                                                                                                                           Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


3-17-2004

Williams v. Hilton Grp PLC
Precedential or Non-Precedential: Non-Precedential

Docket No. 03-2590




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                                                     NOT PRECEDENTIAL

             UNITED STATES COURT OF APPEALS
                  FOR THE THIRD CIRCUIT


                           No. 03-2590


                     STUART A. WILLIAMS;
                  WSC INVESTMENTS, LLC, a
              Pennsylvania Limited Liability Company,
                                               Appellants

                                 v.

                   HILTON GROUP PLC;
    LADBROKES INTERNATIONAL BETTING AND GAMING;
              a division of Hilton Group, PLC,
                ALAN ROSS, an individual




ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE
           WESTERN DISTRICT OF PENNSYLVANIA

                    (Dist. Court No. 99-cv-02024)
          District Court Judge: Honorable Arthur J. Schwab


                     Argued: January 13, 2004

      Before: ALITO, CHERTOFF, and BECKER, Circuit Judges.

                  (Opinion Filed: March 17, 2004 )




                                      David L. McClenahan (argued)
                                            Joseph Leibowicz
                                            Lucas G. Paglia
                                            Kirkpatrick & Lockhart
                                            535 Smithfield Street
                                            Henry W. Oliver Building
                                            Pittsburgh, PA 15222

                                            Attorneys for Appellants

                                            Danforth Newcomb
                                            John Gueli (argued)
                                            Tammy P. Bieber
                                            Shearman & Sterling
                                            599 Lexington Avenue
                                            New York, NY 10022

                                            Paul H. Titus
                                            Schnader, Harrison, Segal & Lewis
                                            120 Fifth Avenue
                                            Fifth Avenue Place, Suite 2700
                                            Pittsburgh, PA 15222

                                            Timothy K. Lewis
                                            2001 Pennsylvania Avenue, NW
                                            Suite 300
                                            Washington, DC 20006

                                            Attorneys for Appellees




                           OPINION OF THE COURT




PER CURIAM:

    Stuart A. Williams and WSC Investments, LLC (collectively “Williams”) filed this

                                        2
action against the Hilton Group, plc and Ladbrokes International Betting and Gaming, a

division of the Hilton Group (collectively “Ladbrokes”), alleging breach of contract in

connection with Williams’s efforts to purchase various North American gaming assets

owned by Ladbrokes. Williams subsequently amended his complaint, adding claims

against Hilton for fraudulent and negligent misrepresentation and punitive damages and

adding Alan Ross, the M anaging Director of Ladbrokes, as a defendant on the tort claims.

The case was originally assigned to Judge Donald J. Lee but was later reassigned to Judge

Arthur J. Schwab, who granted summary judgment in favor of Ladbrokes on the tort

claims asserted. This decision was based on Pennsylvania’s “gist of the action” doctrine.

The District Court certified its order for interlocutory appeal under 28 U.S.C. §

1292(b)(2), and a motion panel of our court permitted the appeal. Although neither the

order of the District Court nor the application for review specified the precise question or

questions presented for interlocutory review, see Fed. R. App. Proc. 5(b)(1)(B), the issues

are sufficiently clear to permit the appeal to go forward. We hold that the “gist of the

action” doctrine bars the tort claims at issue.

       As a preliminary matter, we reject Williams’s argument that the law-of- the-case

doctrine precluded Judge Schwab from granting summary judgment for Ladbrokes on the

tort claims. Williams contends that Judge Lee had previously held that the “gist of the

action” doctrine did not apply to the claims at issue, but we disagree. Williams’s papers

cited some “gist of the action” cases and maintained that his contract and fraud claims



                                                  3
could coexist, see App. at 2373-74, 2380-82, but Judge Lee’s opinion made no direct or

indirect reference to the doctrine, and it was not necessary for Judge Lee to decide the

issue in order to make the rulings that he did .

       We also reject Williams’s argument that the “gist of the action” doctrine does not

bar his tort claims. Although the Pennsylvania Supreme Court has not expressly adopted

this doctrine, we predict that the state supreme court would adopt the doctrine as set out

in the Superior Court’s cases.

       In Etoll, Inc. v. Elias/Savion Advertising, Inc., 811 A.2d 10 (Pa. Super. Ct. 2002),

the Pennsylvania Superior Court, stated that the “gist of the action” doctrine “is designed

to maintain the conceptual distinction between breach of contract claims and tort claims

[by] preclud[ing] plaintiffs from recasting ordinary breach of contract claims into tort

claims.” Id. at 14. The Court then described the difference between contract and tort

claims as follows: “Tort actions lie for breaches of duties imposed by law as a matter of

social policy, while contract actions lie only for breaches of duties imposed by mutual

consensus agreements between particular individuals.” Id. (quoting Bash v. Bell

Telephone Co., 601 A.2d 825, 829 (Pa. Super. Ct. 1992)). In Etoll the Court found that

the “fraud at issue was not so tangential to the parties’ relationship so as to make fraud

the gist of the action.” Etoll, 811 A.2d at 21. Rather, the court stated, the fraud claims

were so “inextricably intertwined with the contract claims” that they were barred as a

matter of law from being raised independently. Id. The Superior Court has applied the



                                              4
“gist of the action” doctrine in other cases. See, e.g., Pittsburgh Construction Co. v.

Griffith, 834 A.2d 572 (Pa. Super. Ct. 2003) (applying Etoll and stating that “courts are

cautious about permitting tort recovery based on contractual breaches”); Pennsylvania

Manufacturers Association Insurance Co. v. L.B. Smith, 831 A.2d 1178, 1181 (Pa. Super.

Ct. 2003) (“The ‘gist of the action’ doctrine is designed to maintain the conceptual

distinction between breach of contract and tort claims.”); Freestone v. New England Log

Homes, Inc., 819 A.2d 550 (Pa. Super. Ct. 2003); see also Bohler-Uddeholm America,

Inc. v. Ellwood Group, Inc., 247 F.3d 79, 103-04 (3d Cir. 2001). From our examination of

the Pennsylvania cases, we conclude that the “gist of the action” doctrine cannot be

captured by any precisely worded test. Instead, the doctrine appears to call for a fact-

intensive judgment as to the true nature of a claim.

       In making the requisite inquiry here, a recent case from the United States District

Court for the Eastern District of Pennsylvania is instructive. In Penn City Investments,

Inc. v. Soltech, Inc., 2003 U.S. Dist. LEXIS 22321 (E.D. Pa. Nov. 25, 2003), the Court

held that the doctrine barred a fraudulent inducement claim where the defendant-counter-

claimant alleged that the counter-defendant had made pre-contract statements in order to

induce it to enter into a contractual relationship. The Court held that the fraudulent

inducement claim was barred because the “pre-contractual statements concerned specific

duties that the parties later outlined in the contract.” Id. at *12; see also id. at *15

(dismissing the tort claims because they were “directly addressed by the contract, or so



                                               5
closely related to the contractual relationship, that the dispute between the parties [needed

to be] resolved by exclusive reference to contractual principles”).

       Here, Williams contends that his fraud claims are not for fraud in the performance

of a contract but are akin to claims for fraud in the inducement because Ladbrokes

“induced Williams into signing the Letter of Intent and dealing with Ladbrokes by lying

about its intent to honor the agreement.” Appellants’ Br. at 25. According to Williams,

Ladbrokes and Ross engaged in a scheme by which they induced Williams to “commit to

buying the properties for $120 million on an exclusive basis, while secretly marketing the

properties to other buyers.” Id. at 26. The Letter of Intent, they assert, was the device by

which W illiams was induced and deceived.

       Applying the case law cited above, we conclude that Williams’s tort claims are

barred. Williams’s tort claims are all founded on Ladbrokes’ agreement to grant him the

exclusive right to purchase the North American assets during the due diligence period.

Williams and Ladbrokes are sophisticated parties who were well able to protect their

rights in relation to this matter by contract, and they attempted to do so. On the particular

facts presented here, we agree with the District Court that the “gist” of Williams’s claims

sounds in contract, not tort. Because of the nature of the “gist of the action” doctrine and

because clarification of the doctrine for precedential purposes must come from the state

courts, further explanation of our holding in this case would not be fruitful.

       Finally, we hold that the District Court did not err in concluding that the doctrine



                                              6
barred Williams’s claims against Ross, as well as his claims against Ladbrokes.

Although Williams did not have a contractual relationship with Ross, Williams cannot

detach Ross from his status as an agent for Ladbrokes. Ross served as the principal

negotiator for Ladbrokes. As the Pennsylvania courts have spelled out, the gist of the

action doctrine bars tort claims against an individual defendant where the contract

between the plaintiff and the officer’s company created the duties that the individual

allegedly breached. See Flynn Co. v. Peerless Door & Glass, Inc., 2002 WL 1018937, at

*3 (Pa. Com. Pl. May 15, 2002) (stating that because it was the contract between the

“plaintiff and defendants that created the duties which Pratt [the individual in question]

allegedly breached” that the gist of the action doctrine barred a suit against the company’s

officer); Atchison Casting Corp. v. Deloitte & Touche, LLP, 2003 WL 1847665, at * 1

(Pa. Com. Pl. March 14, 2003) (dismissing tort claims against corporation and individual

defendants who were employees of corporation on basis of the gist of the action doctrine);

Flynn Co. v. Cytometrics, Inc., 2000 WL 33711055, at *4 (Pa. Com. Pl. Nov. 17, 2000)

(dismissing misrepresentation claims against corporation and its employees individually

under the gist of the action doctrine because the alleged misrepresentations were breaches

of the exclusive representation agreement). All of Ross’s alleged misrepresentations

concerned matters governed by the Letter of Intent between Ladbrokes and Williams.

       After reviewing, all of Williams’s arguments, we affirm the District Court order

granting summary judgment in favor of Ladbrokes on the tort claims at issue.



                                             7
BECKER, Circuit Judge, dissenting.

              I agree with the majority’s disposition of the law of the case issue.

However, I disagree with the majority’s interpretation and application of the Pennsylvania

“gist of the action” jurisprudence, hence this dissent from the judgment. I believe that the

majority reads Pennsylvania law too narrowly. I also believe that its abbreviated and

antiseptic rendering of the underlying facts belies the true nature and ultimate essence of

Ladbrokes’ conduct, which (if proven) would render it liable in tort. I begin with a fuller

description of that conduct, from which it will be apparent that the written agreement, on

which the majority focuses, is not the central fact of the case but rather a mere instrument

of Ladbrokes’ fraudulent scheme.

                                             I.

              In June 1999, plaintiff Stuart Williams was approached by Ladbrokes to

solicit his interest as a potential buyer for Ladbrokes’ North American gaming businesses.

By July 1999, Williams and Alan Ross, representing Ladbrokes, had reached an oral

understanding that Williams would purchase several of Ladbrokes’ casinos, betting

parlors and racetracks for $120 million cash. They then negotiated the terms of a binding

letter of intent. When Ross first met Williams, he had not yet tested the market for the

properties, but he did not want to preclude a deal with Williams if he was unable to get a

higher price elsewhere. Williams insisted that he have the exclusive right to purchase the

properties during the period of due diligence and final agreement drafting. Indeed



                                             8
Williams told Ross that he would not spend “one minute” of his time or “one penny” of

his money pursuing a transaction unless Ladbrokes intended to deal exclusively with him.

Ross did not want exclusivity but, recognizing that Williams would not proceed further

without it, he ultimately assured Williams that Ladbrokes would deal exclusively with

him; the consideration was a hefty purchase price. Although the assurance of exclusivity

was memorialized in the letter of intent and signed by Williams and Ladbrokes, it is clear

from the record that Ladbrokes and Ross never intended to provide exclusivity to

Williams.

                 The record is uncontradicted that Ladbrokes and Ross, even as they

negotiated specifically with Williams about exclusivity and extracted additional

consideration from him in exchange for it, secretly marketed the properties to others.

When asked by Williams whether Ladbrokes had engaged or was engaging in such

discussions, Ross lied and told Williams “no,” and when asked in his deposition why he

had not disclosed his contacts with other potential buyers to Williams, Ross answered,

“Why would I?” An internal Ladbrokes memorandum written by Ross stated that he

intended merely to “keep [Williams] in the running” while he shopped the properties to

third parties.

                 Moreover, throughout August and September 1999, Ross repeatedly lied to

Williams about Williams’s access to due diligence materials, and about the solicitation of

offers for the property under agreement with Williams. When Williams told Ross that he



                                              9
was concerned about the continuing delays and excuses, and specifically asked Ross

whether Ladbrokes was dealing with others, Ross told Williams, “You don’t have

anything to worry about,” and “you’re just overreacting.” But, on July 28, 1999, the same

day Ross signed the letter of intent, Ross had sent documents relating to some of the

properties to one prospective purchaser and a confidentiality agreement to another. On

August 3, Ross met another potential buyer and discussed the possible acquisition of the

properties, including purchase price. And on August 5, Ross met and negotiated with two

other prospective purchasers. Then, on August 10, Ross met with another interested

party, who made an offer. Also that day, another Ladbrokes executive faxed financial

statements and other financial information for the Pennsylvania properties to still another

potential buyer.

              On August 26, 1999, Ladbrokes issued a press release indicating an intent

to sell its North American properties, including the businesses covered by the letter of

intent. Strikingly, the press release made no mention of Williams or the letter of intent.

In response, at least seven more individuals expressed their interest in purchasing some or

all of the properties. By the end of August, Ross had sent financial information to another

prospective purchaser and offered to meet with him the following week. Over the course

of the next week, Ross continued to meet with other possible buyers and received a

concrete offer from one of them.

              Williams called Ross immediately after becoming aware of the August 26,



                                             10
1999 press release. Ross told Williams that “the press release really didn’t have anything

to do with our transaction.” Ross further told Williams “not to worry, that this transaction

was absolutely [his].” Ross also reminded Williams that Ladbrokes’ board had “approved

the transaction.” After further conversations, Ladbrokes’ CEO Peter George wrote

confirming that Ladbrokes would “not solicit expressions of interest,” would not

“negotiat[e] terms of sale and purchase” with any third parties, and would not give any

third parties access to the data room during the period that Williams had access. And yet

on September 3, 1999, at about the same time Ross and George were assuring Williams

they had not and would not solicit expressions of interest of send financial or legal

documents to anyone else, Ross wrote a memo to George stating that Ross intended to

“keep [Williams] in the running” while he continued to shop the gaming business.

              Throughout September 1999, “the beat went on.” The short of it is that

defendants’ repeated lies and misrepresentations were made to string Williams along

while Ladbrokes and Ross continued to shop the properties to third parties. As Judge

Lee, who preceded Judge Schwab in the case, found in connection with his grant of

summary judgment on the issue of the defendant’s breach of their obligation to negotiate

in good faith under the letter of intent, “Ross and other Ladbrokes’ officers and

employees aggressively shopped around the gaming interests as to which Williams had

just been granted exclusivity rights.” This conduct continued even after Ladbrokes finally

gave Williams access to the due diligence materials on September 22, 1999. There were



                                             11
further discussions between Ladbrokes and Williams which ultimately imploded when

Ladbrokes purchased, at a heavy discount, $54 million in bonds that Williams had

expected to assume.

                                              II.

              I do not quarrel with the majority’s general statement of the relevant

Pennsylvania jurisprudence, i.e., that the “gist of the action” doctrine “is designed to

maintain the conceptual distinction between breach of contract claims and tort claims [by]

preclud[ing] plaintiffs from recasting ordinary breach of contract claims into tort claims,”

and that “[t]ort actions lie for breaches of duties imposed by law as a matter of social

policy, while contract actions lie only for breaches of duties imposed by mutual consensus

agreements between particular individuals.” And see Bohler-Uddeholm America, Inc. v.

Ellwood Group, Inc., 247 F.3d 79, 103-04 (3d Cir. 2001) (alteration in original):

                      [T]he important difference between contract and
                      tort actions is that the latter lie from the breach
                      of duties imposed as a matter of social policy
                      while the former lie for the breach of duties
                      imposed by mutual consensus

              Redevelopment Auth. of Cambria Cty. v. International Ins.
              Co., 454 Pa. Super. 374, 685 A.2d 581, 590 (1996) (en banc)
              (quoting Phico Ins. Co. v. Presbyterian Med. Servs. Corp.,
              444 Pa. Super. 221, 663 A.2d 753, 757 (1995)). In other
              words, a claim should be limited to a contract claim when
              “the parties’ obligations are defined by the terms of the
              contracts, and not by the larger social policies embodied in the
              law of torts.” Bash v. Bell Tel. Co., 411 Pa. Super. 347, 601
              A.2d 825, 830 (1992).



                                              12
              I do, however, disagree with what I see as a crabbed view of Pennsylvania’s

willingness to apply tort principles where the facts show that a party to an alleged contract

had a fraudulent intent with respect to its contractual promises. As I read the

Pennsylvania cases, where, as here, there was fraudulent intent, i.e. a subjective and

undisclosed intent not to perform, a fraud claim is stated.

              Let me begin with basic principles. If a party to a contract misrepresents his

or her present intention to perform, he or she has committed the tort of misrepresentation.

On the other hand, if a party had a present intention to perform but later fails to perform,

deliberately or otherwise, the action ordinarily is one for breach of contract, unless the

breaching party gives knowingly false assurances of performance, in which case an action

for misrepresentation can also lie. See 5 Corbin on Contracts § 1077 at 238 (Supp. Fall

2001) (“If a party attempts to commit fraud, he should not be insulated from liability for

punitive damages, just because the means he has chosen for achieving his fraud happen to

involve a breach of contract.”). As we held in Mellon Bank Corp. v. First Union Real

Estate Equity & Mortgage Investments, 951 F.2d 1399, 1410 (3d Cir. 1991), under

Pennsylvania law, “‘[a] statement of present intention which is false when uttered may

constitute a fraudulent misrepresentation of fact.’” (quoting Brentwater Homes, Inc. v.

Weibley, 369 A.2d 1172, 1175 (Pa. 1977)) (alteration in original).

              My view of the open texture of Pennsylvania law in this area is supported

by Jahanshahi v. Centura Development Co. 816 A.2d 1179 (Pa. Super. 2003), which



                                             13
applied an analogous misfeasance/nonfeasance analysis. It is also supported by a number

of federal district court cases applying Pennsylvania law. See, e.g., Precision Printing

Co. v. Unisource Worldwide, Inc., 993 F. Supp. 338, 356 (W.D. Pa. 1998) (“[A] promise

which the promisor had no intention of keeping at the time he made it may be actionable

as fraud.”); Leonard A. Feinberg, Inc. v. Cent. Asia Capital Corp., 974 F. Supp. 822, 843

(E.D. Pa. 1997) (“‘[A] cause of action for fraud can be predicated on future promises if

the defendant knew at the time he made the promise that he would not carry it out.’”

(quoting Killian v. McCulloch, 850 F. Supp. 1239, 1255 (E.D. Pa., 1994)); Fox’s Foods,

Inc. v. Kmart Corp., 870 F. Supp. 599, 609 (M.D. Pa. 1994) (holding there was sufficient

evidence for a jury to conclude that the defendant did not intend to perform when the

promise was made); Ebeling & Reuss, Ltd. v. Swarovski, Int’l, 1992 WL 211554 *9 (E.D.

Pa. August 25, 1992) (“[A] party can be liable for fraud if the party intended not to

comply with the terms of the contract at the inception of the contractual relationship.”).

              I read the majority opinion as having twin foci. On the one hand, whenever

fraudulent misrepresentations to induce a contract result in specific duties outlined in the

later contract between sophisticated parties, the majority would bar an action in tort. On

the other hand, candidly acknowledging the opaqueness and fluidity of the Pennsylvania

gist of the action jurisprudence, the majority really seems to be making an impressionistic

judgment as to whether the action sounds in contract or tort. I’ll take it either way. The

first focus, I respectfully suggest, is simply wrong as a matter of the history of the gist of



                                              14
the action doctrine. The second, which seems to supply the majority’s ratio decidendi,

does not, I submit, square with the facts.

              History tells us that sophisticated parties can be duped, especially when,

like the late Tug M cGraw, they want to believe. The faithless Ross was a master duper.

As Judge Lee held, the facts support the conclusion:

              That Alan Ross and Ladbrokes deliberately and intentionally
              deceived plaintiffs and strung them along while shopping
              their business and properties around to third parties, knowing
              that plaintiffs would be incurring significant expenses toward
              due diligence on a deal defendants decided they were not
              going to consummate.

And as Judge Lee recognized, presented with the facts I have chronicled, a reasonable

jury certainly could conclude that Ladbrokes, through Ross, entered into the letter of

intent in order to induce Williams to keep his money on the table, with no present

intention of honoring its contractual obligations.

              The evidence here is overwhelming and uncontradicted. It reflects an

egregious fraud, papered over by a contract. It is also a case in which “the parties’

obligations are defined . . . by the larger social policies embodied in the law of torts.”

Bohler-Uddeholm America, Inc., supra. I believe that Pennsylvania would, on these

facts, recognize a tort claim. I would therefore reverse the grant of summary judgment in

favor of Ladbrokes (and, a fortiori, of Ross) and remand for a trial on Williams’ fraud

claim.




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