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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 13, 2004 Decided October 26, 2004
No. 03-7083
MEDIA GENERAL, INC., A VIRGINIA CORPORATION,
APPELLANT
v.
DONALD R. TOMLIN, JR., INDIVIDUALLY AND AS TRUSTEE
OF THE TOMLIN FAMILY TRUST, ET AL.,
APPELLEES
Consolidated with
No. 03-7123
Appeals from the United States District Court
for the District of Columbia
(No. 98cv01690)
David E. Mills argued the cause for appellant. With him
on the briefs was Michael D. Rothberg.
Bills of costs must be filed within 14 days after entry of judgment.
The court looks with disfavor upon motions to file bills of costs out
of time.
2
George H. Mernick, III argued the cause for appellees.
With him on the brief were Albert W. Turnbull, John Roun-
saville, Jr., R. Kevin Bailey, Richard A. Getty, William B.
Mallin, and Emily A. Nack.
Before: EDWARDS, HENDERSON, and GARLAND, Circuit
Judges.
Opinion for the Court filed by Circuit Judge EDWARDS.
EDWARDS, Circuit Judge: This case emanates from a stock
purchase transaction pursuant to which appellant Media Gen-
eral, Inc. (‘‘Media General’’) acquired Park Communications,
Inc. (‘‘Park’’) from Donald R. Tomlin, Jr. (‘‘Tomlin’’) and Gary
B. Knapp (‘‘Knapp’’), Park’s sole shareholders. After the
deal had been closed, Media General filed an action in District
Court against appellees Tomlin, Knapp, Wright M. Thomas
(‘‘Thomas’’), Stephen I. Burr (‘‘Burr’’), and the law firm
Eckert Seamans Cherin & Mellott, LLC (‘‘Eckert Seamans’’),
alleging securities fraud under § 10(b) of the Securities Ex-
change Act of 1934, 15 U.S.C. § 78j(b) (2000), and Securities
and Exchange Commission (‘‘SEC’’) Rule 10b-5, 17 C.F.R.
§ 240.10b-5 (2004), common law fraud, and civil conspiracy,
and seeking damages in connection with its purchase of Park.
Media General’s principal complaint is that, during their
negotiations, appellees deliberately deceived Media General
by concealing and misrepresenting a threat by a former Park
employee, Rick A. Prusator (‘‘Prusator’’), to bring a multimil-
lion dollar law suit against Park. Media General contends
that, in concealing the full extent of Prusator’s claims, Park
unlawfully withheld information that was material at the time
of negotiations between Park and Media General.
The District Court granted summary judgment to appel-
lees. The trial court noted that, within 15 days of acquiring
Park, Media General was legally required to file an 8-K Form
with the SEC disclosing any material contingencies such as
lawsuits that might be material to Park’s financial condition.
Although Media General became aware of the full extent of
3
Prusator’s claims within two weeks of acquiring Park, the
Prusator claims were not listed as a material loss contingency
in the 8-K filing. In the District Court’s view, the 8-K filing
proved beyond any doubt that the Prusator claims were not
material to Media General. The District Court thus held
that, ‘‘[h]aving conceded in this case that it deemed the
Prusator litigation not to be material, [Media General] cannot
now oppose summary judgment against it by claiming that
[appellees’] alleged failure to disclose the full extent of Prusa-
tor’s claims was material.’’ Media General, Inc. v. Tomlin,
No. 98-1690, Mem. Op. at 7 (D.D.C. June 18, 2003). Because
materiality is an essential element of each of Media General’s
claims, the District Court concluded that appellees were
entitled to summary judgment.
Media General now appeals, claiming that the District
Court erred in concluding that Media General’s 8-K filing
constituted a concession that Prusator’s threatened claims
were not material to its purchase of Park. On the record at
hand, we conclude that Media General has created a triable
question of fact as to whether the relevant circumstances
changed between the time of the closing and the time of the
SEC filing. A reasonable jury could find that the Prusator
matter was material at the time of the negotiations between
Park and Media General even though it was later viewed as
immaterial at the time of the 8-K filing. The District Court
thus erred in granting summary judgment to appellees. Ac-
cordingly, we reverse and remand the case to the District
Court for further proceedings.
I. BACKGROUND
On July 19, 1996, appellant Media General, a publicly
owned communications company, entered into a merger
agreement (the ‘‘Merger Agreement’’) with Park Acquisitions,
Inc. (‘‘PAI’’), a holding company for Park’s stock. The Merg-
er Agreement specified that Media General would gain con-
trol of all Park stock in exchange for cash payments to
Tomlin and Knapp, Park’s sole shareholders. The total con-
sideration for the merger was to be $710 million, exclusive of
4
certain adjustments and debt to be assumed by Media Gener-
al. At closing, Thomas, president of Park, was to receive a
substantial severance package. Burr and his law firm, Ec-
kert Seamans, represented Park, PAI, Tomlin, and Knapp
during the merger negotiations. Media General, Inc. v.
Tomlin, No. Civ. A. 98-1690, 2001 WL 1230880, at * 1 (D.D.C.
Aug. 9, 2001).
Prior to the Merger Agreement, Park had terminated
Prusator, then a vice president of the company. In Septem-
ber 1996, Prusator asserted that Park owed him $139,000 in
severance pay. Letter from Eckert Seamans to Coopers of
12/4/96, Joint Appendix (‘‘J.A.’’) 316-17. Park refused to pay
Prusator’s claim. On September 20, 1996, Prusator sent
Media General a letter stating that he expected Media Gener-
al to assume various benefits that Park had been providing as
part of his severance package. The letter also informed
Media General about the existence of an unresolved claim
relating to a severance payment. On November 9, 1996,
Prusator’s attorney sent a letter to Park’s counsel, Eckert
Seamans, with new and dramatically increased demands from
Prusator. The November 9 letter threatened a RICO lawsuit
and other causes of action against Park, contended that
Prusator would show compensatory damages in the range of
$3 million to $6 million, enclosed a draft complaint, and
requested $3 million to settle Prusator’s claims. Media Gen-
eral, 2001 WL 1230880, at * 1. Media General was not copied
on the November 9, 1996 letter.
On December 4, 1996, Eckert Seamans prepared an audit
response letter (‘‘Audit Letter’’) for Park’s auditors, Coopers
& Lybrand, LLC (‘‘Coopers’’), in which they reported Prusa-
tor’s expanded claims as a ‘‘material loss contingenc[y].’’ See
Eckert Seamans Letter, J.A. 316-17; Deposition of Stephen I.
Burr, 7/2/02, J.A. 757-58. The Audit Letter indicates that
Eckert Seamans was ‘‘unable to predict the outcome or to
estimate the amount or range of potential loss with respect to
[the Prusator] matter.’’ Eckert Seamans Letter, J.A. 317.
Following receipt of the Audit Letter, Coopers concluded that
the Prusator claims ‘‘met [Coopers’] materiality thresholds
for disclosure’’ and included a footnote referencing Prusator
5
in Park’s draft audited financial statement for the period
ending September 30, 1996. Deposition of Phillip N. Grego-
ry, 11/20/02, J.A. 872-78. Media General did not see the
Audit Letter or the draft audited financial statement until
January 1997, after the merger deal had been closed.
Media General alleges that, in the months after it received
Prusator’s September 20, 1996 letter, it made several inqui-
ries of Park regarding the details of Prusator’s claims and
was never informed by appellees of Prusator’s new claims.
See Deposition of Stephen Y. Dickinson, 5/9/02, J.A. 579-87;
Deposition of Marshall N. Morton, 8/27/02, J.A. 798. Accord-
ing to Media General, on January 6, 1997, the day before the
scheduled closing of the merger, Thomas and Burr stated
that the maximum liability that could result from Prusator’s
threatened lawsuit was $139,000. At closing, the parties
agreed to amend the Merger Agreement to provide that
Media General would assume responsibility for the resolution
of Prusator’s claims in exchange for a $147,000 reduction in
the purchase price, which constituted the amount of the
disputed severance payment plus an allowance for fees and
expenses.
On January 8, 1997, the day after closing, Media General
received a facsimile copy of the draft audited financial state-
ment that had been prepared by Coopers. The statement
included information on Prusator’s expanded claims and
threatened lawsuit. Media General, 2001 WL 1230880, at *2-
3. Shortly thereafter, Media General’s outside counsel alleg-
edly called Burr at Eckert Seamans to express ‘‘anger and
disappointment’’ at not having been informed of Prusator’s
expanded claims which Park’s attorneys deemed sufficiently
important to include in their December 4, 1996 Audit Letter
and Park’s auditors deemed important enough to disclose in
the draft financial statement. Deposition of Leonard Baxt,
6/4/02, J.A. 677. Burr then called an auditor at Coopers to
inquire about the reference to the Prusator claims in the
draft financial statement. Burr was told that Coopers would
likely consider removing the footnote referencing Prusator
only if Eckert Seamans offered a different evaluation of
Prusator’s likelihood of success on his additional claims, i.e.,
6
an evaluation different from the one that Eckert Seamans had
given in its December 4, 1996 Audit Letter. See Burr
Deposition, J.A. 764-67. On January 14, 1997, Burr sent a
letter to Coopers stating the view that Prusator’s likelihood of
success on his additional claims was ‘‘remote.’’ Letter from
Stephen I. Burr to Phillip N. Gregory of 1/14/97, J.A. 370.
Coopers then agreed that the Prusator matter could be
deleted from the footnotes in Park’s draft financial statement.
Media General was informed of this change in the draft
financial statement.
On January 21, 1997, in accordance with SEC regulations,
Media General filed an 8-K form with the SEC. In its 8-K
filing, Media General was required to disclose any contingen-
cies that would be material to Park’s financial condition. See
17 C.F.R. §§ 240.13a-11; 210.10-01(a)(5) (2004). In light of
the January 14, 1997 ‘‘remoteness’’ letter from Eckert Sea-
mans and Coopers’ decision to delete the Prusator matter
from the draft financial statement, Media General concluded
that it was unnecessary to include Prusator’s threatened
litigation in its 8-K filing. See Morton Deposition, 8/27/02,
J.A. 813-14. The Coopers auditor agreed that the changed
assessment of Prusator’s likelihood of success on his addition-
al claims relieved Media General of any requirement to report
the Prusator matter in its 8-K filing. See Gregory Deposi-
tion, 11/20/02, J.A. 885-86.
On February 7, 1997, Media General offered to settle the
Prusator matter for $139,000. Prusator rejected the offer
and filed an action in the Eastern District of Kentucky
against Park, PAI, Thomas, Knapp, Tomlin, and Media Gen-
eral. After nine of the 10 counts in Prusator’s complaint
withstood a motion to dismiss, Media General and Prusator
settled for $205,000. Media General, 2001 WL 1230880, at
*3.
Media General filed the present action in the District Court
for the District of Columbia against Tomlin, Knapp, Thomas,
Burr, and Eckert Seamans, alleging that defendants had
violated SEC Rule 10b-5, committed common law fraud, and
engaged in a civil conspiracy. Defendants moved to dismiss
7
for failure to state a claim, but this motion was denied in
August 2001. Id. at *1. Following extensive discovery,
defendants moved for summary judgment. In June 2003, the
District Court granted the motion. The District Court held
that Media General had conceded that the allegedly concealed
information regarding Prusator’s claims was immaterial,
which meant Media General could not satisfy the elements of
its Rule 10b-5 or common law fraud claims. By extension,
the District Court ruled that Media General could not succeed
on its conspiracy claim, which requires the existence of an
agreement to participate in an unlawful act. Media General,
No. 98-1690, Mem. Op. at 4-9 (D.D.C. June 18, 2003). The
District Court also awarded defendants costs. Media Gener-
al, Inc. v. Tomlin, No. 98-1690, Ord. (D.D.C. Aug. 5, 2003).
Media General appeals both rulings.
II. ANALYSIS
A. Standard of Review
This court reviews the District Court’s grant of summary
judgment de novo, viewing the evidence in the light most
favorable to the non-moving party. Cruz v. American Air-
lines, Inc., 356 F.3d 320, 328 (D.C. Cir. 2004). The District
Court’s judgment will be affirmed only if appellees have
demonstrated that there is no genuine issue of material fact
as to whether they are entitled to judgment. See id. More-
over, if material facts are susceptible to divergent inferences,
we must reverse the District Court’s grant of summary
judgment. See Tao v. Freeh, 27 F.3d 635, 638 (D.C. Cir.
1994). Whether alleged misrepresentations or omissions are
material under the securities laws is a mixed question of law
and fact that is particularly well suited for jury determina-
tion. See, e.g., Mendell v. Greenberg, 927 F.2d 667, 673 (2d
Cir. 1990), modified on other grounds, 938 F.2d 1528 (2d Cir.
1991). Materiality should be resolved by summary judgment
only if ‘‘the alleged misrepresentations or omissions are so
clearly unimportant to an investment decision that reasonable
minds cannot differTTTT’’ Berg v. First Am. Bankshares,
Inc., 796 F.2d 489, 495 (D.C. Cir. 1986).
8
B. The Materiality of the Prusator Claims
Materiality is an essential element of Media General’s fraud
claims under both Rule 10b-5, see Kowal v. MCI Communica-
tions Corp., 16 F.3d 1271, 1276 (D.C. Cir. 1994), and District
of Columbia tort law, see Railan v. Katyal, 766 A.2d 998, 1009
(D.C. 2001). Because a civil conspiracy requires an agree-
ment to participate in an unlawful act, materiality is also an
essential element of Media General’s civil conspiracy claim.
See Weishapl v. Sowers, 771 A.2d 1014, 1023 (D.C. 2001).
In Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988), the
Supreme Court articulated the general test for determining
whether a fact is material under the federal securities laws:
‘‘to fulfill the materiality requirement ‘there must be a sub-
stantial likelihood that the disclosure of the omitted fact
would have been viewed by the reasonable investor as having
significantly altered the ‘‘total mix’’ of information made
available’ ’’ (quoting TSC Indus., Inc. v. Northway, Inc., 426
U.S. 438, 449 (1976)). Under this test, the materiality of a
misrepresentation or omission must be assessed as of the
time of the contested transaction. Thus, in this case, if
Prusator’s claims were a material contingency at the time of
the Media General/Park merger closing, it is irrelevant that
Media General and Prusator subsequently settled the claims
for an amount well under the multimillion dollar sum that
Prusator initially sought. See, e.g., Pommer v. Medtest Corp.,
961 F.2d 620, 623 (7th Cir. 1992) (noting that the ‘‘securities
laws approach matters from an ex ante perspective’’). Like
the parties, we assume that the same materiality standard
under the federal securities laws governs Media General’s
common law claims.
By granting their motion for summary judgment, the Dis-
trict Court concluded that no reasonable jury could find that
appellees’ alleged nondisclosures to Media General were ma-
terial. We disagree with the District Court’s conclusion.
A reasonable jury could decide that, had Media General
known about the expanded Prusator claims at the time of
closing, the terms of the merger would have been different.
Indeed, at closing, the parties agreed that Media General
9
would assume responsibility for the Prusator lawsuit in ex-
change for a reduction of $147,000 in the purchase price
based on Prusator’s severance claim. The potential materiali-
ty of Prusator’s expanded claims is further supported by the
testimony of Park’s counsel Burr. Burr, who knew about the
Prusator litigation before the merger closing, stated that he
would have wanted to know about Prusator’s expanded claims
if he had been in Media General’s position. Burr Deposition,
J.A. 740-42. This testimony is not dispositive, but it certainly
suggests that reasonable investors could have concluded that
the expanded Prusator claims were material to Media Gener-
al’s acquisition of Park. See, e.g., SEC v. Mayhew, 121 F.3d
44, 52 (2d Cir. 1997) (‘‘[A] major factor in determining wheth-
er information was material is the importance attached to it
by those who knew about it.’’).
In concluding that the threatened Prusator lawsuit was
immaterial as a matter of law, the District Court relied on the
fact that Media General filed an 8-K statement within two
weeks of the merger closing and failed to list the Prusator
matter as a material contingency even though Media General
knew the full extent of Prusator’s claims at the time of its 8-K
filing. The District Court also noted that Media General’s
Chief Financial Officer (‘‘CFO’’) Marshall N. Morton (‘‘Mor-
ton’’) testified that he would not have signed the 8-K form as
filed had he believed the Prusator litigation was material.
From these facts, the District Court determined that defen-
dants were entitled to summary judgment because the 8-K
filing constituted a concession by Media General that Prusa-
tor’s claims were not material to its purchase of Park. See
Media General, No. 98-1690, Mem. Op. at 6-8 (D.D.C. June
18, 2003). This line of reasoning cannot withstand scrutiny
under the applicable law governing materiality and summary
judgments.
On December 4, 1996, approximately one month before the
deal closed, Eckert Seamans sent Coopers the Audit Letter in
which Prusator’s expanded claims were reported as a materi-
al loss contingency. However, after closing, but before Media
General filed its 8-K statement, Burr wrote a letter to Phillip
N. Gregory (‘‘Gregory’’), the auditor at Coopers, in which he
10
concluded that the new claims were in fact remote. Media
General argues that it relied on Burr’s January 14 letter in
deciding that the Prusator matter was not material when it
filed the 8-K statement. Appellees respond that, in the
December 4 letter, Burr simply included all claims of $100,000
or more against Park, regardless of their likelihood of suc-
cess. See Letter from Michael E. Reed to Stephen I. Burr of
10/31/96, J.A. 242-43; Burr Deposition, J.A. 759-60. Appel-
lees also argue that Burr consistently held the view that
Prusator’s expanded claims were remote, and that he did not
conduct any additional investigation before writing the Janu-
ary 14 letter.
This dispute over the import of Burr’s letter is precisely
the kind of fact-specific question that should be resolved by a
jury. Ample evidence in the record suggests that a reason-
able jury could find that Burr changed his opinion about the
remoteness of the Prusator litigation, and that this meant,
from Media General’s perspective, that the potential litigation
was material at the time of closing but immaterial by the time
it filed its 8-K statement. Several facts support this view.
First, the January 14 letter Burr sent Gregory is subject to
an interpretation suggesting that Burr did additional research
post-closing, which altered his view of the Prusator matter.
In that letter, Burr wrote:
You asked me for an evaluation of the merits of the
claims made by Rick Prusator referred to in our
audit response letter of December 4, 1996. I have
reviewed the claims made by Prusator and discussed
the underlying factual circumstances with Tom
Thomas, who was President of Park Communica-
tions at the relevant time. Based upon that review
and those discussions with Mr. Thomas, I have come
to the conclusion that [Prusator’s likelihood of suc-
cess on his expanded claims is] remote.
Burr Letter, J.A. 370 (emphasis added). Second, Gregory
testified that he understood the January 14 letter to state
that the Prusator claims were remote, whereas the December
4 letter did not. Gregory Deposition, J.A. 884-87. Finally,
11
Media General’s CFO Morton testified that it was on the
basis of the January 14 letter, which, in his view, represented
a considered change in Burr’s opinion, that Morton concluded
that the potential Prusator lawsuit would not have a material
adverse effect on the business, operations, or financial condi-
tion of Park. Morton Deposition, J.A. 813-14. In short, the
record in this case makes it clear that there is a triable issue
of fact as to whether relevant circumstances changed between
the closing of the merger and Media General’s 8-K filing.
Therefore, summary judgment was inappropriate.
In reaching this conclusion, we do not embrace Media
General’s sweeping contention that post-transaction evidence
can never be considered as relevant in analyzing whether an
alleged misrepresentation or omission was material at the
time of the transaction. This argument goes much too far in
what it suggests. See, e.g., RMED Int’l, Inc. v. Sloan’s
Supermarkets, Inc., No. 94Civ.5587, 2002 WL 31780188, at *2
(S.D.N.Y. Dec. 11, 2002) (explaining that ‘‘simply stating that
materiality and scienter are determined based on the facts at
the time of the alleged misstatement does not mean that later
occurring evidence is irrelevant,’’ and denying motion to
exclude evidence relating to events occurring after the period
of the alleged Rule 10b-5 violation).
The District Court’s error in this case was not its consider-
ation of post-closing evidence, but, rather, its determination
that the 8-K filing demonstrated beyond any doubt that
Media General had conceded that the Prusator claims were
not material to its purchase of Park. Because of the changed
circumstances between the time of the merger closing and the
time when Media General filed its 8-K statement, the material
facts are susceptible to divergent inferences. Therefore, the
District Court had no basis upon which to grant summary
judgment for appellees.
Finally, we turn briefly to appellees’ contention that the
Merger Agreement prevents Media General from demon-
strating that the Prusator litigation was material at the time
of the merger closing. In advancing this argument, appellees
rely on § 8.3 of the July 1996 Merger Agreement, which
12
indicates that Media General could not refuse to close under
the terms of that agreement unless an event occurred that
had a ‘‘Company Material Adverse Effect’’ on Park. Merger
Agreement, J.A. 138-39. Section 4.1 defines a Company
Material Adverse Effect as a ‘‘material adverse effect on the
business, operations or financial condition of [Park] taken as a
whole.’’ Id. at J.A. 118. Because Media General ultimately
concluded that the Prusator litigation did not have a material
adverse effect on Park’s business, operations, or financial
condition, appellees contend that Media General would have
been unable to walk away from the transaction or negotiate
substantially different terms before closing based on the
existence of Prusator’s claims. There are at least two prob-
lems with this argument.
First, Media General claims that its determination that the
Prusator litigation did not have a material adverse effect on
Park’s business, operations, or financial condition was made
only after Park’s counsel and auditors changed their views on
the ‘‘remoteness’’ of Prusator’s claims. Appellees suggest
otherwise. This is a matter for a trier of facts.
Second, implicit in appellees’ argument is the suggestion
that a contingency cannot be material with respect to closing
negotiations if it does not rise to the level of a Company
Material Adverse Effect as defined by the Merger Agree-
ment. The parties’ agreement does not say this and, at least
intuitively, the proposition seems unsound. Indeed, at clos-
ing, the parties here negotiated hard over the Prusator
matter and agreed to amend the Merger Agreement to
provide that Media General would assume responsibility for
the resolution of Prusator’s severance claims in exchange for
a $147,000 reduction in the purchase price. Media General
argues quite reasonably that it would have sought substantial-
ly greater concessions had it known of Prusator’s expanded
claims at closing.
In short, the cited provisions in the parties’ Merger Agree-
ment are not dispositive of the materiality question before the
court. In a trial on the merits, appellees are free to raise the
Merger Agreement and suggest to the trier of fact favorable
13
inferences that ought to be drawn from the agreement. But
these are not matters that can be resolved on summary
judgment.
III. CONCLUSION
The District Court’s grant of summary judgment and
award of costs to appellees are hereby reversed, and the case
is remanded for further proceedings consistent with this
opinion.
So ordered.