The opinion of the court was delivered by: Richard W. Roberts United States District Judge
Plaintiff Media General, Inc. ("Media General") purchased Park Communications, Inc. ("Park") and its liabilities for $710 million, allegedly without knowing certain details of a threatened civil action by Rick Prusator, a former Park employee. Media General, asserting a violation of Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. § 240.10b-5, promulgated under 15 U.S.C. § 78j(b), common law fraud and civil conspiracy, has sued defendants Donald R. Tomlin and Gary B. Knapp, Park's sole shareholders, Wright M. Thomas, Park's then-President, and Stephen Burr and his law firm, Eckert Seamans Cherin & Mellott, LLC ("Eckert"), Park's outside counsel for the transaction. Defendants collectively filed multiple motions for summary judgment, which plaintiff opposed.*fn1 Because the $10 million that Media General seeks in fraud damages is barred as a matter of law for both the securities and common law fraud claims, it will be disallowed. In addition, because Media General has not shown that defendants "omit[ted] 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," 17 C.F.R. § 240.10b-5, and because defendants have shown that no jury could reasonably conclude that plaintiffs' reliance on defendants' statements regarding the risk posed by a potential lawsuit against Park was reasonable, defendants will be granted summary judgment.
In the early summer of 1996, Park's sales agent approached Media General about a possible sale of Park. In anticipation of executing a merger agreement, Media General engaged in certain due diligence efforts through its outside counsel Dow Lohnes & Albertson ("Dow"), spearheaded by Leonard Baxt, a senior partner in Dow's corporate department. (Defs. Eckert & Burr's Mot. for Summ. J., Decl. of Emily Nack ("Nack Decl.") Vol. II, Ex. 35, Dep. of Leonard Baxt, Dec. 9, 2002 ("Baxt Dep.") at 69-70.) Those efforts included review by a Dow attorney of audit response letters describing pending and potential litigation then known. Nack Decl. Vol. I, Ex. 11, Memo. from Timothy Power to Stephen Dickinson and George Mahoney, July 18, 1996); Nack Decl. Vol. II, Ex. 38, Dep. of George Mahoney, Aug. 1, 2002 ("Mahoney Dep.") at 218-19.) On July 19, 1996, the parties executed the merger agreement providing for the sale of Park to Media General for $710 million.
Media General's general counsel, George Mahoney, was in charge of the legal aspects of the Park acquisition. (Mahoney Dep. at 257.) As he had in prior recent acquisitions, Mahoney oversaw the legal due diligence efforts by delegating them to Dow. (Mahoney Dep. at 14-16, 212.) John Byrnes, a senior partner at Dow in the firm's corporate department, took charge of the post-merger agreement legal due diligence efforts under Mahoney's direction. (Nack Decl. Vol. II, Ex. 36, Dep. of John Byrnes, Sept. 9, 2002 ("Byrnes Dep.") at 10.)
In September 1996, in preparation for consummating the merger, Park asked Coopers & Lybrand, LLP ("Coopers") to assist with an audited financial statement of Park, a process that included requesting updated audit response letters. By late September, Media General knew of Coopers' audit. As is customary for an acquiring company in a major acquisition, Media General asked for and was granted direct access to the financial information and work papers Coopers had in order to prepare Park's audited financial statement. All defendants knew that Media General had access to Coopers' working papers and the papers Park provided to Coopers for the audit. (Nack Decl. Vol. II, Ex. 37, Dep. of Stephen Dickinson, May 9, 2002, at 30; Nack Decl. Vol. II, Ex. 39, Dep. of Phillip Gregory, Nov. 20, 2002, at 188-90.)
On September 6, 1996, Prusator, a former Park employee, made a letter demand of $139,000 that he alleged was severance pay due him, and threatened a lawsuit. Two weeks later, Prusator sent a letter to Marshall Morton, a senior officer at Media General, mentioning the unresolved issue of unpaid severance that he had turned over to an attorney for recovery. (Opp'n Ex. 10.) Morton asked Stephen Dickinson, Media General's corporate controller, to find out more about the Prusator case, and Dickinson, in turn, questioned Park's president, Thomas. Thomas, by telephone as well as by letter dated October 14, 1996, provided Media General with the severance agreements at the heart of the dispute and explained Park's position on the matter. (Opp'n Ex. 9.) Through Eckert, Park sent Prusator's attorney a letter dated October 23, 1996, warning that further communications from Prusator with Media General would be construed as tortious interference with contract. (Opp'n Ex. 13.) Park, by letter dated October 31, 1996, asked its attorneys at Eckert to write an audit response letter, and specifically to provide Coopers with information about any claims seeking more than $100,000. (Nack Decl. Vol. I, Ex. 15.)
By letter dated November 9, 1996 enclosing a draft complaint, Prusator's attorney informed one of Park's attorneys at Eckert that Prusator was expanding his demands to include claims for fraud, misrepresentation, breach of fiduciary duty, intentional interference with breach of prospective contract rights, civil RICO violations, securities law violations, wrongful termination of employment and breach of good faith and fair dealing. Prusator estimated the value of these new claims at between $3 and $6 million. (Nack Decl. Vol. I, Ex. 7.) By letter dated November 12, 1996, Stephen Burr, a partner at Eckert and outside counsel to Park, Tomlin and Knapp for this transaction, sent copies of the draft Prusator complaint and accompanying letter to Thomas, Tomlin and Knapp, and stated his assessment that the expanded claims appeared to be based on very frivolous grounds. (Id.) Burr also informed Coopers about Prusator's expanded demands in his audit response letter dated December 4, 1996. (Nack Decl. Vol. I, Ex. 16.) The draft audited financial statement included a footnote identifying contingencies and explicitly describing the details of Prusator's expanded claim. (Nack Decl. Vol. I, Ex. 17 at 10.)
Although Baxt and Burr had several telephone contacts during the fall of 1996, it was not until January 2, 1997 that they discussed the Prusator matter. (Baxt Dep. at 140-41.) The subject came up in the context of discussions about several issues for which Media General was seeking dollar adjustments to the closing price, and discussion of the Prusator suit was limited to the parties' respective positions on the closing adjustment it warranted. (Baxt Dep. at 136-37; Defs. Eckert & Burr's Mot. for Summ. J., Suppl. to Nack Decl. ("Nack Suppl.")
Ex. 41-A, Dep. of Stephen Burr ("Burr Dep.") at 206.) At that point, Park had offered $50,000 in an attempt to settle the matter before closing, but Prusator had rejected the offer. Park maintained its position that the claim could be settled for $50,000, but Media General, knowing it would assume liability at closing, wanted an adjustment for the whole $139,000 relating to severance pay. (Burr Dep. at 191, 206-08.)
The lead lawyers involved in this transaction, Mahoney, Baxt, Byrnes, and Burr, were each experienced in corporate mergers and familiar with audit response letters. They each knew that audit response letters were often reviewed by the purchasing company in connection major acquisitions. (Mahoney Dep. at 212-23; Baxt Dep. at 150-152; Byrnes Dep. at 170-71.) Prior to executing the merger agreement in July, Mahoney and Baxt had received a memorandum noting that audit response letters had been reviewed by a Dow attorney as part of the due diligence effort. However, in the period between executing the merger agreement and executing the merger, neither Media General nor its outside counsel reviewed Park's draft audited financial statement or the audit response letter detailing Prusator's expanded claims. (Mahoney Dep. at 212-27; Byrnes Dep. at 173.) Dickinson did not press for a copy of the audit report before the closing, and asked only that he receive a copy when the audit was completed. (Nack Suppl., Ex. 41-D, Dickinson Dep. ("Dickinson Dep.") at 296.) Mahoney failed to tell Byrnes about the ongoing audit by Coopers. (Nack Suppl., Ex. 41-F, Mahoney Dep. at 130.) Byrnes, who led the legal due diligence effort, did not himself do any due diligence on the Prusator matter prior to the pre-closing meetings, and does not recall whether anyone working under his direction or control did any due diligence on the Prusator claim. (Byrnes Dep. at 46.)
Closing was scheduled for January 7, 2007. At the pre-closing discussions on January 6 and 7, Mahoney, Baxt, and Byrnes divided up the negotiating duties on Media General's side, and Dickinson was with them at the table. (Dickinson Dep. at 109.) Burr represented Park and its owners, with Thomas at his side for the purpose of providing information to the buyers. (Nack Suppl., Ex. 41-G, Dep. of Wright M. Thomas, May 14, 2002 ("Thomas Dep.") at 181, 188.)*fn2 About ten or twelve items on a closing checklist involving price adjustments well in excess of $10 million in the aggregate were serially discussed, first between the parties' representatives and then between the principals and their representatives in private. (Nack Suppl., Ex. 41-B, Baxt Dep. ("Baxt Dep. at Nack Suppl.") at 89-94; Byrnes Dep. at 47-48.) The threatened litigation from Prusator was just one of the several items under discussion. (Baxt Dep. at Nack Suppl. at 91-93.)
Byrnes, Baxt, Mahoney and Dickinson have slightly differing recollections of the discussion about the Prusator matter at the pre-closing. Byrnes, who took the lead on the Prusator matter, made no contemporaneous record memorializing the discussion (Nack Suppl., Ex. 41-C, Byrnes Dep. at 205), but recalls saying "[t]ell us about the Prusator matter." (Byrnes Dep. at 50.) He also recalls that in response Thomas explained that there were two severance agreements and that Park viewed the later agreement as superceding the earlier and that Prusator disagreed, that the figure $147,000 was bandied about, that Park had offered $50,000 to settle the matter, but that Prusator wanted the entire $139,000, and that Byrnes asked follow-up questions about the two agreements and commented that perhaps the two agreements were not perfectly drafted. (Id. at 50-51.) Byrnes recalls that Burr did not say anything at this time. (Id. at 51.)
Baxt took notes during some of the pre-closing meetings, and had reviewed them prior to his deposition. The notes, however, were not capable of identifying who said what or distinguishing what was actually said from what was understood. (Baxt Dep. at 99; Baxt Dep. at Nack Suppl. at 101-07.) Without any specific recollection of the words he or anyone else spoke (Baxt Dep. at Nack Suppl. at 95, 98), Baxt generally recalls that both he and Byrnes asked for an update on the Prusator claims, that Thomas began to explain the dispute as to the severance agreement, and that Burr said there was nothing new to report in ...