Media General, Inc. v. Tomlin

• Decision Date: 27 June 2008
• Docket Number: No. 07-7137.,No. 08-7006.,07-7137.,08-7006.
• Parties: MEDIA GENERAL, INC., a Virginia Corporation, Appellant v. Donald R. TOMLIN, Jr., Individually and as Trustee of the Tomlin Family Trust, et al., Appellees.
• Court: U.S. Court of Appeals — District of Columbia Circuit

532 F.3d 854

MEDIA GENERAL, INC., a Virginia Corporation, Appellant v. Donald R. TOMLIN, Jr., Individually and as Trustee of the Tomlin Family Trust, et al., Appellees.

No. 07-7137.

No. 08-7006.

United States Court of Appeals, District of Columbia Circuit.

Argued May 12, 2008.

Decided June 27, 2008.

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.

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 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 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 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.

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...