United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued May 12, 2008 Decided June 27, 2008
No. 07-7137
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 08-7006
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 were Michael D. Rothberg and Lynn M. Deavers.
Catherine E. Stetson argued the cause for appellee. With
her on the brief were George H. Mernick III, Richard A. Getty,
Suart F. Delery, William B. Mallin, Edward J. Longosz II, and
Mark A. Johnston. John R. Kenrick entered an appearance.
Before: GINSBURG, BROWN and GRIFFITH, Circuit Judges.
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Opinion for the Court filed by Circuit Judge GINSBURG.
GINSBURG, Circuit Judge: Media General bought Park
Communications for $710 million in 1996 without knowing that
one of Park’s recently departed vice presidents, Richard
Prusator, had threatened to sue Park, seeking $6 million for
wrongful discharge. After settling with Prusator and incurring
substantial attorney’s fees, Media General sued several persons
associated with Park for securities fraud, alleging they had made
material misrepresentations and omissions concerning the threat
of litigation. The district court granted summary judgment to
the defendants. We affirm in part and reverse in part.
I. Background*
In 1996 Donald Tomlin and Gary Knapp approached Media
General and asked whether it would be interested in purchasing
their company, Park Communications. In July of that year, the
two companies executed a merger agreement in which Media
General agreed to pay $710 million for Park.
Because the transaction was subject to approval by the
Federal Communications Commission, the sellers would
continue to manage Park for a considerable time before the
closing could take place. The agreement therefore provided that
the purchase price could be adjusted to reflect certain events
occurring prior to the closing. Park also represented “[t]here is
no suit ... to the knowledge of the Company[] threatened against
or affecting the Company ... that ... is reasonably expected to
have a Company Material Adverse Effect” and promised this
representation would be “true ... as of the [closing date] as if
made at and as of [that] time.” Media General was given the
right to terminate the merger agreement if Park did not fulfill
*
Except as noted, the facts are undisputed.
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this promise. In addition, Marshall Morton, the Chief Financial
Officer of Media General, asserts that $10 million of the $710
million price Media General agreed to pay was in exchange for
Park’s promise of “straightforward behavior” until the closing
took place. That alleged understanding was not, however,
reduced to writing.
Also in July 1996, Park fired Prusator, one of its vice
presidents. Two months later, Prusator’s lawyer wrote to Park,
threatening to sue if he did not receive a $139,000 severance
payment. Prusator also informed Media General that his lawyer
was attempting to recover the severance payment, stating Media
General “should be aware of” this issue “in case the matter [is]
... not settled by the time of the closing.” Park then threatened
to sue Prusator for tortious interference with contract if he ever
contacted Media General again. Prusator sent no further
communications to Media General but he did increase the
pressure on Park. He sent Park a draft complaint alleging
wrongful termination, a RICO violation, and securities fraud.
He suggested damages might be as high as $6 million but
expressed his willingness to settle the matter for $3 million.
Park did not inform Media General of this threatened
lawsuit. Three representatives of Media General -- the
Comptroller, the Chief Financial Officer, and outside counsel --
say they inquired about Prusator’s claim during the months
between the execution of the merger agreement and the closing,
and were assured by both Wright Thomas, Park’s president, and
Stephen Burr, Park’s outside counsel, that Prusator sought only
$139,000. In December 1996, however, Park sent a letter to its
auditor describing the threatened lawsuit in detail and
characterizing it as a “material loss contingency.” The auditor,
who agreed with that assessment, prepared a draft audit in which
he noted in the margin that “legal counsel to [Park] has not been
able to form an opinion on the merits of [Prusator’s] claims.”
Although Media General was aware of the pending audit, Media
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General did not ask to see the draft audit or any correspondence
between Park and the auditor.
In January 1997 the parties attended pre-closing meetings
to address certain unresolved issues. Four representatives of
Media General testified that they inquired again at the meetings
about Prusator but were not told of his claim for $6 million.
During the closing negotiations, Park agreed to decrease the
purchase price by $147,000, comprising $139,000 for Prusator’s
claim for severance pay plus an allowance for fees and
expenses.
The day after the closing, Media General received from
Park a copy of the draft audit, from which it first learned of
Prusator’s $6 million claim. Leonard Baxt, Media General’s
outside counsel, called Burr, Park’s outside counsel, and
expressed “great disappointment” at not having been told about
this litigation prior to the closing. Shortly thereafter, Burr told
the auditor that Prusator’s chance of succeeding on his $6
million claim was “remote,” as a result of which the auditor
deleted from the draft audit the footnote regarding the Prusator
litigation. Two weeks after the closing, when Media General
filed Form 8-K with the Securities and Exchange Commission,
in which it was required to disclose any contingencies material
to Park’s financial condition, it did not mention the Prusator
litigation.
Prusator followed through on his threat to sue. After nine
of the ten counts in his complaint had survived a motion to
dismiss, Media General settled with him for more than $200,000
-- the $139,000 he had asked for initially plus his attorney’s
fees. Media General claims it incurred $241,541.51 in
attorney’s fees of its own.
In 1998 Media General sued Tomlin and Knapp, Park’s two
former shareholders, as well as Thomas, Burr, and Burr’s law
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firm, alleging both securities and common law fraud, based
upon their failure to disclose Prusator’s threatened claim for $6
million prior to the closing. The district court granted the
defendants’ motion for summary judgment. It held the Prusator
litigation was not “material” to the merger because Media
General did not characterize it as such in its SEC filing.
This court reversed, concluding a reasonable jury could find
the Prusator litigation was “material.” 387 F.3d 865, 870
(2004). We rejected the district court’s reliance upon Media
General’s SEC filing, noting that Media General filed that
document only after the merger had closed. Id. at 870-71. The
relevant time for determining whether a fact was material to the
merger was at the moment before the closing. Id. at 871.
We also rejected the defendants’ contention the lawsuit was
not material because Media General was bound by the merger
agreement and therefore could not have walked away from the
deal even if it had known about Prusator’s lawsuit. Under that
agreement, Media General could have withdrawn if the lawsuit
constituted a “Company Material Adverse Effect.” Id. at 871-
72. Even if the lawsuit was not such an “Effect,” Media General
could have sought greater concessions “had it known of
Prusator’s expanded claims at closing”; as it was, it received a
$147,000 reduction in the purchase price. Id. at 872.
On remand, the district court again held the defendants were
entitled to summary judgment on Media General’s claims of
fraud. 505 F. Supp. 2d 51 (2007). It regarded the testimony of
the Media General representatives as too vague to support the
inference that Park’s omissions were misleading, id. at 62, and
considered Media General’s reliance upon Park’s purported
misrepresentations unreasonable because Media General could
have asked Park for the correspondence between Park and its
auditors. Id. at 63-66.
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The district court also rejected Media General’s claim for
$10 million in damages in addition to the costs it incurred in the
Prusator litigation. Media General argued the purchase price of
$710 million included $10 million it had agreed to pay
specifically in exchange for Park’s assurance of straightforward
dealing; therefore, had it known at closing that Park had failed
to disclose the lawsuit, Media General would have demanded an
extra $10 million concession. The district court found this
theory too speculative to survive summary judgment. Id. at 61.
II. Analysis
Media General now appeals for the second time. As before,
we review the district court’s grant of summary judgment de
novo. Curtin v. United Airlines, Inc., 275 F.3d 88, 93 (D.C. Cir.
2001).
A. The claims of fraud
Media General contends the district court erred in entering
judgment for Park on its claims of securities fraud under SEC
Rule 10b-5 and common-law fraud under District of Columbia
law. Under Rule 10b-5, it is unlawful to make “any untrue
statement of a material fact or to omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading ...
in connection with the purchase or sale of any security.” 17
C.F.R. § 240.10b-5; see also 15 U.S.C. § 78j(b). To prevail in
an action brought under Rule 10b-5, the plaintiff must
demonstrate that (1) the misrepresentation or misleading
omission was made with an “intent to deceive, manipulate, or
defraud,” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193
(1976); (2) he reasonably relied upon it, see Kowal v. MCI
Commc’ns Corp., 16 F.3d 1271, 1276-77 (D.C. Cir. 1994); and
(3) he suffered an economic loss as a result, 15 U.S.C. § 78u-
4(b)(4). The elements of common law fraud are similar: The
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plaintiff must show that the defendant, with the intent to induce
reliance, knowingly misrepresented or omitted a material fact
upon which the plaintiff reasonably relied to his detriment. See,
e.g., Schiff v. Am. Ass’n of Retired Persons, 697 A.2d 1193,
1198 (D.C. 1997); One-O-One Enters. v. Caruso, 848 F.2d
1283, 1286 (D.C. Cir. 1988).
It is beyond cavil that a reasonable jury could find
representatives of Park made both misleading omissions and
untrue statements. Four representatives of Media General
testified that they inquired about the Prusator matter repeatedly,
both before and during the meetings leading up to the closing,
and that the Park representatives, in response, consistently
adverted only to Prusator’s $139,000 claim, never mentioning
his $6 million claim. Those were misleading omissions. See
Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th
Cir. 2002) (omission misleading if it “affirmatively create[s] an
impression of a state of affairs that differs ... from the one that
actually exists”). Further, Dickinson testified that a Media
General representative asked “specific questions” during the
closing meeting and was assured the lawsuit was for “no more
than $139,000,” which was an affirmative misrepresentation.
The district court, however, held Media General’s reliance
upon these alleged omissions and misrepresentations was
unreasonable because it did not ask to see Park’s letters to its
auditor, which described the threatened litigation fully. We do
not agree.
First, several representatives of Media General testified that
they asked Burr and Thomas about the Prusator litigation, and
were told only about the $139,000 and not about the $6 million
claim. If so, then Media General was not obliged to ask for
Park’s letters to its auditor in order to determine whether the
Park people were lying. See Astor Chauffeured Limousine Co.
v. Runnfeldt Inv. Corp., 910 F.2d 1540, 1546 (7th Cir. 1990)
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(“Securities laws are designed ... to compel the person who
knows firm-specific information to reveal it .... To say that a
deceived buyer may not recover unless it has tried to verify the
seller’s statements would prevent the achievement of this
objective”).
Second, Park was contractually obliged to disclose any
material litigation threatened prior to the closing -- and this
court has already concluded a reasonable jury could find the
Prusator matter was material. 387 F.3d at 871-72. Absent any
evidence to the contrary (of which more in the next paragraph)
it was reasonable for Media General to assume Park was not
breaching an express term of their contract.
Third, Park acted affirmatively to conceal the expanded
Prusator claims from Media General. When Prusator informed
Media General he would sue for $139,000, Park threatened to
sue Prusator if he sent any more correspondence to Media
General. Media General could reasonably rely upon Park not
only to honor its contractual duty to disclose any threatened
lawsuit but, even more certainly, not to hinder Media General
from learning about a lawsuit. Banca Cremi, S.A. v. Alex.
Brown & Sons, Inc., 132 F.3d 1017, 1028 (4th Cir. 1997) (noting
that reliance may be reasonable when the defendant
“conceal[ed] ... the fraud”).
The district court also concluded “[t]here is no showing that
defendants knew” Media General was unaware of the expanded
claims, 505 F. Supp. 2d at 64, but the record is to the contrary.
When the defendants were made aware Prusator had alerted
Media General to his claim for $139,000, they threatened to sue
him if he sent Media General any further correspondence; Park
obviously tried to ensure that Media General remained unaware
of any further developments in the Prusator litigation. Park got
some confirmation at the negotiations prior to the closing that its
plan had worked; Media General demanded a reduction in price
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to offset only the $139,000 claim. Park’s representatives could
readily infer that Media General was unaware of any greater
claim. Their actual state of mind is a question for the jury.
In sum, a reasonable jury could find Park made misleading
omissions and misrepresentations upon which Media General
reasonably relied and which, as we have previously explained,
prevented Media General from seeking “substantially greater
concessions” at the closing negotiations. 387 F.3d at 872.
Media General is, therefore, entitled to a trial on both its 10b-5
and its common law claims.
B. Damages
Having concluded a reasonable jury could find the
defendants committed fraud, we now consider what damages
theories Media General may raise before the jury. Media
General asserts it incurred damages in two ways. First, it
contends that if it had known about the Prusator litigation at the
closing negotiations, then it could have obtained complete
indemnification for the cost of litigating those claims; therefore,
it is entitled to recover the settlement paid to Prusator and the
attorney’s fees it incurred litigating the case. The defendants do
not contest that this is a plausible theory of damages.
Media General also argues it is entitled $10 million in
damages above and beyond the cost of litigating Prusator’s
lawsuit, which argument the district court rejected as
speculative. Media General asserts that in negotiating the
merger agreement, it agreed to raise its purchase price from
$700 million to $710 million in return for Park’s oral agreement
to “act in good faith.” Media General does not claim Park is
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liable for breaching this purported oral agreement.* Rather,
Media General’s theory is that if Park had apprised it of
Prusator’s $6 million claim before the closing, then it would
have threatened to withdraw from the deal unless Park not only
indemnified it for the costs of the Prusator litigation but also
sweetened the pot with a $10 million price reduction,
corresponding to their alleged $10 million oral agreement.
Media General contends that because Park’s market value had
declined by $100 million between the signing of the merger
agreement and the closing, the sellers would have agreed readily
to a $10 million price reduction in order to preserve a $90
million premium over the market value.
Media General’s theory is implausible. If it had threatened
to withdraw from the merger agreement because of the Prusator
litigation, then Park could simply have offered to indemnify
Media General for any costs associated with that lawsuit.
Indeed, a Media General official conceded that if Park had
provided full indemnification for the expanded Prusator claims,
those claims would not otherwise have altered the transaction.
Media General could no longer have walked away from the deal
because the litigation would no longer have been materially
adverse to Media General’s interests. There is no reason to
believe Park would have reduced the purchase price based upon
a $10 million oral agreement the very existence of which the
parties had denied in their written agreement.
III. Conclusion
*
With good reason: The merger agreement not only makes no
mention of the oral agreement for $10 million; it provides there “are
no other representations or warranties ... between the parties ...
except as expressly set forth herein.”
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The judgment of the district court is affirmed with respect
to the claim for $10 million in damages. The judgment is
reversed with respect to the fraud claims, which are remanded
for further proceedings consistent with this opinion.
So ordered.