O'Connor v. Cory
382 F. Supp. 3d 534
N.D. Tex.2019Background
- Plaintiffs O'Connor and Stewart sold Red River Solutions to Atherio under a written Purchase Agreement dated June 25, 2013; closing/funding occurred June 26–27, 2013.
- Plaintiffs allege securities and Delaware common‑law fraud based on Agreement representations about Thomas Farb’s employment status (CFO) and alleged undisclosed severance liabilities owed to Farb.
- Farb had an earlier employment agreement that potentially entitled him to >$1M in severance if he voluntarily resigned for "Good Reason"; he sent a notice invoking that clause in June 2013 and subsequently signed revised side agreements around the closing that Plaintiffs say concealed the obligation.
- The Agreement contains a non‑reliance clause; the court limited Plaintiffs’ fraud claims to representations expressly in the Agreement (not extracontractual statements).
- On summary judgment Defendants argued (inter alia) lack of misrepresentation, lack of materiality, failure of loss causation, insufficiency of pleading for certain Agreement provisions (§4.3), failure to plead equitable fraud, statute‑of‑limitations, and an earlier release as to Cory.
- Court denied summary judgment on some discrete factual disputes (e.g., §4.6 GAAP accrual issues and Farb’s title at closing) but granted summary judgment overall because Plaintiffs failed to show that Defendants’ alleged misrepresentations were the legal cause of Plaintiffs’ economic loss and Plaintiffs failed to plead equitable fraud and claims tied to §4.3.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Adequacy of pleading re: §4.6 (GAAP/disclosed liabilities) | Plaintiffs allege §4.6 misrepresented Atherio’s financials by failing to accrue/disclose Farb severance; pleadings satisfy Rule 9(b) for §4.6 | Cory: no obligation existed to disclose because Farb’s resignation was subject to a cure period; side agreements and release removed any Atherio liability | Court: §4.6 allegations adequately pleaded; triable factual dispute exists, so no summary judgment on §4.6 |
| Adequacy of pleading re: §4.3 (outstanding stock rights) | Plaintiffs assert §4.3 was violated by an undisclosed stock obligation | Cory: §4.3 was not pled in the complaint; Plaintiffs raised it only in briefing | Court: grant summary judgment for Cory on §4.3 claims for failure to plead with particularity |
| Pleading equitable fraud (Delaware) | Plaintiffs contend equitable fraud is covered by their state‑law fraud counts and elements mirror common‑law fraud | Cory: equitable fraud requires a basis for equity jurisdiction (special/fiduciary relationship) not alleged here; parties were sophisticated and had counsel | Court: Plaintiffs failed to plead the special relationship or basis for equity relief; equitable‑fraud claim dismissed |
| Loss causation for 10b‑5 and Delaware fraud claims | Plaintiffs: misrepresentations induced them to accept overvalued consideration; Farb’s departure and undisclosed severance harmed Atherio’s value and caused their loss | Defendants: loss causation is distinct from transaction causation; Plaintiffs offer no evidence that the specific misrepresented facts were a substantial factor in Plaintiffs’ post‑closing losses | Court: applied non‑fraud‑on‑the‑market standard — plaintiffs must show the very facts misrepresented or omitted were a substantial factor in causing the loss; Plaintiffs failed to do so; summary judgment for Defendants on securities and common‑law fraud |
Key Cases Cited
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (U.S. 2005) (plaintiff must plead and prove loss causation; price inflation alone is insufficient)
- Stoneridge Inv. Partners, LLC v. Scientific‑Atlanta, 552 U.S. 148 (U.S. 2008) (elements of private §10(b) action and limits on implied liability)
- Lormand v. US Unwired, Inc., 565 F.3d 228 (5th Cir. 2009) (Rule 10b‑5 framework and material misstatement/ omission analysis)
- Merck & Co., Inc. v. Reynolds, 559 U.S. 633 (U.S. 2010) (accrual of securities claim and discovery rule for §1658 statute of limitations)
- McCabe v. Ernst & Young, LLP, 494 F.3d 418 (3d Cir. 2007) (loss causation in private sales: plaintiff must show misrepresented facts were a substantial factor in causing loss)
- Nuveen Mun. High Income Opportunity Fund v. City of Alameda, Cal., 730 F.3d 1111 (9th Cir. 2013) (loss causation analysis applies in private/instrumental sales; but‑for causation alone insufficient)
- Greenberg v. Crossroads Sys., Inc., 364 F.3d 657 (5th Cir. 2004) (proof of loss causation in fraud‑on‑the‑market context requires a link between corrective disclosure and price decline)