Merrill Lynch v. Allegheny Energy

05-5129-cv
Merrill Lynch v. Allegheny Energy
UNITED STATES COURT OF APPEALS 1 FOR THE SECOND CIRCUIT 2
3 _______________ 4
5 August Term, 2006 6
7 (Argued October 30, 2006 Decided August 31, 2007) 8
9 Docket No. 05-5129-cv 10
11
_______________ 12
13 Merrill Lynch & Co. Inc., Merrill Lynch & Capital Services, Inc., 14 ML IBK Positions, Inc., 15
16 Plaintiffs-Counter-Defendants-Appellees, 17
18 v. 19
20 Allegheny Energy, Inc., Allegheny Energy Supply Company, LLC, 21
22 Defendants-Counterclaimant-Appellants. 23
24 _______________ 25
26 Before: 27 CARDAMONE, WALKER, and RAGGI, 28 Circuit Judges. 29
30 _______________ 31
32 Allegheny Energy, Inc. and Allegheny Energy Supply Company, 33 LLC appeal the judgment entered August 26, 2005 in the United 34 States District Court for the Southern District of New York 35 (Baer, J.) awarding Merrill Lynch & Co. Inc., Merrill Lynch & 36 Capital Services, Inc., and ML IBK Positions, Inc. $158 million 37 on its contract claim and dismissing appellant's counterclaims. 38
39 Affirmed in part, reversed in part, and remanded. 40
41 _______________ 42

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_______________ 1
2 KATHLEEN M. SULLIVAN, Redwood Shores, California (Daniel H. 3 Bromberg, Daniel A. Zaheer, Quinn Emanuel Urquhart Oliver & 4 Hedges, LLP, Redwood Shores, California; Peter E. Calamari, 5 Sanford I. Weisburst, William B. Adams, Quinn Emanuel 6 Urquhart Oliver & Hedges, LLP, New York, New York, of 7 counsel), for Defendants-Counterclaimants-Appellants. 8
9 STUART J. BASKIN, New York, New York (Jeremy G. Epstein, John 10 Gueli, Shearman & Sterling LLP, New York, New York, of 11 counsel), for Plaintiffs-Counter-Defendants-Appellees. 12
13 _______________ 14

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2
CARDAMONE, Circuit Judge: 1
Allegheny Energy, Inc. (Allegheny, defendant or appellant) 2
and its wholly-owned subsidiary Allegheny Energy Supply Company, 3
LLC (Supply) appeal from a judgment of the United States District 4
Court for the Southern District of New York (Baer, J.) entered 5
August 26, 2005 awarding Merrill Lynch & Co. Inc., Merrill Lynch 6
& Capital Services, Inc., and ML IBK Positions, Inc. 7
(collectively Merrill Lynch or plaintiff) $158 million on its 8
contract claim against Allegheny and dismissing Allegheny's 9
counterclaims. 10
The case arises out of Allegheny's acquisition of Global 11
Energy Markets (GEM), an energy commodities trading business 12
owned by Merrill Lynch, for the sum of $490 million plus a two 13
percent interest in Supply. Market conditions spiraled downwards 14
after the fall of Enron in 2001. In 2002 when Allegheny failed 15
to perform its contractual commitment to contribute certain 16
assets to Supply, Merrill Lynch exercised its right to sell back 17
its interest in Supply at an agreed price of $115 million. 18
Litigation ensued when Allegheny questioned the accuracy of 19
Merrill Lynch's representations to it with respect to GEM, and 20
refused to honor Merrill Lynch's right to sell its interest in 21
Supply back to Allegheny. 22
Some facts critical to the sale of GEM were peculiarly 23
within the knowledge of Merrill Lynch and not disclosed by it to 24
Allegheny. The lack of that information may have played a part 25
in defendant's decision to purchase GEM. But, not knowing the 26

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3
undisclosed facts means Allegheny could not accurately assess its 1
decision. As Alexander Pope succinctly said "What can we reason, 2
but from what we know?" Alexander Pope, An Essay on Man: 3
Epistle I -- Of the Nature and State of Man with Respect to the 4
Universe, in 40 The Harvard Classics, 418 (Charles W. Eliot ed., 5
1910). For that reason this judgment must be reversed in part. 6
BACKGROUND and FACTS 7
This litigation involves two business entities that have a 8
significant presence in the American economy. Allegheny is a 9
Pennsylvania-based energy company with more than 5,000 employees. 10
Merrill Lynch is a leading financial management company with 11
offices in 36 countries. Allegheny sought in 2000 to expand 12
Supply, its wholly-owned subsidiary, through the acquisition of 13
an energy commodities trading company. Merrill Lynch, which had 14
until that time acted as Allegheny's financial advisor, offered 15
Allegheny one of its trading desks, Global Energy Markets. 16
Serious negotiations concerning the acquisition of GEM by 17
Allegheny began in September 2000. When Merrill Lynch withdrew 18
as Allegheny's financial advisor, Allegheny retained a new team 19
of sophisticated advisors. 20
A. Financial Data on GEM 21
Merrill Lynch prepared and delivered to Allegheny financial 22
data on GEM's performance and profitability. These financial 23
summaries covered September, October 2000, and January 2001, and 24
included profit and loss calculations on GEM's largest trading 25
asset, the Williams contract. The September and October 26

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4
financial summaries were flawed in two notable respects: The 1
data reflected substantially higher revenues and net income for 2
GEM than was reflected on Merrill Lynch's books and records, and 3
the reports were not prepared by Merrill Lynch's finance 4
department as required by its own internal regulations. 5
GEM had a contract with Williams Energy Marketing & Trading, 6
a Southern California energy provider, giving GEM options to buy 7
electricity over a period of years. The October financials 8
recognized additional revenues of $32 million attributed to the 9
Williams contract. When defendant discovered an earlier estimate 10
of David Chung, an expert hired by Merrill Lynch to value the 11
Williams contract, that reflected a $10.5 million loss on the 12
contract, defendant challenged the integrity of the process by 13
which Merrill Lynch arrived at the $32 million figure. 14
Nonetheless, the district court credited Merrill Lynch's 15
explanation that Chung's lower valuation was rejected because his 16
methodology was improper under generally accepted accounting 17
principles. 18
In early January 2001, within days of the scheduled signing, 19
Merrill Lynch realized that the September and October summaries 20
contained significantly different numbers than those reflected on 21
Merrill Lynch's own books. On January 5, 2001 plaintiff 22
corrected at least some of the inaccuracies in the earlier 23
reports, but overstated earnings generated by operations other 24
than the Williams contract. It appears that the non-Williams 25
component of GEM was only of peripheral concern to the parties. 26

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5
The January financials did not reflect $28 million in losses 1
incurred on the Williams contract. Merrill Lynch explained the 2
omission by reference to a company policy under which such losses 3
are reflected at the management level so that traders will not be 4
penalized for unpredictable fluctuations in assets like the 5
Williams contract. The district court found these losses were 6
disclosed to Allegheny in valuation spreadsheets prepared by 7
Chung. When plaintiff's negotiating team delivered the January 8
data it informed Allegheny that the updated report should be 9
substituted for the September and October summaries. Merrill 10
Lynch's partial explanation for the different figures was that 11
the January version reflected certain overhead costs that were 12
disregarded earlier. Allegheny asserts it rejected the new 13
financials and insisted that the deal proceed on the basis of the 14
September and October reports. 15
It is a significant factor in this litigation that Dan 16
Gordon, GEM's chief executive officer, played a large role in 17
Merrill Lynch's alleged fraud. Gordon has since admitted to 18
knowingly providing Allegheny with inaccurate information in the 19
September and October financials. After the closing of the GEM 20
deal it was learned that Gordon had embezzled $43 million dollars 21
from Merrill Lynch by rigging a fraudulent contract for outage 22
insurance on the Williams contract with a sham company he owned 23
called Falcon Energy Holdings (Falcon). He was later convicted 24
and jailed for his criminal conduct. 25

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6
Although there is no direct evidence that other officers at 1
Merrill Lynch knew of Gordon's embezzlement prior to the closing, 2
the record reveals some of plaintiff's officials were aware 3
Gordon had evaded its internal credit controls to set up the 4
Falcon deal and had lied about the evasion. Plaintiff also knew 5
that Gordon had prepared the flawed September and October 6
financials, but seems to have believed that the inaccuracies were 7
the product of disapproved accounting methods, rather than 8
dishonesty. Merrill Lynch failed to disclose any of these facts 9
to Allegheny. 10
B. The Purchase Agreement 11
After four months of due diligence the parties signed an 12
Asset Contribution and Purchase Agreement (Purchase Agreement or 13
Agreement) on January 8, 2001. Under the Agreement Allegheny 14
acquired GEM paying Merrill Lynch $490 million in cash and giving 15
it a two percent membership interest in Supply. Section 5.15 of 16
the Purchase Agreement provided that if Allegheny failed to 17
contribute certain assets to Supply by September 16, 2002 Merrill 18
Lynch could require Allegheny to repurchase its interest in 19
Supply for $115 million. 20
Merrill Lynch agreed to several warranties in the Agreement 21
relating to the quality and nature of the information it had 22
provided Allegheny. Section 3.12(b) stated that the Business 23
Selected Data has been prepared in good faith by the management 24
of the business based upon the financial records of the business. 25
The district court found the provision referenced the January 26

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7
financial data exclusively. In § 3.12(c), which the district 1
court found applicable to all of the disputed financial data, 2
Merrill Lynch represented the "books of account and other 3
financial records of [GEM] (i) are in all material respects true, 4
complete and correct, and do not contain or reflect any material 5
inaccuracies or discrepancies and (ii) have been maintained in 6
accordance with [plaintiff's] business and accounting practices." 7
Plaintiff agreed in § 3.16 that the information it provided to 8
Allegheny "in the aggregate, includes all information known to 9
the Sellers which, in their reasonable judgment exercised in good 10
faith, is appropriate for the Purchasers to evaluate [GEM's] 11
trading positions and trading operations." The parties waived 12
"any and all right to trial by jury in any legal proceeding 13
arising out of or related to" the Purchase Agreement. 14
C. Prior Proceedings 15
In early September 2002 Allegheny reported that it would be 16
unable to contribute to Supply the assets contemplated in the 17
Agreement and Merrill Lynch gave prompt notice of its intention 18
to exercise its put right pursuant to § 5.15. On September 24, 19
2002 Merrill Lynch filed the instant action against Allegheny in 20
district court, contending Allegheny breached the Agreement by 21
failing to honor Merrill Lynch's put right. 22
Defendant brought an action against plaintiff in state court 23
the following day and moved to stay the federal proceedings 24
plaintiff had instituted arguing that Supply's presence in the 25
federal litigation would defeat complete diversity as both Supply 26

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8
and Merrill Lynch were Delaware citizens. On May 30, 2003 the 1
district court denied Allegheny's motion for a stay and ordered 2
that Supply, as a necessary party whose absence produced a risk 3
that the parties would be subject to inconsistent obligations, be 4
joined to the action pursuant to Federal Rule of Civil Procedure 5
19(a). Merrill Lynch & Co. v. Allegheny Energy, Inc., 02 Civ. 6
7689, 2003 WL 21254420 (S.D.N.Y. May 30, 2003). After 7
classifying Supply as a defendant for jurisdictional purposes, 8
the court concluded that 28 U.S.C. § 1367 authorized its exercise 9
of supplemental jurisdiction over Supply's "downsloping" claims 10
against Merrill Lynch. Id. at *4-5. 11
Allegheny asserted counterclaims against Merrill Lynch for, 12
inter alia, fraudulent inducement and breach of contract, and 13
requested a jury trial to resolve its fraud counterclaim. 14
Plaintiff moved to dismiss defendant's counterclaims and strike 15
its jury demand. On November 24, 2003 the district court ruled 16
Allegheny had stated viable claims for breach of contract and 17
fraudulent inducement, but found Allegheny's contractual waiver 18
of its right to a jury trial effective vis-à-vis its fraud claim. 19
Merrill Lynch & Co. v. Allegheny Energy, Inc., 382 F. Supp. 2d 20
411 (S.D.N.Y. 2003). 21
Both parties moved for summary judgment, with Merrill Lynch 22
arguing that Allegheny breached the Agreement, and Allegheny 23
contending that it had no duty to perform because Merrill Lynch 24
had materially breached its obligations. Reasoning that Merrill 25
Lynch had substantially performed its side of the Agreement, the 26

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9
district court rejected Allegheny's defense and awarded summary 1
judgment to Merrill Lynch on its contractual claim. Merrill 2
Lynch & Co. v. Allegheny Energy, Inc., 02 Civ. 7689, 2005 WL 3
832050, at *3 (S.D.N.Y. Apr. 12, 2005). 4
Following a 13-day bench trial in May 2005, the trial court 5
dismissed Allegheny's breach of warranty and fraud counterclaims 6
and awarded Merrill Lynch $115 million plus interest on its 7
breach of contract claim. Merrill Lynch & Co. v. Allegheny 8
Energy, Inc., 02 Civ. 7689, 2005 WL 1663265 (S.D.N.Y. Jul. 18, 9
2005). Final judgment was entered on August 26, 2005. This 10
appeal followed. 11
DISCUSSION 12
Appellant raises a number of issues on this appeal that 13
warrant discussion. We analyze, first, a threshold issue 14
challenging the subject matter jurisdiction of the district 15
court; second, dismissal of Allegheny's fraudulent inducement 16
counterclaim; third, dismissal of defendant's breach of warranty 17
counterclaim; fourth, the grant of summary judgment to plaintiff 18
Merrill Lynch; and fifth, the denial of Allegheny's demand for a 19
jury trial. Before we begin analysis of these five issues, we 20
touch briefly on the standard of our review. 21
We review de novo the district court's disposition of a 22
motion for summary judgment under the same standard applied by 23
the district court. Tocker v. Philip Morris Cos., 470 F.3d 481, 24
486-87 (2d Cir. 2006). Following a bench trial, we review the 25
trial court's factual findings for clear error, Concourse Rehab. 26

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10
& Nursing Ctr., Inc. v. DeBuono, 179 F.3d 38, 43 (2d Cir. 1999), 1
while its resolution of legal questions, including jurisdiction 2
and the right to a jury trial, are subject to de novo review. 3
See id.; Brown v. Sandimo Materials, 250 F.3d 120, 125 (2d Cir. 4
2001). 5
I Subject Matter Jurisdiction 6
Allegheny challenges first the subject matter jurisdiction 7
of the district court because it contends the joinder of Supply, 8
a Delaware citizen as is Merrill Lynch, destroyed complete 9
diversity. Citing Viacom Int'l, Inc. v. Kearney, 212 F.3d 721 10
(2d Cir. 2000), the district court exercised supplemental 11
jurisdiction under 28 U.S.C. § 1367 over the claims Supply 12
asserted against Merrill Lynch, and aligned Supply as a defendant 13
with Allegheny for jurisdictional purposes. 14
A. The Effect of Exxon on the District Court's Ruling 15
Appellant does not argue the district court reached the 16
wrong result under Viacom, but insists Exxon Mobil Corp. v. 17
Allapattah Servs., Inc., 545 U.S. 546 (2005), bars jurisdiction 18
when citizens from the same state are found on opposite sides of 19
an action. Exxon addressed the question whether 28 U.S.C. § 1367 20
authorizes the exercise of jurisdiction over actions that do not 21
meet the amount-in-controversy requirement in a case where at 22
least one plaintiff's claim satisfies the requirement. Id. at 23
558. 24
The Supreme Court ruled in Exxon that the assertion by a 25
single diverse plaintiff of a claim that satisfies the 26

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11
jurisdictional requirements of 28 U.S.C. § 1332 is a civil action 1
over which a district court may take original jurisdiction. Id. 2
at 559. Once jurisdiction is anchored, § 1367(a) permits the 3
exercise of supplemental jurisdiction over claims asserted by 4
additional diverse plaintiffs, whether or not such claims meet 5
the amount-in-controversy requirement, unless jurisdiction is 6
barred by § 1367(b). Id. at 558-59. 7
Exxon makes clear that its expansive interpretation of 8
§ 1367 does not extend to additional parties whose presence 9
defeats diversity. Id. at 562, 564, 566; see also 13 Charles A. 10
Wright et al., Federal Practice & Procedure § 3523, at 99 n.42.1, 11
103 (2d ed. 1984 & Supp. 2007). The reason for the different 12
treatment of these two § 1332 requirements is found in their 13
differing purposes. The purpose of the amount-in-controversy 14
requirement, on one hand, is fulfilled by a single claim of 15
sufficient importance to warrant a federal forum and is not 16
negated by additional, smaller claims. A failure of diversity, 17
on the other hand, contaminates the action, so to speak, and 18
takes away any justification for providing a federal forum. See 19
Exxon, 545 U.S. at 562. 20
It follows that a defect of the latter sort eliminates every 21
claim in the action, including any jurisdictionally proper action 22
that might otherwise have anchored original jurisdiction, and 23
removes the civil action from the purview of § 1367 altogether. 24
Id. at 564 ("[T]he presence in the action of a single plaintiff 25
from the same State as a single defendant deprives the district 26

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12
court of original jurisdiction over the entire action." (emphasis 1
added)). Further, it is clear that a diversity-destroying party 2
joined after the action is underway may catalyze loss of 3
jurisdiction. Id. at 565 ("A nondiverse plaintiff might be 4
omitted intentionally from the original action, but joined later 5
under Rule 19 as a necessary party. The contamination theory 6
described above, if applicable, means this ruse would fail, but 7
Congress may have wanted to make assurance double sure."). 8
We cannot fault the district court for not anticipating in 9
2003 the Supreme Court's 2005 opinion in Exxon. Nonetheless, in 10
light of Exxon, the district court's reliance on our assumption 11
in Viacom that original jurisdiction is anchored in the diversity 12
between the original parties and so any subsequent joinder that 13
is not prohibited by § 1367(b) comes within the court's 14
supplemental jurisdiction, see 212 F.3d at 726, was misplaced. 15
It is now apparent that the contamination theory furnishes 16
limitations on joinder in certain circumstances that may well 17
extend beyond the restrictions listed in § 1367(b). Viacom, 18
which came down before Exxon, did not explore these limitations. 19
The Supreme Court does not define the reach of the 20
contamination theory and does not purport to announce a new 21
standard for assessing diversity defects but instead relies on 22
the Court's consistent construction of the complete diversity 23
rule. Exxon, 545 U.S. at 553, 556, 564. However, even if we 24
read Exxon as preserving certain well-established exceptions to 25
the complete diversity rule, see, e.g., Owen Equip. & Erection 26

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13
Co. v. Kroger, 437 U.S. 365, 377 (1978); see also, e.g., 1
Caterpillar Inc. v. Lewis, 519 U.S. 61, 66 n.1 (1996); In re 2
Olympic Mills Corp., 477 F.3d 1, 11-12 (1st Cir. 2007), Supply's 3
joinder does not fall within any such exception. A leading 4
practice treatise says "parties that are joined under Rules 19 5
and 20 . . . must independently satisfy the jurisdictional 6
requirements." 13B Wright et al., supra, § 3608, at 454; see 7
also Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 8
102, 108 (1968) (noting that joinder of non-diverse defendant 9
under Rule 19(a) destroys jurisdiction); Haas v. Jefferson Nat'l 10
Bank of Miami Beach, 442 F.2d 394, 396 (5th Cir. 1971) (same). 11
B. Rule 19 Determination; Dismissal of Supply 12
Under Rule 19 Supply's status as a necessary party -- which 13
neither party disputes -- and our holding that its joinder is not 14
feasible require us to determine whether Supply is in fact 15
indispensable. Fed. R. Civ. P. 19; Viacom, 212 F.3d at 725. We 16
are influenced by the procedural posture in which this case comes 17
to us and obliged to make full use of hindsight in assessing the 18
four factors set out in Rule 19(b). Provident, 390 U.S. at 109- 19
12. At this stage of litigation, Merrill Lynch's interest in 20
preserving a fully litigated judgment may be overborne only by 21
greater contrary considerations than those that would be required 22
at an earlier stage of the litigation. See id. at 112. 23
Allegheny has not pointed to adequate opposing considerations, 24
but simply stated conclusorily in its brief on appeal that 25
Supply, as a party to the Purchase Agreement, was a paradigmatic 26

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14
indispensable party. Further, Allegheny may be deemed to have 1
consented to Supply's characterization as a dispensable party by 2
virtue of its failure to argue before the district court, in 3
connection with its motion to stay federal proceedings, that 4
Supply was indispensable, and its subsequent failure to raise the 5
point sufficiently in its brief on this appeal. See Cuoco v. 6
Moritsugu, 222 F.3d 99, 112 n.4 (2d Cir. 2000). 7
Moreover, we are persuaded by Merrill Lynch's point that the 8
retroactive absence of Supply -- defendant's wholly-owned 9
subsidiary -- is not prejudicial to Supply, defendant or 10
plaintiff. See Fed. R. Civ. P. 19(b) (factors one & two); Extra 11
Equipamentos e Exportação Ltda. v. Case Corp., 361 F.3d 359, 364 12
(7th Cir. 2004) ("[W]e have great difficulty seeing how a 100 13
percent subsidiary could ever be an indispensable 14
party . . . ."). Given our emphasis on considerations of 15
finality, efficiency, and economy on review of a fully tried 16
case, SCS Commc'ns, Inc. v. Herrick Co., 360 F.3d 329, 337 (2d 17
Cir. 2004), we also think Supply's (retroactive) absence does not 18
render its judgment inadequate. See Fed. R. Civ. P. 19(b) 19
(factor three); Provident, 390 U.S. at 110-11. We have already 20
commented on plaintiff's interest in preserving the judgment. 21
See Fed. R. Civ. P. 19(b) (factor four). 22
C. Dismissal of Supply 23
We exercise our authority under Federal Rule of Civil 24
Procedure 21 to cure, ex post, the above-noted jurisdictional 25
defect by dismissing Supply, a dispensable jurisdictional 26

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15
spoiler. See SCS Commc'ns, 360 F.3d at 335; see also Newman- 1
Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 832-38 (1989). 2
Allegheny's sole objection to Supply's dismissal, that Merrill 3
Lynch sought a tactical advantage by filing in federal court 4
without joining Supply, is meritless. Newman-Green did alert us 5
to the possibility that the presence of the party subject to 6
dismissal may have produced a tactical advantage to another 7
party, id. at 838, but defendant seems to argue something else 8
entirely, to wit, that Merrill Lynch sought to benefit from 9
Supply's absence from the action. 10
II Appellant's Fraudulent Inducement Counterclaim 11
Allegheny's fraud claim is based on Merrill Lynch's 12
misrepresentations concerning GEM's finances and its failure to 13
disclose the circumstances surrounding the preparation of the 14
flawed September and October financials and Gordon's evasion of 15
Merrill Lynch's credit controls. The district court dismissed 16
the claim on the grounds that defendant: (A) failed to show it 17
justifiably relied on plaintiff's misrepresentations; and (B) 18
failed to prove that its injury was proximately caused by them. 19
Merrill Lynch asserts on appeal that Allegheny should not be 20
permitted to pursue its fraudulent inducement claim because (C) 21
it is duplicative of defendant's breach of warranty claim. 22
We analyze these grounds in a moment. First we discuss 23
proof of fraud in New York. In New York a plaintiff alleging 24
fraud must show by clear and convincing evidence that the 25
defendant knowingly or recklessly misrepresented a material fact, 26

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16
intending to induce the plaintiff's reliance, and that the 1
plaintiff relied on the misrepresentation and suffered damages as 2
a result. See, e.g., Crigger v. Fahnestock & Co., 443 F.3d 230, 3
234 (2d Cir. 2006); Jo Ann Homes at Bellmore, Inc. v. Dworetz, 25 4
NY2d 112, 119 (1969). Where a defendant, as here, seeks to show 5
fraud by omission, it must prove additionally that the plaintiff 6
had a duty to disclose the concealed fact. Congress Fin. Corp. 7
v. John Morrell & Co., 790 F. Supp. 459, 472 (S.D.N.Y. 1992). 8
A. Justifiable Reliance and Due Diligence 9
New York courts are generally skeptical of claims of 10
reliance asserted by "sophisticated businessmen engaged in major 11
transactions [who] enjoy access to critical information but fail 12
to take advantage of that access." Grumman Allied Indus., Inc. 13
v. Rohr Indus., Inc., 748 F.2d 729, 737 (2d Cir. 1984). Both 14
parties before us are sophisticated business entities that are 15
held to a high standard of conduct in the events leading up to 16
the sale and purchase of GEM. 17
The district court found that because Allegheny could have 18
discovered the truths that Merrill Lynch obscured or omitted had 19
it pursued its due diligence "with a little more pizzazz," its 20
fraud counterclaim failed to satisfy the justifiable reliance 21
prong. It charged Allegheny with the means and responsibility to 22
discover, for example, Gordon's embezzlement, notwithstanding 23
Merrill Lynch's claim that its own officials were unaware of the 24
embezzlement until after the sale of GEM. 25

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17
In assessing whether defendant met its burden in showing 1
justifiable reliance, we look to a number of factors including 2
the content of its agreement with plaintiff. See Emergent 3
Capital Inv. Mgmt. v. Stonepath Group, Inc., 343 F.3d 189, 195-96 4
(2d Cir. 2003); Lazard Freres & Co. v. Protective Life Ins. Co., 5
108 F.3d 1531, 1543 (2d Cir. 1997) (noting significance of 6
protective language in contract). The warranties contained in 7
§§ 3.12(b), 3.12(c) and 3.16 imposed a duty on Merrill Lynch to 8
provide accurate and adequate facts and entitled Allegheny to 9
rely on them without further investigation or sleuthing. See 10
Metropolitan Coal Co. v. Howard, 155 F.2d 780, 784 (2d Cir. 1946) 11
(L. Hand, J.) ("A warranty . . . . is intended precisely to 12
relieve the promisee of any duty to ascertain the fact for 13
himself."). Further, as Judge Friendly instructs, New York 14
authority follows a two-tier standard in assessing the duty of 15
the party claiming fraud, according to whether the 16
misrepresentations relate to matters peculiarly within the other 17
party's knowledge. If so, the wronged party may rely on them 18
without further investigation. See Mallis v. Bankers Trust Co., 19
615 F.2d 68, 80-81 (2d Cir. 1980). Merrill Lynch's warranties in 20
effect represent contractual stipulations that the facts covered 21
by them be treated as information exclusively within Merrill 22
Lynch's knowledge. 23
While the district court wrongly held defendant to too 24
stringent a standard of reliance, Allegheny may not satisfy its 25
burden simply by pointing to the warranties because, for purposes 26

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18
of showing fraud, a party cannot demonstrate justifiable reliance 1
on representations it knew were false, see Banque Franco- 2
Hellenique de Commerce v. Christophides, 106 F.3d 22, 27 (2d Cir. 3
1997) (noting that plaintiff cannot show it justifiably relied on 4
statements it had reason to know were false). Thus, on remand 5
Allegheny must offer proof that its reliance on the alleged 6
misrepresentations was not so utterly unreasonable, foolish or 7
knowingly blind as to compel the conclusion that whatever injury 8
it suffered was its own responsibility. See W. Page Keeton et 9
al., Prosser & Keeton on the Law of Torts § 108, at 750 (5th ed. 10
1984); see also Christophides, 106 F.3d at 26-27. 11
Appellant's asserted reliance on the September and October 12
financials despite its receipt of a different financial report 13
appears at first blush to evince the sort of recklessness or 14
knowing blindness that raises doubt about its reliance. But the 15
apparent malleability of GEM's financial figures to accommodate 16
reserve calculations and sundry accounting concepts tempers any 17
initial skepticism. We note, for example, that the district 18
court did not find any foul play in Merrill Lynch's exposition of 19
the Williams profit and loss estimates notwithstanding 20
defendant's evidence that the final figure was $40 million (or 21
four times) higher than an early estimate produced by a valuation 22
expert at Merrill Lynch. It may be that Allegheny was not 23
reckless in believing the earlier figures -- qualified by 24
whatever accounting choices underlay them -- were defensible. 25
Such an argument could find support in defendant's assertion that 26

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19
plaintiff, by concealing the circumstances surrounding the 1
preparation and delivery of the earlier financial summaries, 2
failed in its duty candidly to alert defendant to the risk that 3
the earlier financials were flat-out wrong. 4
We recognize that Dan Gordon, the author of those inflated 5
financials, committed crimes against Merrill Lynch, his employer. 6
Yet, insofar as Gordon's crimes injured both plaintiff and 7
defendant, we think as between the two parties the responsibility 8
and risks must be borne by plaintiff, Gordon's employer. 9
Further, Merrill Lynch failed to reveal to Allegheny what it did 10
know about Gordon, its principal officer at GEM. Although 11
required by credit controls to obtain prior approval from 12
plaintiff's credit department before trading with new partners, 13
Gordon consummated the Falcon transaction without obtaining such 14
approval. Merrill Lynch discovered the violation of its credit 15
control policy and Gordon's lying about his insurance scam in 16
early September 2000. But plaintiff did not disclose these facts 17
to Allegheny. Instead, plaintiff assured defendant that GEM's 18
principal officer, Dan Gordon, was a person of integrity. 19
B. Proximate Cause 20
In assessing the viability of Allegheny's fraud and contract 21
claims, the district court relied heavily on federal cases that 22
were focused primarily on securities fraud claims. See, e.g., 23
Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005) (addressing 24
fraud claims based on federal securities statutes and 25
implementing regulations); Lentell v. Merrill Lynch & Co., 396 26

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20
F.3d 161 (2d Cir. 2005) (same). Following this line of 1
precedent, the trial court held that GEM's positive performance 2
in the year following the sale, together with the lack of any 3
causal link between GEM's ultimate failure and Merrill Lynch's 4
misrepresentations, precluded Allegheny's fraud claim. 5
The concept of loss causation elucidated in Dura is closely 6
related to the common law doctrine of proximate cause. 544 U.S. 7
at 343-44; Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1495 (2d 8
Cir. 1992). Dura culls from the common law the black letter law 9
that a fraud plaintiff must show that he acted on the basis of 10
the fraud and suffered pecuniary loss as a result of so acting. 11
544 U.S. at 343-44. Without doubt, these principles govern 12
defendant's fraud claim, but Dura's conclusion that overpayment 13
alone cannot prove loss causation, as the district court 14
incorrectly believed, is based on the tailored application of 15
these principles set out by the Supreme Court in the securities 16
context. Such application does not govern here. 17
Instead, we look to New York law that follows the well- 18
established common law rule that fraud damages represent the 19
difference between the purchase price of the asset and its true 20
value, plus interest, generally measured as of the date of sale. 21
McGuire v. Russell Miller, Inc. of N.Y., 1 F.3d 1306, 1310 (2d 22
Cir. 1993); Hanlon v. MacFadden Publ'ns, Inc., 302 N.Y. 502, 511 23
(1951); cf. Hotaling v. A.B. Leach & Co., 247 N.Y. 84, 87-88 24
(1928) (explaining that this rule reflects notion that seller's 25

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21
fraud is complete at time of sale and subsequent events do not 1
increase or diminish liability). 2
In Dura the Supreme Court explained that a mere disparity 3
between the purchase price plaintiffs paid for their shares of 4
common stock and the shares' true value at the time of purchase 5
is insufficient to prove loss causation. 544 U.S. at 342, 347. 6
Dura's bar on recovery based on overpayment alone represents an 7
easily explained departure from common law guidelines on 8
computing damages. The Supreme Court explained that the inflated 9
purchase payment made for a misrepresented stock is "offset by 10
ownership of a share that at that instant possesses equivalent 11
value." Id. at 342. Further, in securities cases there is a 12
presumption that shares are purchased for the purpose of 13
investment and their true value to the investor is the price at 14
which they may later be sold. 15
Allegheny's fraud claim, by contrast, involves the sale of a 16
business, and under the terms of the Purchase Agreement between 17
the parties New York -- not federal -- law governs its 18
construction and approach to damages. In agreeing on GEM's 19
purchase price, we assume the parties placed value on its 20
intrinsic qualities, including its key personnel and its 21
financial performance. If appellant proves Merrill Lynch 22
fraudulently misrepresented those qualities, it may show that it 23
has acquired an asset at a price that exceeded its true value. 24
If the district court finds Allegheny's fraud claim otherwise 25
valid, damages should be awarded Allegheny to the extent that the 26

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22
purchase price overstated GEM's value on the date of sale as a 1
result of Merrill Lynch's misrepresentations and omissions. Such 2
damages, if any, are considered general, not consequential, 3
damages. 4
C. Fraud Counterclaim Not Duplicative of Warranty Counterclaim 5
In Bridgestone/Firestone, Inc. v. Recovery Credit Servs., 6
Inc., 98 F.3d 13, 20 (2d Cir. 1996), we observed that under New 7
York law, parallel fraud and contract claims may be brought if 8
the plaintiff (1) demonstrates a legal duty separate from the 9
duty to perform under the contract; (2) points to a fraudulent 10
misrepresentation that is collateral or extraneous to the 11
contract; or (3) seeks special damages that are unrecoverable as 12
contract damages. New York distinguishes between a promissory 13
statement of what will be done in the future that gives rise only 14
to a breach of contract cause of action and a misrepresentation 15
of a present fact that gives rise to a separate cause of action 16
for fraudulent inducement. See Stewart v. Jackson & Nash, 976 17
F.2d 86, 88-89 (2d Cir. 1992). Hence, a claim based on 18
fraudulent inducement of a contract is separate and distinct from 19
a breach of contract claim under New York law. Id.; see also RKB 20
Enters., Inc. v. Ernst & Young, 582 N.Y.S.2d 814, 816 (3d Dep't 21
1992) ("A party fraudulently induced to enter into a contract may 22
join a cause of action for fraud with one for breach of the same 23
contract."). 24
Defendant's allegations in this case involve misstatements 25
and omissions of present facts, not contractual promises 26

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23
regarding prospective performance. "[A] misrepresentation of 1
present facts is collateral to the contract (though it may have 2
induced the plaintiff to sign the contract) and therefore 3
involves a separate breach of duty." First Bank of the Americas 4
v. Motor Car Funding, Inc., 690 N.Y.S.2d 17, 21 (1st Dep't 1999); 5
see also Deerfield Commc'ns Corp. v. Chesebrough-Ponds, Inc., 68 6
NY2d 954, 956 (1986). 7
That the alleged misrepresentations would represent, if 8
proven, a breach of the contractual warranties as well does not 9
alter the result. A plaintiff may elect to sue in fraud on the 10
basis of misrepresentations that breach express warranties. Such 11
cause of action enjoys a longstanding pedigree in New York. See 12
Ward v. Wiman, 17 Wend. 193 (1837). As to the duplication 13
charge, the New York Court of Appeals has allowed a fraud claim 14
to proceed in tandem with a contract claim where the seller 15
misrepresented facts as to the present condition of his property, 16
even though these facts were warranted in the parties' contract. 17
Jo Ann Homes, 25 NY2d at 119-20 (holding without discussion on 18
duplication); cf. Deerfield, 68 NY2d at 956 (holding oral 19
representation formed proper basis for contract and fraud 20
charge). The Appellate Division has provided a convincing 21
rationale: "A warranty is not a promise of performance, but a 22
statement of present fact." First Bank, 690 N.Y.S.2d at 21. 23
III Allegheny's Breach of Warranty Counterclaim 24
Appellant contends the misrepresentations and omissions 25
discussed above breached §§ 3.12(b), 3.12(c) and 3.16 of the 26

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24
Purchase Agreement. The district court did not exonerate Merrill 1
Lynch of all alleged breaches, but dismissed appellant's contract 2
claim because it had failed to prove that any breach had 3
proximately caused its injury or to prove reasonably 4
ascertainable damages. 5
A. Causation and Damages 6
Here too, the district court turned to federal cases 7
addressing securities fraud, discussed above, to hold defendant 8
was required to show Merrill Lynch's misrepresentations caused 9
actual loss. As noted, actual loss cannot be shown in the 10
securities context by mere allegation that a plaintiff purchased 11
shares at a price that exceeded their true value. Dura, 544 U.S. 12
at 342. Our conclusion above that these cases do not govern 13
Allegheny's fraud counterclaim applies a fortiori to its breach 14
of warranty counterclaims. 15
Under New York law, an express warranty is part and parcel 16
of the contract containing it and an action for its breach is 17
grounded in contract. See CBS, Inc. v. Ziff-Davis Publ'g Co., 75 18
NY2d 496, 503 (1990). A party injured by breach of contract is 19
entitled to be placed in the position it would have occupied had 20
the contract been fulfilled according to its terms. Boyce v. 21
Soundview Tech. Group, Inc., 464 F.3d 376, 384 (2d Cir. 2006). 22
It follows that appellant is entitled to the benefit of its 23
bargain, measured as the difference between the value of GEM as 24
warranted by Merrill Lynch and its true value at the time of the 25
transaction. See Bennett v. U.S. Trust Co. of N.Y., 770 F.2d 26

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25
308, 316 (2d Cir. 1985); Clearview Concrete Prods. Corp. v. S. 1
Charles Gherardi, Inc., 453 N.Y.S.2d 750, 756 (2d Dep't 1982). 2
It is a well established principle that contract damages are 3
measured at the time of the breach. Sharma v. Skaarup Ship Mgmt. 4
Corp., 916 F.2d 820, 825 (2d Cir. 1990) (collecting cases); Simon 5
v. Electrospace Corp., 28 NY2d 136, 145 (1971). The district 6
court's inquiry into GEM's performance and market conditions in 7
the months following the acquisition was improper because events 8
subsequent to the breach, viewed in hindsight, may neither offset 9
nor enhance Allegheny's general damages. See Sharma, 916 F.2d at 10
826. 11
Our review of the district court's pertinent findings allows 12
us to dispose with confidence of only one of appellant's 13
allegations. The trial court's determination that § 3.12(b) only 14
applied to the January financials, coupled with its finding that 15
this latter set of data was prepared in good faith and was 16
basically accurate, renders reconsideration on remand of the 17
alleged breach of this warranty unnecessary. 18
By contrast, defendant's claims relating to §§ 3.12(c) and 19
3.16 require further consideration by the district court through 20
the lens of the proper legal standard. The trial court found 21
that Merrill Lynch had breached "at least some" warranties and 22
that § 3.12(c) was materially breached by the September and 23
October financials. Its conclusions with respect to § 3.16 are 24
insufficient to determine whether it found plaintiff breached the 25
warranty or whether any such breach resulted in a diminution in 26

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26
the objective value of GEM at the time of the sale. For example, 1
the district court's finding that Merrill Lynch did not deny 2
access to Allegheny during due diligence is not tantamount to 3
finding that Merrill Lynch met its contractual obligation under 4
§ 3.16 to "provide" certain information to Allegheny. Moreover, 5
the trial judge reached no conclusion with regard to whether 6
plaintiff's failure to disclose Gordon's evasion of its in-house 7
credit controls and to alert defendant to the circumstances 8
underlying the preparation of the September and October 9
financials constituted a breach of this warranty. For correction 10
of the above recited errors, we must remand. 11
On remand the difference between the value of GEM as 12
warranted and its value as delivered should be calculated. GEM's 13
value as delivered should reflect any deductions from its 14
purchase price necessary to reflect the broken warranties. In 15
other words, the district court should determine how GEM would 16
have been valued by knowledgeable investors at the time of the 17
sale were such investors aware of any breaches proved by 18
Allegheny. As any such damages are general rather than 19
consequential, Allegheny is required to show with reasonable 20
certainty the fact of damage, not its amount. See Tractebel 21
Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 110 (2d 22
Cir. 2007). 23
B. Reliance on Express Warranties 24
The district court was of the view that Allegheny would not 25
have insisted on a lower price had it known all the facts and 26

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27
appears to have inferred from this finding that Allegheny did not 1
rely on Merrill Lynch's representations in agreeing to close the 2
deal at the agreed upon price. The trial court's reasoning was 3
flawed. It incorrectly used the standard for reliance on express 4
warranties applicable to contract claims. The dispositive 5
question is whether defendant would have insisted on a lower 6
price had it not believed it was purchasing plaintiff's promise 7
to compensate it for any injury caused by the falsity of the 8
warranted facts. See Metropolitan Coal, 155 F.2d at 784 9
(defining warranty as "a promise to indemnify promisee for any 10
loss if the fact warranted proves untrue"); CBS, 75 NY2d at 504. 11
In contrast to the reliance required to make out a claim for 12
fraud, the general rule is that a buyer may enforce an express 13
warranty even if it had reason to know that the warranted facts 14
were untrue. Rogath v. Siebenmann, 129 F.3d 261, 265 (2d Cir. 15
1997) (stating that buyer with knowledge of falsity of warranted 16
facts may purchase seller's warranty as insurance against future 17
claims); Vigortone AG Prods., Inc. v. PM AG Prods., Inc., 316 18
F.3d 641, 648 (7th Cir. 2002). This rule is subject to an 19
important condition. The plaintiff must show that it believed 20
that it was purchasing seller's promise regarding the truth of 21
the warranted facts. Rogath, 129 F.3d at 265. We have held that 22
where the seller has disclosed at the outset facts that would 23
constitute a breach of warranty, that is to say, the inaccuracy 24
of certain warranties, and the buyer closes with full knowledge 25
and acceptance of those inaccuracies, the buyer cannot later be 26

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28
said to believe he was purchasing the seller's promise respecting 1
the truth of the warranties. Id. Here, if the district court 2
finds that Merrill Lynch candidly disclosed that the September 3
and October financials were wrongly inflated and therefore 4
inaccurate, Allegheny cannot prevail on its claim that Merrill 5
Lynch breached § 3.12(c). 6
IV Summary Judgment Reversed 7
In April 2005, the district court granted summary judgment 8
to Merrill Lynch on its contract claim and rejected Allegheny's 9
defense that Merrill Lynch's breach of various warranties excused 10
Allegheny from further performance under the Purchase Agreement. 11
The court reasoned that plaintiff had substantially performed 12
inasmuch as it had no further performance pending, i.e., having 13
delivered GEM, there was no further action that Merrill Lynch was 14
required to take under the Purchase Agreement. Further, the 15
summary judgment order suggested that allegations of breach of 16
warranty were insufficient, categorically, to excuse the injured 17
party's performance under a contract. The court also found 18
Allegheny had obtained the primary intended benefit under the 19
contract through its two-year ownership of GEM. 20
Under New York law, a party's performance under a contract 21
is excused where the other party has substantially failed to 22
perform its side of the bargain or, synonymously, where that 23
party has committed a material breach. See Hadden v. Consol. 24
Edison Co. of N.Y., 34 NY2d 88, 96 (1974) (assessing substantial 25
performance on basis of several factors, such as the absolute and 26

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29
relative magnitude of default, its effect on the contract's 1
purpose, willfulness, and degree to which injured party has 2
benefitted under contract). The issue of whether a party has 3
substantially performed is usually a question of fact and should 4
be decided as a matter of law only where the inferences are 5
certain. Anderson Clayton & Co. v. Alanthus Corp., 457 N.Y.S.2d 6
578 (2d Dep't 1983). 7
The legal arguments relied on by the district court and the 8
inferences it drew were insufficient to hold that Merrill Lynch 9
substantially performed under the Purchase Agreement at the 10
summary judgment stage. We agree with appellants that there is 11
no reason under New York law to treat a breach of warranty any 12
differently than any other contractual breach. See CBS, 75 NY2d 13
at 503. It follows that if Merrill Lynch breached one or more 14
warranties and the cumulative effect of such breaches was 15
material, it did not substantially perform its side of the deal. 16
Further, while we do not dispute that Merrill Lynch's delivery 17
and Allegheny's two-year ownership of GEM represented advanced 18
performance of the contract in a chronological sense, the trial 19
court was required to address appellant's argument that GEM 20
turned out to be substantially different from what the parties 21
had bargained for, thereby "defeat[ing] the object of the parties 22
in making the contract," Frank Felix Assocs. v. Austin Drugs, 23
Inc., 111 F.3d 284, 289 (2d Cir. 1997). See Richard A. Lord, 24
Williston on Contracts § 63:3, at 438-39 (4th ed. 2002). Such a 25

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30
claim, if proved, would excuse defendant's non-performance under 1
the Purchase Agreement. 2
Appellees contend that the district court's eventual factual 3
findings amply support its prior summary judgment ruling. See 4
generally Kerman v. City of New York, 261 F.3d 229, 235 n.3 (2d 5
Cir. 2001) (considering entire record in reviewing summary 6
judgment). Although Allegheny might have argued that we should 7
stand in the shoes of the district court at the time of summary 8
judgment to assess the propriety of its disposition, see U.S. E. 9
Telecomms., Inc. v. U.S. W. Commc'n Servs., Inc., 38 F.3d 1289, 10
1301 (2d Cir. 1994) ("Our review is confined to an examination of 11
the materials before the trial court at the time the ruling was 12
made, and neither the evidence offered subsequently at trial nor 13
the verdict is relevant."), it waived this argument by relying on 14
later-developed portions of the record (including the district 15
court's findings) to support its challenge to summary judgment on 16
appeal. Kerman, supra, which was decided in 2001, did not 17
acknowledge U.S. E. Telecomms., supra, decided in 1994. 18
Thus, we have considered whether the district court's 19
finding that the January financials were mostly accurate and its 20
statement that "everyone wanted this deal to go through and 21
either understood or did not care about the changed financial 22
statements" are dispositive on the issue of materiality. Having 23
considered these findings, we conclude the district court's 24
flawed summary judgment cannot be affirmed on the basis of such 25
partial findings. We note that Allegheny has alleged breach of 26

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31
warranty on the basis of material omissions as well as 1
misrepresentations. Allegheny's attitude prior to signing and 2
its nonchalant response to information it possessed at that time 3
has no bearing on the materiality of information that was 4
withheld by Merrill Lynch. More generally, the district court 5
has not provided us with an adequate assessment of the pertinent 6
factors to determine whether the broken warranties amounted to a 7
material breach. See Hadden, 34 NY2d at 96. Accordingly, we 8
must reverse the district court's April 2005 grant of summary 9
judgment to Merrill Lynch. 10
V Allegheny's Jury Demand 11
Under § 11.09(b) of the Purchase Agreement, Allegheny 12
irrevocably waived any right to a jury trial in a proceeding 13
arising out of the Purchase Agreement. According to Allegheny 14
the waiver does not apply to its fraudulent inducement claim. 15
The district court agreed with Merrill Lynch that a jury waiver 16
applies to a claim for fraudulent inducement where it is not 17
alleged that the waiver provision itself was procured by fraud. 18
When asserted in federal court, the right to a jury trial is 19
governed by federal law. McGuire, 1 F.3d at 1313; see also Med. 20
Air Tech. Corp. v. Marwan Inv., Inc., 303 F.3d 11, 18 (1st Cir. 21
2002) (applying federal law to decide enforceability of jury 22
waiver). Although the right is fundamental and a presumption 23
exists against its waiver, a contractual waiver is enforceable if 24
it is made knowingly, intentionally, and voluntarily. Nat'l 25
Equip. Rental, Ltd. v. Hendrix, 565 F.2d 255, 258 (2d Cir. 1977). 26

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32
Whether a contractual waiver is effective against a claim that 1
the contract containing the waiver was induced by fraud is a 2
question of first impression in this Circuit, and federal 3
precedent on the topic is thin. We join the Tenth Circuit in 4
holding that unless a party alleges that its agreement to waive 5
its right to a jury trial was itself induced by fraud, the 6
party's contractual waiver is enforceable vis-à-vis an allegation 7
of fraudulent inducement relating to the contract as a whole. 8
See Telum, Inc. v. E.F. Hutton Credit Corp., 859 F.2d 835, 837-38 9
(10th Cir. 1988). 10
Telum drew an analogy to the arbitration context, in which 11
the Supreme Court has held that an agreement to arbitrate is 12
effective with respect to claims of fraudulent inducement that 13
relate to the contract generally, but not to the agreement to 14
arbitrate specifically. Id. at 837. Although we do not disagree 15
with appellant that the arbitration cases rely on a federal 16
statutory scheme favoring arbitrability that runs contrary to the 17
presumption against waiver applicable here, we think the analogy 18
persuasive as a matter of logic. 19
A promise to bring proceedings before a judge, not a jury, 20
is akin to an agreement to arbitrate in that both express the 21
parties' consent as to how to handle differences that may arise. 22
Indeed, arbitration represents a more dramatic departure from the 23
judicial forum than does a bench trial from a jury trial. Id. at 24
838. If one litigant alleges that an agreement's dispute 25
resolution provision itself was procured by fraud, the fairest 26

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33
course is to afford that litigant the protections he would have 1
enjoyed had he never been fraudulently induced to forsake them by 2
contract. If, on the contrary, the litigant does not challenge 3
the provision as being the product of fraud, we see no reason to 4
replace the agreed upon mode of dispute resolution with another. 5
Further, as we expressed in the arbitration context, we are 6
concerned that deciding this issue in favor of appellant makes it 7
too easy for a litigant to avoid its contractual promise to 8
submit a case to a judge by alleging fraud. See, e.g., El Hoss 9
Eng'g & Transp. Co. v. Am. Indep. Oil Co., 289 F.2d 346, 349 (2d 10
Cir. 1961) (discussing problems posed by fraud in the inducement 11
claims including sham litigations pursued to avoid arbitration). 12
CONCLUSION 13
For the foregoing reasons, we (1) order the dismissal of 14
Supply; (2) reverse the award of summary judgment to Merrill 15
Lynch on its breach of contract claim; (3) reverse the dismissal 16
of Allegheny's counterclaim for fraudulent inducement; (4) 17
reverse the dismissal of Allegheny's counterclaim for breach of 18
warranty as to §§ 3.12(c) and 3.16 of the Agreement; and (5) 19
affirm the denial of appellant's jury demand. The case is 20
remanded to the district court for further proceedings consistent 21
with this opinion. 22

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