Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-07-07137/USCOURTS-caDC-07-07137-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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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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*

Except as noted, the facts are undisputed.

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

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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. § 78u4(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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*

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.”

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

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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.

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