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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 September 13, 2004 Decided October 26, 2004

No. 03-7083

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

No. 03-7123

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 was Michael D. Rothberg.

 Bills of costs must be filed within 14 days after entry of judgment.

The court looks with disfavor upon motions to file bills of costs out

of time.

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George H. Mernick, III argued the cause for appellees.

With him on the brief were Albert W. Turnbull, John Rounsaville, Jr., R. Kevin Bailey, Richard A. Getty, William B.

Mallin, and Emily A. Nack.

Before: EDWARDS, HENDERSON, and GARLAND, Circuit

Judges.

Opinion for the Court filed by Circuit Judge EDWARDS.

EDWARDS, Circuit Judge: 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

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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.

I. BACKGROUND

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

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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

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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.,

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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 General and Prusator

settled for $205,000. Media General, 2001 WL 1230880, at

*3.

Media General filed the present action in the District Court

for the District of Columbia against Tomlin, Knapp, Thomas,

Burr, and Eckert Seamans, alleging that defendants had

violated SEC Rule 10b-5, committed common law fraud, and

engaged in a civil conspiracy. Defendants moved to dismiss

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for failure to state a claim, but this motion was denied in

August 2001. Id. at *1. Following extensive discovery,

defendants moved for summary judgment. In June 2003, the

District Court granted the motion. The District Court held

that Media General had conceded that the allegedly concealed

information regarding Prusator’s claims was immaterial,

which meant Media General could not satisfy the elements of

its Rule 10b-5 or common law fraud claims. By extension,

the District Court ruled that Media General could not succeed

on its conspiracy claim, which requires the existence of an

agreement to participate in an unlawful act. Media General,

No. 98-1690, Mem. Op. at 4-9 (D.D.C. June 18, 2003). The

District Court also awarded defendants costs. Media General, Inc. v. Tomlin, No. 98-1690, Ord. (D.D.C. Aug. 5, 2003).

Media General appeals both rulings.

II. ANALYSIS

A. Standard of Review

This court reviews the District Court’s grant of summary

judgment de novo, viewing the evidence in the light most

favorable to the non-moving party. Cruz v. American Airlines, Inc., 356 F.3d 320, 328 (D.C. Cir. 2004). The District

Court’s judgment will be affirmed only if appellees have

demonstrated that there is no genuine issue of material fact

as to whether they are entitled to judgment. See id. Moreover, if material facts are susceptible to divergent inferences,

we must reverse the District Court’s grant of summary

judgment. See Tao v. Freeh, 27 F.3d 635, 638 (D.C. Cir.

1994). Whether alleged misrepresentations or omissions are

material under the securities laws is a mixed question of law

and fact that is particularly well suited for jury determination. See, e.g., Mendell v. Greenberg, 927 F.2d 667, 673 (2d

Cir. 1990), modified on other grounds, 938 F.2d 1528 (2d Cir.

1991). Materiality should be resolved by summary judgment

only if ‘‘the alleged misrepresentations or omissions are so

clearly unimportant to an investment decision that reasonable

minds cannot differTTTT’’ Berg v. First Am. Bankshares,

Inc., 796 F.2d 489, 495 (D.C. Cir. 1986).

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B. The Materiality of the Prusator Claims

Materiality is an essential element of Media General’s fraud

claims under both Rule 10b-5, see Kowal v. MCI Communications Corp., 16 F.3d 1271, 1276 (D.C. Cir. 1994), and District

of Columbia tort law, see Railan v. Katyal, 766 A.2d 998, 1009

(D.C. 2001). Because a civil conspiracy requires an agreement to participate in an unlawful act, materiality is also an

essential element of Media General’s civil conspiracy claim.

See Weishapl v. Sowers, 771 A.2d 1014, 1023 (D.C. 2001).

In Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988), the

Supreme Court articulated the general test for determining

whether a fact is material under the federal securities laws:

‘‘to fulfill the materiality requirement ‘there must be a substantial likelihood that the disclosure of the omitted fact

would have been viewed by the reasonable investor as having

significantly altered the ‘‘total mix’’ of information made

available’ ’’ (quoting TSC Indus., Inc. v. Northway, Inc., 426

U.S. 438, 449 (1976)). Under this test, the materiality of a

misrepresentation or omission must be assessed as of the

time of the contested transaction. Thus, in this case, if

Prusator’s claims were a material contingency at the time of

the Media General/Park merger closing, it is irrelevant that

Media General and Prusator subsequently settled the claims

for an amount well under the multimillion dollar sum that

Prusator initially sought. See, e.g., Pommer v. Medtest Corp.,

961 F.2d 620, 623 (7th Cir. 1992) (noting that the ‘‘securities

laws approach matters from an ex ante perspective’’). Like

the parties, we assume that the same materiality standard

under the federal securities laws governs Media General’s

common law claims.

By granting their motion for summary judgment, the District Court concluded that no reasonable jury could find that

appellees’ alleged nondisclosures to Media General were material. We disagree with the District Court’s conclusion.

A reasonable jury could decide that, had Media General

known about the expanded Prusator claims at the time of

closing, the terms of the merger would have been different.

Indeed, at closing, the parties agreed that Media General

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would assume responsibility for the Prusator lawsuit in exchange for a reduction of $147,000 in the purchase price

based on Prusator’s severance claim. The potential materiality of Prusator’s expanded claims is further supported by the

testimony of Park’s counsel Burr. Burr, who knew about the

Prusator litigation before the merger closing, stated that he

would have wanted to know about Prusator’s expanded claims

if he had been in Media General’s position. Burr Deposition,

J.A. 740-42. This testimony is not dispositive, but it certainly

suggests that reasonable investors could have concluded that

the expanded Prusator claims were material to Media General’s acquisition of Park. See, e.g., SEC v. Mayhew, 121 F.3d

44, 52 (2d Cir. 1997) (‘‘[A] major factor in determining whether information was material is the importance attached to it

by those who knew about it.’’).

In concluding that the threatened Prusator lawsuit was

immaterial as a matter of law, the District Court relied on the

fact that Media General filed an 8-K statement within two

weeks of the merger closing and failed to list the Prusator

matter as a material contingency even though Media General

knew the full extent of Prusator’s claims at the time of its 8-K

filing. The District Court also noted that Media General’s

Chief Financial Officer (‘‘CFO’’) Marshall N. Morton (‘‘Morton’’) testified that he would not have signed the 8-K form as

filed had he believed the Prusator litigation was material.

From these facts, the District Court determined that defendants were entitled to summary judgment because the 8-K

filing constituted a concession by Media General that Prusator’s claims were not material to its purchase of Park. See

Media General, No. 98-1690, Mem. Op. at 6-8 (D.D.C. June

18, 2003). This line of reasoning cannot withstand scrutiny

under the applicable law governing materiality and summary

judgments.

On December 4, 1996, approximately one month before the

deal closed, Eckert Seamans sent Coopers the Audit Letter in

which Prusator’s expanded claims were reported as a material loss contingency. However, after closing, but before Media

General filed its 8-K statement, Burr wrote a letter to Phillip

N. Gregory (‘‘Gregory’’), the auditor at Coopers, in which he

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concluded that the new claims were in fact remote. Media

General argues that it relied on Burr’s January 14 letter in

deciding that the Prusator matter was not material when it

filed the 8-K statement. Appellees respond that, in the

December 4 letter, Burr simply included all claims of $100,000

or more against Park, regardless of their likelihood of success. See Letter from Michael E. Reed to Stephen I. Burr of

10/31/96, J.A. 242-43; Burr Deposition, J.A. 759-60. Appellees also argue that Burr consistently held the view that

Prusator’s expanded claims were remote, and that he did not

conduct any additional investigation before writing the January 14 letter.

This dispute over the import of Burr’s letter is precisely

the kind of fact-specific question that should be resolved by a

jury. Ample evidence in the record suggests that a reasonable jury could find that Burr changed his opinion about the

remoteness of the Prusator litigation, and that this meant,

from Media General’s perspective, that the potential litigation

was material at the time of closing but immaterial by the time

it filed its 8-K statement. Several facts support this view.

First, the January 14 letter Burr sent Gregory is subject to

an interpretation suggesting that Burr did additional research

post-closing, which altered his view of the Prusator matter.

In that letter, Burr wrote:

You asked me for an evaluation of the merits of the

claims made by Rick Prusator referred to in our

audit response letter of December 4, 1996. I have

reviewed the claims made by Prusator and discussed

the underlying factual circumstances with Tom

Thomas, who was President of Park Communications at the relevant time. Based upon that review

and those discussions with Mr. Thomas, I have come

to the conclusion that [Prusator’s likelihood of success on his expanded claims is] remote.

Burr Letter, J.A. 370 (emphasis added). Second, Gregory

testified that he understood the January 14 letter to state

that the Prusator claims were remote, whereas the December

4 letter did not. Gregory Deposition, J.A. 884-87. Finally,

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Media General’s CFO Morton testified that it was on the

basis of the January 14 letter, which, in his view, represented

a considered change in Burr’s opinion, that Morton concluded

that the potential Prusator lawsuit would not have a material

adverse effect on the business, operations, or financial condition of Park. Morton Deposition, J.A. 813-14. In short, the

record in this case makes it clear that there is a triable issue

of fact as to whether relevant circumstances changed between

the closing of the merger and Media General’s 8-K filing.

Therefore, summary judgment was inappropriate.

In reaching this conclusion, we do not embrace Media

General’s sweeping contention that post-transaction evidence

can never be considered as relevant in analyzing whether an

alleged misrepresentation or omission was material at the

time of the transaction. This argument goes much too far in

what it suggests. See, e.g., RMED Int’l, Inc. v. Sloan’s

Supermarkets, Inc., No. 94Civ.5587, 2002 WL 31780188, at *2

(S.D.N.Y. Dec. 11, 2002) (explaining that ‘‘simply stating that

materiality and scienter are determined based on the facts at

the time of the alleged misstatement does not mean that later

occurring evidence is irrelevant,’’ and denying motion to

exclude evidence relating to events occurring after the period

of the alleged Rule 10b-5 violation).

The District Court’s error in this case was not its consideration of post-closing evidence, but, rather, its determination

that the 8-K filing demonstrated beyond any doubt that

Media General had conceded that the Prusator claims were

not material to its purchase of Park. Because of the changed

circumstances between the time of the merger closing and the

time when Media General filed its 8-K statement, the material

facts are susceptible to divergent inferences. Therefore, the

District Court had no basis upon which to grant summary

judgment for appellees.

Finally, we turn briefly to appellees’ contention that the

Merger Agreement prevents Media General from demonstrating that the Prusator litigation was material at the time

of the merger closing. In advancing this argument, appellees

rely on § 8.3 of the July 1996 Merger Agreement, which

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indicates that Media General could not refuse to close under

the terms of that agreement unless an event occurred that

had a ‘‘Company Material Adverse Effect’’ on Park. Merger

Agreement, J.A. 138-39. Section 4.1 defines a Company

Material Adverse Effect as a ‘‘material adverse effect on the

business, operations or financial condition of [Park] taken as a

whole.’’ Id. at J.A. 118. Because Media General ultimately

concluded that the Prusator litigation did not have a material

adverse effect on Park’s business, operations, or financial

condition, appellees contend that Media General would have

been unable to walk away from the transaction or negotiate

substantially different terms before closing based on the

existence of Prusator’s claims. There are at least two problems with this argument.

First, Media General claims that its determination that the

Prusator litigation did not have a material adverse effect on

Park’s business, operations, or financial condition was made

only after Park’s counsel and auditors changed their views on

the ‘‘remoteness’’ of Prusator’s claims. Appellees suggest

otherwise. This is a matter for a trier of facts.

Second, implicit in appellees’ argument is the suggestion

that a contingency cannot be material with respect to closing

negotiations if it does not rise to the level of a Company

Material Adverse Effect as defined by the Merger Agreement. The parties’ agreement does not say this and, at least

intuitively, the proposition seems unsound. Indeed, at closing, the parties here negotiated hard over the Prusator

matter and agreed to amend the Merger Agreement to

provide that Media General would assume responsibility for

the resolution of Prusator’s severance claims in exchange for

a $147,000 reduction in the purchase price. Media General

argues quite reasonably that it would have sought substantially greater concessions had it known of Prusator’s expanded

claims at closing.

In short, the cited provisions in the parties’ Merger Agreement are not dispositive of the materiality question before the

court. In a trial on the merits, appellees are free to raise the

Merger Agreement and suggest to the trier of fact favorable

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inferences that ought to be drawn from the agreement. But

these are not matters that can be resolved on summary

judgment.

III. CONCLUSION

The District Court’s grant of summary judgment and

award of costs to appellees are hereby reversed, and the case

is remanded for further proceedings consistent with this

opinion.

So ordered.

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