O'Connor v. Cory
| Decision Date | 03 January 2019 |
| Docket Number | CIVIL ACTION NO. 3:16-CV-1731-B |
| Citation | 382 F.Supp.3d 534 |
| Parties | Tammy O'CONNOR and Michael Stewart, Plaintiffs, v. Jason CORY, Thomas Farb, and Greg Furst, Defendants. |
| Court | U.S. District Court — Northern District of Texas |
Andrew Baxter Ryan, Mitchell Ramon Garrett, Ryan Law Partners LLP, Dallas, TX, for Defendants.
Bryan Paul Stevens, Jennifer R. Poe, Hallett & Perrin PC, Chase J. Potter, Clark Hill Strasburger, Dallas, TX, Sarah Nichols Wariner, Clark Hill Strasburger, Scott Shanes, Strasburger & Price LLP, Frisco, TX, for Plaintiffs.
Plaintiffs sold their company to the Defendants' company. A purchasing agreement memorialized the transaction. Plaintiffs bring claims for securities fraud and common-law fraud against Defendants based on alleged misrepresentations in this Agreement. Defendants now move for summary judgment on a number of grounds. The Court GRANTS Defendants' motions because (1) Plaintiffs have failed to establish their alleged loss was caused by Defendants' conduct and (2) Plaintiffs failed to plead an equitable-fraud claim. Plaintiffs' claims are therefore DISMISSED .
This dispute stems from a written purchase agreement (hereinafter the "Agreement") between Plaintiffs Tammy O'Connor and Michael Stewart, and Atherio, Inc.2 (Atherio). Under this Agreement, Plaintiffs sold their interest in their technology-consulting company, Red River Solutions, to Atherio. See Doc. 118-2, Pls.' App., 7–70 (the Agreement).
In the summer of 2012, Plaintiffs began marketing their company for sale through an investment banker and a transactional lawyer. Doc. 124, Defs.' Resp., 5. Shortly thereafter, Plaintiffs began negotiating the sale of the company with representatives from Atherio. Over the course of eleven months, the two sides negotiated and finalized the Agreement whereby Atherio would purchase Plaintiffs' interest in Red River Solutions in exchange for $3.15 million, stock in Atherio, and other compensation. See Doc. 95, Def. Cory's Resp. to Pls.'
Mot. for Summ. J., 5. The deal closed sometime between June 25 and June 27 of 2013.3
Plaintiffs now allege fraud claims against Defendants Jason Cory, Thomas Farb, and Greg Furst in relation to this Agreement. During the negotiation and closing of the transaction, Defendant Cory was Atherio's Chief Executive Officer. Defendants Farb and Furst also held executive positions at Atherio.
Plaintiffs base their fraud claims on alleged misrepresentations in the Agreement regarding the resignation of Thomas Farb as Atherio's Chief Financial Officer. Doc. 156, Pls.' Resp. to Defs.' Mot. Summ. J., 26–39. Sometime in the summer or fall of 2012, Plaintiffs claim they were told that Farb would be Atherio's CFO. See Doc. 124-4, Defs.' App'x, 21 (Deposition of Tammy O'Connor). Farb signed an employment agreement with Atherio on or around December 28, 2012. Doc. 156, Pls.' Resp., 9; Doc. 156, Pls.' App'x, 122 (unsigned employment agreement). This employment agreement contains a number of provisions relevant to Plaintiffs' fraud claims. To start, the employment agreement specified Farb would be paid a base salary of at least $250,000 per annum, as well as a guaranteed annual bonus of not less than $200,000. Doc. 156, Pls.' App'x, 123. The employment agreement also provides that upon Farb's voluntary resignation from Atherio for "Good Reason," Farb would be entitled to a number of severance benefits, including a "lump sum payment equal to two times Executive's base salary ... payable in full within thirty (30) days of such Involuntary Termination," and guaranteed bonus payments. Id. at 126–29; Doc. 156, Pls.' Resp., 9–10 (Plaintiffs calculate the total severance pay owed Farb at $1,020,500). However, Farb was entitled to these severance benefits only "[i]n the event of his Involuntary Termination." Doc. 156, Pls.' App'x, 128. Under the employment agreement, "Involuntary Termination" included a situation where Farb "voluntarily resigns from the Company for any of the following reasons (‘Good Reason’)[.]" Id. One of the reasons was:
The deterioration of Executive's relationship with the Company's Board of Directors, Chairman, President and/or Chief Operating Officer ..., which determination shall be made by Executive in his sole discretion, so as to make performance of Executive's responsibilities impossible or impracticable, which is not rectified to Executive's reasonable satisfaction within thirty (30) day's written notice thereof to the Company from Executive.
Id. (¶ VIII.A.2.d).
In the months leading up to the close of the Agreement, Farb's relationship with Cory and Atherio deteriorated. This seems to be due to the fact that Farb was not being paid. Doc. 156, Pls.' App'x, 715 (Deposition of Farb). On June 5, 2013, Farb sent written notice to Cory stating that he was invoking the "Involuntary Termination" Section (VIII.A.2.d) in his employment agreement. Doc. 140, Farb & Furst's App'x, 499–503. Plaintiffs assert that this written notice triggered the "Good Reasons" portion of the employment agreement that entitled Farb to over $1 million in severance benefits. Doc. 156, Pls.' Resp., 14–15. Defendants argue this merely triggered a reconciliation period whereby Farb and Atherio had thirty days (until July 5, 2013) to cure the employment relationship. Doc. 140, Farb & Furst's Mot. Summ. J., 8. After Farb sent this notice, he and Cory continued to negotiate regarding his employment status and compensation structure going forward. Doc. 156, Pls.' Resp., 15 . Also during this time, Defendants were sending Plaintiffs disclosures listing the employment status of Atherio's executives, including Farb. Doc. 156, Pls.' App'x, 387.
The Agreement has an effective date of June 25, 2013, but the transaction was not fully funded until June 27, 2013. Doc. 140, Farb & Furst's Mot. Summ. J., 8 (citing Farb & Furst's App'x, 2). The delay appears to be caused by the status of Farb's employment and Atherio's lenders. Atherio needed two lenders to complete the transaction: SunTrust (the senior lender) and Prudent Capital (the mezzanine lender). Doc. 140, Farb & Furst App'x, 531. However, before the lenders would agree to finance the transaction, the executives at Atherio, including Farb, had to revise their employment agreements and waive rights under their old agreements. Id. Leading up to the close, Farb and Cory were vigorously disputing what a new agreement for Farb would look like, how much equity he would get under such an agreement, and what Farb's new title at Atherio would be. Doc. 156, Pls.' Resp., 19–23 (collecting correspondence between Farb and Cory). But it appeared that both realized Farb needed to be at Atherio for the Agreement to close. Doc. 156, Pls.' App'x, 391–92.
On June 26, 2013, a day after the Agreement was signed, Farb signed a new employment agreement. Doc. 140, Farb & Furst's App'x, 504–509. In that agreement, Farb waived any rights under his original employment agreement with Atherio, including any deferred compensation or severance. Id. Farb would continue working at Atherio through September 2013, but he would no longer be the CFO. Id. ().
On June 27, 2013, Farb entered into another agreement, this time with Atherio Investments, LLC and Atherio Investments Management, LLC. Id. at 510–19. Under this second agreement, to which Atherio, Inc. was not a party, the parties agreed to use "reasonable efforts" to effectuate an assumption agreement with Atherio, Inc. whereby the two Atherio LLCs would assume a portion of Farb's deferred compensation previously owed under his original employment agreement. Id. Plaintiffs argue that none of this information was disclosed to them before or during the close of the transaction. Doc. 156, Pls.' Resp., 22. Further, Plaintiffs claim that these releases were part of a scheme to temporarily remove the $1 million liability of severance benefits Atherio owed Farb. Id. Plaintiffs argue that Defendants formed, controlled, and operated these Atherio LLCs as vehicles to conceal Atherio's liability to Farb in order to ensure Plaintiffs would go through with the sale of their company. Id. Defendants argue that (1) Farb released any right to severance before these agreements were made so no severance obligation was ever owed and (2) the assumption agreement was never entered into and thus was never a liability for Atherio. Doc. 140, Farb & Furst's Mot. Summ. J., 11; Doc. 144, Cory's Br. Summ. J., 8.
In sum, Plaintiffs' fraud claims are based on (1) Defendants' failure to disclose that Farb may not have been Atherio's CFO at the close of the Agreement and (2) Defendants' failure to disclose an alleged severance obligation owed to Farb and the assumption agreements related to the obligation.
Plaintiffs filed their Complaint against Defendants on June 23, 2016. See Doc. 1, Pls.' Compl. Plaintiffs' current Second Amended Complaint alleges causes of action under federal securities laws, Texas securities law, and common law fraud and unspecified statutory law fraud. See Doc. 37, Pls.' 2d Am. Compl.
This Order succeeds the Court's previous Rule 56(f) Order (Doc. 152). As will be explained below, the Court ruled in that Order that Plaintiffs' claims are limited, based on a nonreliance clause, to representations made in the Agreement. In that Order, the Court also dismissed Plaintiffs' Texas securities act claim based on the choice-of-law clause in the Agreement.
Defendants Farb and Furst filed their motion for summary judgment on September 27, 2018 (Doc. 140). Defendant Cory filed his amended motion for summary judgment on September 28, 2018 (Doc. 142). Plaintiffs filed their response on November 5, 2018 (Doc. 156). Cory filed his reply on November 19, 2018 (Doc. 165). Farb and Furst filed their reply on that same...
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