Appeals from the United States District Court for the District of Columbia (No. 98cv01690)
Before: Edwards, Henderson, and Garland, Circuit
The opinion of the court was delivered by: Edwards, Circuit Judge
Argued September 13, 2004
This case emanates from a stock purchase transaction pursuant to which appellant Media General, 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 Exchange 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 multimillion 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 appellees. 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 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 Prusator'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. Accordingly, we reverse and remand the case to the District Court for further proceedings.
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 Merger Agreement specified that Media General would gain control of all Park stock in exchange for cash payments to Tomlin and Knapp, Park's sole shareholders. The total consideration for the merger was to be $710 million, exclusive of certain adjustments and debt to be assumed by Media General. At closing, Thomas, president of Park, was to receive a substantial severance package. Burr and his law firm, Eckert 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 September 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 General 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 General, 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 Prusator'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 in Park's draft audited financial statement for the period ending September 30, 1996. Deposition of Phillip N. Gregory, 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 inquiries 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. According 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 statement 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 allegedly 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., 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 contingencies 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 Seamans 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 additional claims relieved Media General of any requirement to report the Prusator matter in its 8-K filing. See Gregory Deposition, 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 General. After nine of the 10 counts in Prusator's complaint withstood a motion to dismiss, Media ...