations made by Leonard Levie” or that

“any of the alleged misrepresentations or omissions were made or

withheld by Leonard Levie with the requisite deliberate intent to

deceive.”   J.A. 129.   We conclude that the factual findings of the

district court are not clearly erroneous, and we affirm on the

reasoning of the district court.




     2
      Sherwood also contends that Eleanor is vicariously liable for
Leonard’s fraudulent conduct.     This argument must fail because
Leonard did not make any fraudulent statements for which Eleanor
might be held vicariously liable.

                                   9
                                     C.

      Sherwood seeks a declaratory judgment voiding the “Put Rights”

provision in the Merger Agreement. This claim rests essentially on

the same theoretical basis as the fraudulent inducement claim.

That is, were it not for the misrepresentations of the defendants,

Sherwood would not have entered into the Merger Agreement in the

first place.     In response, Eleanor brought counterclaims against

Sherwood for breach of contract as to the Put Rights provision and

for specific performance of the Put Rights provision. The district

court concluded that because Sherwood failed to establish that the

defendants engaged in securities fraud or fraudulently induced the

Sherwood-Asher merger, there was no basis for it to afford Sherwood

the declaratory or injunctive relief it sought.

      By contrast, the district court found that Eleanor established

her counterclaim for breach of contract.                  The district court

reasoned that “Sherwood did not honor Eleanor Levie’s Put Right, in

part, because it attributed its failure to have an effective

registration statement six months after closing to the Sellers,”

but that “under Section 4.3 [of the Merger Agreement] such a

failure to register the shares simply does not affect the vesting

of   the   put   right   afforded   to    the   Sellers    at   the   one   year

anniversary of the Merger, which has since passed.”              J.A. 133-34.

Thus, the district court concluded that Sherwood was “contractually

obligated to honor Section 4.3 of the Merger Agreement,” that


                                     10
Sherwood’s failure to do so constituted a breach of the Merger

Agreement, and that Eleanor “is entitled to specific performance,

. . . result[ing] in Sherwood owing Eleanor $296,552.25.”         J.A.

134.3       Finding no reversible error, we affirm the district court’s

rulings on all of the claims relating to Eleanor’s Put Rights for

the reasons stated by the district court.

        We have reviewed Sherwood’s remaining arguments in light of

the record and the findings of the district court and conclude that

they are without merit.



                                    III.

        Accordingly, we affirm the decision of the district court.



                                                              AFFIRMED




        3
      Sherwood moved to alter or amend the judgment, arguing that
Eleanor was not entitled to specific performance because she was in
material breach of the Merger Agreement. The district court denied
the motion, finding that Sherwood had not asserted a breach of
contract claim against Eleanor or pursued such a theory at trial.
We affirm the district court’s order for the reasons set forth
therein.

                                     11
