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FE Digital Investments Limited v. Hale

August 3, 2007


The opinion of the court was delivered by: Milton I. Shadur Senior United States District Judge


FE Digital Investments Limited ("FE Digital") has sued Lyric Hughes Hale ("Hale"), tendering two counts asserting breach of contract and one count asserting common-law fraud. FE Digital charges Hale, Chief Executive Officer of China Online ("China Online"), with having recklessly misrepresented the financial health of that corporation in September 2001 when Digital contracted to purchase a block of its shares for $1.5 million.*fn1

FE Digital also charges that Hale failed to live up to a promise she made to procure the sale of those shares under the terms set out in a contemporaneous Letter of Undertaking ("Letter") signed by Hale and agreed to in writing by FE Digital.

FE Digital has now moved to resolve its claims against Hale via summary judgment pursuant to Fed. R. Civ. P. ("Rule") 56. For the reasons stated in this memorandum opinion and order, FE Digital's motion for summary judgment is granted on the fraud claim and the breach of contract claim stemming from the share purchase Agreement, entitling it to relief that renders moot the breach of contract claim based on the Letter.

Summary Judgment Standards

Well-established Rule 56 principles impose on parties wishing to prevail on summary judgment the burden of establishing the lack of a genuine issue of material fact (Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)). For that purpose this Court must consider the evidentiary record in the light most favorable to Hale and draw all reasonable inferences in her favor (Lesch v. Crown Cork & Seal Co., 282 F.3d 467, 471 (7th Cir. 2002)). But to avoid summary judgment, Hale must produce "more than a mere scintilla of evidence to support h[er] position" that a genuine issue of material fact exists (Pugh v. City of Attica, 259 F.3d 619, 625 (7th Cir. 2001)) and "must set forth specific facts that demonstrate a genuine issue of triable fact" (id.). If the record were to reveal that no reasonable jury could find in favor of Hale, summary judgment will be granted (see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)).

To evaluate that possibility, what follows is a summary of the facts, viewed in a light favorable to Hale under the criteria prescribed by Rule 56 and this District Court's LR 56.1.*fn2 And that obviates the need, in the evidentiary recital, to repeat "according to Hale" or the like or to identify any conflicting account, though references to the latter are sometimes included for purely informational purposes.


Events giving rise to this litigation arose from the Agreement among FE Digital, China Online and Hale (F. St. ¶7) under which FE Digital agreed to pay $1.5 million to purchase China Online shares (id.). Hale executed the Agreement both on behalf of China Online and in her individual capacity (id. ¶8).

Agreement Art. II and its Section 2.5 (copied verbatim) provide in relevant part:

The Company and Hughes*fn3 (each severally and together jointly) hereby represent and warrant to the Investor as follows:

Section 2.5 Financial Statements. The financial statements attached hereto as Exhibit 2.5 (the "Financial Statements") (i) do not contain or reflect any material inaccuracies or discrepancies, (ii) disclose a true and fair view of the financial position of the Company both as at 31 July 2001 and, (subject to changes required to reflect the normal day to day operation of the business of the Company between 1 August 2001 and the Closing Date, which operation has not resulted in the Company incurring any liabilities

[A] other than in the normal course of business or

[B] which may or could adversely effect the ability of the Company to carry on business or which if disclosed to the Investor would materially influence the Investors decision to invest in the Company), the Closing Date, and (iii) have been prepared in accordance with United States' generally accepted accounting principles and practice subject to the absence of footnote disclosures and to normal year-end adjustments. Other than (i) the amount of US$1,168,670.05 specified in the Financial Statements as "Total Accounts Payable," (as adjusted by virtue of the matters referred to in (ii) above of this Section 2.5)(ii) the amount specified in Section 5.1(b) of this Agreement, and (iii) the expenses specified in the Monthly Expense Summary (as defined below), there are no other debts or liabilities of the Company that will become due and owing prior to December 31, 2001.

And as required by that provision, Hale produced a copy of China Online's July 31, 2001 financial statements as Agreement Ex. 2.5 (F. St. ¶11).

Hale's deposition testimony as to the financial statements was that she neither reviewed the actual numbers nor verified their accuracy with any members of China Online's financial team (F. St. ΒΆΒΆ13, 17). She further testified that she informed FE Digital's Director Victor Chu ("Chu") that China Online's financial statements were "not necessarily up-to-date" because it lacked the capital to pay its accounting firm, so there had not been a recent audit (H. Dep. 36). ...

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