O'Connor v. Cory
| Decision Date | 19 October 2018 |
| Docket Number | CIVIL ACTION NO. 3:16-CV-1731-B |
| 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 |
Plaintiffs sold their company to Defendants' company. A Purchasing Agreement memorialized the transaction. Plaintiffs have now brought fraud claims against Defendants based on representations both in and outside the Agreement. Defendants raise a disclaimer-of-reliance defense arguing that the Agreement expressly states that Plaintiffs relied only on representations contained in the Agreement, and thus, Plaintiffs cannot base their fraud claims on extracontractual representations. This Court granted summary judgment under Rule 56(f) on all Plaintiffs' claims based on Defendants' disclaimer-of-reliance defense, but provided Plaintiffs with the opportunity to respond. Based on the parties' responsive briefing, the Court will not dismiss Plaintiffs' claims in their entirety. However, the Court will GRANT, in part, summary judgment against Plaintiffs pursuant to Rule 56(f).
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. 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 a variety of fraud claims against Defendants Jason Cory, Thomas Farb, and Greg Furst in relation to the 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 representations that Defendants made both in and outside of the Agreement. Regarding extracontractual representations, Plaintiffs allege that during various meetings and discussions leading up to the closing, Cory made misrepresentations about his age, his military experience, and his net worth. Doc. 118, Pls.' Resp., 6. Plaintiffs also allege that Defendants made various different misrepresentations—both within the Agreement and outside of it—regarding the resignation of Farb as Atherio's Chief Financial Officer. Doc. 63-1, Pls.' Br. in Support of Mot. for Partial Summ. J., 3. According to Plaintiffs, Farb resigned before the Agreement closed and thus Atherio was obligated to pay Farb over $1 million in severance benefits at that time. Doc. 118, Pls.' Resp., 6-7. Plaintiffs claim that Defendants failed to disclose and further affirmatively hid these facts. Id. On the other hand, Defendants argue that Farb did not resign until one day after the Agreement closed and that the severance obligation to Farb under his employment agreement was never triggered; thus, Defendants claim they did not misrepresent or fail to disclose any facts related to Farb. Doc. 124, Defs.' Resp., 7-9.
The crux of the issue here is a disclaimer-of-reliance clause in the Agreement. Plaintiffs disclaimed reliance on representations outside of the Agreement—i.e., extracontractual representations—in § 3.28(c) of the Agreement:
Each Contributor [Plaintiff] hereby acknowledges and agrees that the representations and warranties of the Acquirer [Atherio] contained in this Agreement represent all of the representations and warranties made by it as part of the transactions contemplated hereby and that neither Contributor [Plaintiffs] nor any Person claiming through any Contributor is relying on any other representations or warranties (express and or implied) in making its decision to consummate these transactions.
Id. at 47 (emphasis added).
The Court already held that Plaintiffs cannot base their fraud claims on any extracontractualrepresentations because of this disclaimer-of-reliance clause. Doc. 109, Order. Plaintiffs now assert that their fraud claims should survive summary judgment because Defendants have made intracontractual misrepresentations. Doc. 118, Pls.' Resp., 12-19.
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 statutory fraud. See Doc. 37, Pls.' Second Am. Compl.
This Order comes as a result of the Court's June 7, 2018 Order denying Plaintiffs' motion for partial summary judgment on Defendants' disclaimer-of-reliance defense. Doc. 109, Order. Each Defendant pleaded, among other things, an affirmative defense based on the Agreement's disclaimer-of-reliance clause. Doc. 46, Cory's Answer, ¶ 350; Doc. 47, Furst & Farb's Answer, 36, ¶ 7. Plaintiffs moved for partial summary judgment on the Defendants' disclaimer-of-reliance defense. Doc. 63, Pls.' Mot. Summ. J. The Court's June 7, 2018 Order not only denied Plaintiffs' motion, but the Court also granted summary judgment under Rule 56(f) against all of Plaintiffs' claims pursuant to the disclaimer-of-reliance clause. Doc. 109, Order, 5. The Court ordered Plaintiffs to file a response containing reasons why the Court should not grant summary judgment in favor of Defendants.
Plaintiffs timely filed their response on July 9, 2018. Doc. 118, Pls.' Rule 56(f) Resp. to the Court's Summ. J. Order ( ). Defendants then filed their response to Plaintiffs' response on July 30, 2018. Doc. 124, Defs.' Resp. to Pls.' Resp. ( ). Finally, Plaintiffs filed their reply brief on August 10, 2018. Doc. 129, Pls.' Reply. With the motion now ripe for review, the Court will consider whether summary judgment is appropriate on Defendants' disclaimer-of-reliancedefense.
Courts must grant summary judgment "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The summary judgment movant bears the burden of proving that no genuine issue of material fact exists. Latimer v. SmithKline & French Labs., 919 F.2d 301, 303 (5th Cir. 1990). However, if the nonmovant ultimately bears the burden of proof at trial, the summary judgment movant need not support its motion with evidence negating the nonmovant's case. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986). Rather, the summary judgment movant may satisfy its burden by pointing to the mere absence of evidence supporting the nonmovant's case. Id. When the movant bears the burden of proving an affirmative defense at trial, "it must establish beyond dispute all of the defense's essential elements." Bank of La. v. Aetna U.S. Healthcare, Inc., 468 F.3d 237, 241 (5th Cir. 2006) (citing Martin v. Alamo Cmty. Coll. Dist., 353 F.3d 409, 412 (5th Cir. 2003)).
Once the summary judgment movant has met this burden, the nonmovant must "go beyond the pleadings and designate specific facts showing that there is a genuine issue for trial." Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994)(per curiam). Factual controversies regarding the existence of a genuine issue for trial must be resolved in favor of the nonmovant. Id. Nevertheless, a nonmovant may not simply rely on the Court to sift through the record to find a fact issue, but must instead point to specific evidence in the record and articulate precisely how that evidence supports the challenged claim. Ragas v. Tenn. Gas Pipeline Co., 136 F.3d 455, 458 (5th Cir. 1998). Moreover, the evidence the nonmovant does provide must raise more than "somemetaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). If the nonmovant is unable to make such a showing, the court must grant summary judgment. Little, 37 F.3d at 1075.
Under the recently amended Rule 56(f), a district court may (1) grant summary judgment for a nonmovant; (2) grant the motion on grounds not raised by a party; or (3) consider summary judgment on its own after identifying for the parties material facts that may not be genuinely in dispute. Fed. R. Civ. P. 56(f)(1)-(3). However, before doing so, the court must give the parties notice and a reasonable time to respond. Id.; see Luig v. North Bay Enters., Inc., 817 F.3d 901, 905 (5th Cir. 2016) () (citing Celotex Corp. v. Catrett, 477 U.S. 317, 326 (1986)).
Plaintiffs have proposed four reasons why the Court should not grant summary judgment for Defendants. First, Plaintiffs claim § 4.3(a) of the Agreement excepts all of their fraud claims from the disclaimer-of-reliance clause and thus their fraud clams wholly survive this Court's June 7, 2018 Order. Second, Plaintiffs claim that, alternatively, their Delaware common-law fraud claims based on intracontractual misrepresentations in the Agreement should survive the Court's prior Order. Third, Plaintiffs contend that Third Circuit law governs the effect of the disclaimer-of-reliance clause on their federal securities claim and that under Third Circuit law, the disclaimer-of-reliance clause does not bar their claim. And fourth, Plaintiffs argue that their Texas Securities Act (TSA) claim...
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