382 F. Supp. 3d 534 | N.D. Tex. | 2019
Plaintiffs sold their company to the Defendants' company. A purchasing agreement memorialized the transaction. Plaintiffs bring claims for securities fraud and common-law fraud against Defendants based on alleged misrepresentations in this Agreement. Defendants now move for summary judgment on a number of grounds. The Court GRANTS Defendants' motions because (1) Plaintiffs have failed to establish their alleged loss was caused by Defendants' conduct and (2) Plaintiffs failed to plead an equitable-fraud claim. Plaintiffs' claims are therefore DISMISSED .
I.
BACKGROUND
A. Factual History
This dispute stems from a written purchase agreement (hereinafter the "Agreement") between Plaintiffs Tammy O'Connor and Michael Stewart, and Atherio, Inc.
In the summer of 2012, Plaintiffs began marketing their company for sale through an investment banker and a transactional lawyer. Doc. 124, Defs.' Resp., 5. Shortly thereafter, Plaintiffs began negotiating the sale of the company with representatives from Atherio. Over the course of eleven months, the two sides negotiated and finalized the Agreement whereby Atherio would purchase Plaintiffs' interest in Red River Solutions in exchange for $3.15 million, stock in Atherio, and other compensation. See Doc. 95, Def. Cory's Resp. to Pls.'
*541Mot. for Summ. J., 5. The deal closed sometime between June 25 and June 27 of 2013.
Plaintiffs now allege fraud claims against Defendants Jason Cory, Thomas Farb, and Greg Furst in relation to this Agreement. During the negotiation and closing of the transaction, Defendant Cory was Atherio's Chief Executive Officer. Defendants Farb and Furst also held executive positions at Atherio.
Plaintiffs base their fraud claims on alleged misrepresentations in the Agreement regarding the resignation of Thomas Farb as Atherio's Chief Financial Officer. Doc. 156, Pls.' Resp. to Defs.' Mot. Summ. J., 26-39. Sometime in the summer or fall of 2012, Plaintiffs claim they were told that Farb would be Atherio's CFO. See Doc. 124-4, Defs.' App'x, 21 (Deposition of Tammy O'Connor). Farb signed an employment agreement with Atherio on or around December 28, 2012. Doc. 156, Pls.' Resp., 9; Doc. 156, Pls.' App'x, 122 (unsigned employment agreement). This employment agreement contains a number of provisions relevant to Plaintiffs' fraud claims. To start, the employment agreement specified Farb would be paid a base salary of at least $250,000 per annum, as well as a guaranteed annual bonus of not less than $200,000. Doc. 156, Pls.' App'x, 123. The employment agreement also provides that upon Farb's voluntary resignation from Atherio for "Good Reason," Farb would be entitled to a number of severance benefits, including a "lump sum payment equal to two times Executive's base salary ... payable in full within thirty (30) days of such Involuntary Termination," and guaranteed bonus payments. Id. at 126-29; Doc. 156, Pls.' Resp., 9-10 (Plaintiffs calculate the total severance pay owed Farb at $1,020,500). However, Farb was entitled to these severance benefits only "[i]n the event of his Involuntary Termination." Doc. 156, Pls.' App'x, 128. Under the employment agreement, "Involuntary Termination" included a situation where Farb "voluntarily resigns from the Company for any of the following reasons ('Good Reason')[.]" Id. One of the reasons was:
The deterioration of Executive's relationship with the Company's Board of Directors, Chairman, President and/or Chief Operating Officer ..., which determination shall be made by Executive in his sole discretion, so as to make performance of Executive's responsibilities impossible or impracticable, which is not rectified to Executive's reasonable satisfaction within thirty (30) day's written notice thereof to the Company from Executive.
Id. (¶ VIII.A.2.d).
In the months leading up to the close of the Agreement, Farb's relationship with Cory and Atherio deteriorated. This seems to be due to the fact that Farb was not being paid. Doc. 156, Pls.' App'x, 715 (Deposition of Farb). On June 5, 2013, Farb sent written notice to Cory stating that he was invoking the "Involuntary Termination" Section (VIII.A.2.d) in his employment agreement. Doc. 140, Farb & Furst's App'x, 499-503. Plaintiffs assert that this written notice triggered the "Good Reasons" portion of the employment agreement that entitled Farb to over $1 million in severance benefits. Doc. 156, Pls.' Resp., 14-15. Defendants argue this merely triggered a reconciliation period whereby Farb and Atherio had thirty days (until July 5, 2013) to cure the employment relationship. Doc. 140, Farb & Furst's Mot.
*542Summ. J., 8. After Farb sent this notice, he and Cory continued to negotiate regarding his employment status and compensation structure going forward. Doc. 156, Pls.' Resp., 15 (citing Pls.' App'x, 286, 289, 295, 298). Also during this time, Defendants were sending Plaintiffs disclosures listing the employment status of Atherio's executives, including Farb. Doc. 156, Pls.' App'x, 387.
The Agreement has an effective date of June 25, 2013, but the transaction was not fully funded until June 27, 2013. Doc. 140, Farb & Furst's Mot. Summ. J., 8 (citing Farb & Furst's App'x, 2). The delay appears to be caused by the status of Farb's employment and Atherio's lenders. Atherio needed two lenders to complete the transaction: SunTrust (the senior lender) and Prudent Capital (the mezzanine lender). Doc. 140, Farb & Furst App'x, 531. However, before the lenders would agree to finance the transaction, the executives at Atherio, including Farb, had to revise their employment agreements and waive rights under their old agreements. Id. Leading up to the close, Farb and Cory were vigorously disputing what a new agreement for Farb would look like, how much equity he would get under such an agreement, and what Farb's new title at Atherio would be. Doc. 156, Pls.' Resp., 19-23 (collecting correspondence between Farb and Cory). But it appeared that both realized Farb needed to be at Atherio for the Agreement to close. Doc. 156, Pls.' App'x, 391-92.
On June 26, 2013, a day after the Agreement was signed, Farb signed a new employment agreement. Doc. 140, Farb & Furst's App'x, 504-509. In that agreement, Farb waived any rights under his original employment agreement with Atherio, including any deferred compensation or severance. Id. Farb would continue working at Atherio through September 2013, but he would no longer be the CFO. Id. (noting his title changed to "Executive Vice President, Corporate Development").
On June 27, 2013, Farb entered into another agreement, this time with Atherio Investments, LLC and Atherio Investments Management, LLC. Id. at 510-19. Under this second agreement, to which Atherio, Inc. was not a party, the parties agreed to use "reasonable efforts" to effectuate an assumption agreement with Atherio, Inc. whereby the two Atherio LLCs would assume a portion of Farb's deferred compensation previously owed under his original employment agreement. Id. Plaintiffs argue that none of this information was disclosed to them before or during the close of the transaction. Doc. 156, Pls.' Resp., 22. Further, Plaintiffs claim that these releases were part of a scheme to temporarily remove the $1 million liability of severance benefits Atherio owed Farb. Id. Plaintiffs argue that Defendants formed, controlled, and operated these Atherio LLCs as vehicles to conceal Atherio's liability to Farb in order to ensure Plaintiffs would go through with the sale of their company. Id. Defendants argue that (1) Farb released any right to severance before these agreements were made so no severance obligation was ever owed and (2) the assumption agreement was never entered into and thus was never a liability for Atherio. Doc. 140, Farb & Furst's Mot. Summ. J., 11; Doc. 144, Cory's Br. Summ. J., 8.
In sum, Plaintiffs' fraud claims are based on (1) Defendants' failure to disclose that Farb may not have been Atherio's CFO at the close of the Agreement and (2) Defendants' failure to disclose an alleged severance obligation owed to Farb and the assumption agreements related to the obligation.
B. Procedural History
Plaintiffs filed their Complaint against Defendants on June 23, 2016. See Doc. 1, *543Pls.' Compl. Plaintiffs' current Second Amended Complaint alleges causes of action under federal securities laws, Texas securities law, and common law fraud and unspecified statutory law fraud. See Doc. 37, Pls.' 2d Am. Compl.
This Order succeeds the Court's previous Rule 56(f) Order (Doc. 152). As will be explained below, the Court ruled in that Order that Plaintiffs' claims are limited, based on a nonreliance clause, to representations made in the Agreement. In that Order, the Court also dismissed Plaintiffs' Texas securities act claim based on the choice-of-law clause in the Agreement.
Defendants Farb and Furst filed their motion for summary judgment on September 27, 2018 (Doc. 140). Defendant Cory filed his amended motion for summary judgment on September 28, 2018 (Doc. 142). Plaintiffs filed their response on November 5, 2018 (Doc. 156). Cory filed his reply on November 19, 2018 (Doc. 165). Farb and Furst filed their reply on that same day (Doc. 167). With the motions now ripe for review, the Court will consider whether summary judgment is appropriate.
II.
LEGAL STANDARD
Courts must grant summary judgment "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The summary judgment movant bears the burden of proving that no genuine issue of material fact exists. Latimer v. SmithKline & French Labs. ,
Once the summary judgment movant has met this burden, the nonmovant must "go beyond the pleadings and designate specific facts showing that there is a genuine issue for trial." Little v. Liquid Air Corp. ,
III.
ANALYSIS
Defendant Jason Cory and Defendants Thomas Farb and Greg Furst have separately moved for summary judgment on all *544of Plaintiffs' claims. Doc. 142, Cory's Mot. for Summ. J.; Doc. 140, Farb & Furst's Mot. for Summ. J. Some of their arguments overlap; some do not. The Court will address their arguments together where possible, and separately where it cannot. Additionally, some of their grounds for summary judgment have been addressed in the Court's previous orders. See, e.g. , Doc. 152, Rule 56(f) Order, & Doc. 157, Mem. Op. & Order on Mot. for Leave to Am. The Court will not reconsider those rulings.
Plaintiffs have two claims remaining: (1) a federal securities-fraud claim under § 10(b) of the Exchange Act and (2) a common-law fraud claim under Delaware law. These claims are based on misrepresentations or omissions Defendants made in connection with Atherio's Agreement to purchase Plaintiffs' company, Red River Solutions. Importantly, as the Court held in the Rule 56(f) Order, the nonreliance clause in the Agreement limits both of Plaintiffs' fraud claims to representations specifically made in that Agreement. Doc. 152, Rule 56(f) Order. Thus, Plaintiffs' claims have been restricted to three misrepresentations in the Agreement, all related to Farb's resignation as CFO of Atherio and alleged severance obligations owed to Farb after his resignation.
Defendants all move for summary judgment on the ground that Plaintiffs cannot support certain elements of their fraud claims. Specifically, Cory argues that there were no misrepresentations in the Agreement and that, even if there were, they would not be material. Cory also argues he did not have a duty to disclose information related to Farb's employment situation. Next, all Defendants argue that Plaintiffs have not adduced evidence of loss causation-i.e. , that the alleged fraud here legally caused Plaintiffs' economic loss. Cory further argues there is no evidence that Plaintiffs justifiably relied on the alleged representations. And Farb and Furst argue that Plaintiffs cannot demonstrate sufficient evidence to create a fact issue on damages.
Additionally, Defendants argue other defenses entitle them to summary judgment. Cory argues Plaintiffs' claims should be dismissed because (1) Plaintiffs released their claims against Cory in a separate agreement, (2) Plaintiffs' claims are barred by the statute of limitations, and (3) Plaintiffs failed to adequately plead alleged misrepresentations based on certain provisions in the Agreement and failed to plead an equitable-fraud claim. Further, Farb and Furst argue Plaintiffs' claims sound in contract, not tort.
The Court will first address Defendants' arguments that Plaintiffs failed to adequately plead certain facts and claims. The Court will then turn to Defendants' challenges to Plaintiffs' proof of the elements of their claims. Finally, the Court will analyze Defendants' defenses.
A. Adequacy of Pleadings
i. Pleadings Based on Misrepresentations of the Agreement
Cory argues that, in response to the Court's Rule 56(f) Order, Plaintiffs altered their pleadings and argued for the first time that Defendants violated representations made in §§ 4.3 and 4.6 of the Agreement. Doc. 144, Cory' Br. Summ. J., 47-49. Plaintiffs counter that their allegations related to these sections of the Agreement and Farb's severance obligation are sufficiently detailed in their second amended complaint. Doc. 156, Pls.' Resp., 51. On reply, Cory presses that § 4.3 of the Agreement is never mentioned in the complaint. Doc. 165, Cory's Reply, 29.
*545"To state a claim under Rule 10b-5 'a plaintiff must allege, in connection with the purchase or sale of securities, (1) a misstatement or an omission (2) of material fact (3) made with scienter (4) on which the plaintiff relied (5) that proximately caused [the plaintiff's] injury.' " Neiman v. Bulmahn ,
(1) specify ... each statement alleged to have been misleading, i.e., contended to be fraudulent; (2) identify the speaker; (3) state when and where the statement was made; (4) plead with particularity the contents of the false representations; (5) plead with particularity what the person making the misrepresentation obtained thereby; and (6) explain the reason or reasons why the statement is misleading, i.e., why the statement is fraudulent.
Starting with § 4.6, the Court finds Plaintiffs adequately pleaded a securities-fraud claim as to a violation of this section. In paragraphs 252 to 264 of the second amended complaint, Plaintiffs thoroughly discuss the specific representations in §§ 4.6(a)&(b) of the Agreement that they believe Defendants violated. Doc. 37, 2d Am. Compl., ¶¶ 252-264. Plaintiffs specify that from these misrepresentations, the Defendants were able to hide a large liability and avoid insolvency, id. ¶¶ 260-61, and induce Plaintiffs to enter into the transaction. Id. ¶ 265. Plaintiffs also sufficiently pleaded how the statements were misleading: the undisclosed severance-obligation agreements violated GAAP (as required by § 4.6(a) ) and was an undisclosed liability (violating § 4.6(b) ). See id. ¶¶ 253-60; ¶¶ 154-64 (discussing the alleged violation of GAAP based on the undisclosed severance obligation). Thus, the Court will not grant Cory's motion as to allegations related to § 4.6.
The Court will not do the same for the § 4.3 claims. As admitted by Plaintiffs and stressed by Cory, the second amended complaint nowhere mentions § 4.3. See Doc. 37, 2d Am. Compl.; Doc. 156, Pls.' Resp., 51 n.28. Plaintiffs argue their allegations should survive because they sufficiently described the acts that violated this section elsewhere in the complaint. Id. The Court rejects this contention-the law is clear that Plaintiffs must identify "each statement alleged to have been misleading." Goldstein ,
ii. Pleading Equitable Fraud Under Delaware Law
Cory also argues that Plaintiffs failed to plead an equitable-fraud claim under Delaware law. Doc. 144, Cory's Br. Summ. J., 47-48. Cory claims that Plaintiffs asserted this claim for the first time in their Rule 56(f) briefing.
Plaintiffs are correct to point out that the "elements of equitable fraud are similar to the elements of common law fraud, except that proof of scienter ... is not necessary to obtain relief." Marina View Condo. Ass'n of Unit Owners v. Rehoboth Marina Ventures, LLC ,
Because Plaintiffs have failed to adequately plead such a claim, the Court dismisses Plaintiffs' equitable-fraud claim. The Court next moves to Defendants' arguments that Plaintiffs have not adduced sufficient evidence to prove certain elements of their claims.
B. Securities-Fraud Claim Under § 10(b) and 10b-5
Plaintiffs plead a claim under section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The Exchange Act prohibits "(1) the 'use or employment' ... of any ... deceptive device,' (2) 'in connection with the purchase or sale of any security,' and (3) 'in contravention of' Securities and Exchange Commission 'rules and regulations.' " Lormand v. US Unwired, Inc. ,
"The courts have implied from these statutes and Rule a private damages action, which resembles, but is not identical to, common-law tort actions for deceit and misrepresentation." Dura Pharm., Inc. v. Broudo ,
i. Misrepresentations or Omissions
The first element a private securities-fraud plaintiff must show is a material misrepresentation or omission. See Lormand ,
Plaintiffs argue three misrepresentations in the Agreement form the basis of their fraud claims:
(1) Defendants violated § 4.6 by failing to disclose severance liabilities owed to Farb;
(2) Defendants violated § 4.3 by failing to disclose an outstanding agreement obligating Atherio to issue stock to another party; and
(3) Defendants misrepresented Farb's status as CFO in a capitalization table listing the issued and outstanding equity of Atherio.
The Court analyzes each representation separately.
a. Section 4.6
In § 4.6(a) of the Agreement, Atherio represented and warranted that each of its financial statements disclosed in the transaction had "been prepared in accordance with GAAP [Generally Accepted Accounting Principles]"
Cory bases this argument on two factual propositions. First, Cory asserts the severance obligation was never an obligation because Farb never resigned. Doc. 144, Cory's Br. Summ. J., 21. Farb sent Cory an official resignation letter on June 5, *5482013-20 days before the alleged June 25, 2013 closing date.
Second, Cory argues the Agreement could not close unless Farb first released or amended his employment agreement. Doc. 165, Cory's Reply, 10. Cory cites to email chains between him and Farb discussing the need to revise Farb's employment agreement in order to obtain necessary funds from investment firms to close the transaction. Id. One of Atherio's main lenders, Prudent Capital, required that the executive employment agreements (including Farb's) be revised, presumably to remove large potential liabilities presented by those agreements. Id. Plaintiffs agree with this point. Doc. 156, Pls.' Resp., 19. Cory thus argues that the close of the transaction is proof that the severance obligation was never paid because the transaction could never have closed with such an obligation on Atherio's books. Doc. 165, Cory's Reply, 11.
In response, Plaintiffs point to evidence they argue indicates that the severance obligation should have made it into the financial disclosures.
*549to Exclude, 1-2. Byers further testified that Atherio's financial statements needed to be GAAP-compliant the date they were provided to Plaintiffs and that they were not compliant. Doc. 156, Pls.' Resp., 31.
Plaintiffs also push back on Cory's assertion that there was no misrepresentation because Farb was never owed a severance obligation.
Finally, in their surreply,
After considering the arguments above, the Court finds that Plaintiffs have cited sufficient evidence to create a triable issue as to whether this section of the Agreement is a misrepresentation. Plaintiffs have introduced evidence that, without informing Plaintiffs, Farb sought to leave the company and invoke the severance portion of his employment agreement. Doc. 156, Pls.' Resp., 14-15. This severance obligation was substantial-totaling over $1 million. Id. And, while Cory may be right that Farb was never owed any severance (or that he wasn't owed this amount until after the close), the issue of whether Atherio's financial statements needed to disclose this pending liability is better left to accounting experts and the appraisal of trial testimony. The Court thus will not grant summary judgment on this issue.
b. Section 4.3(a)
Atherio represented in § 4.3(a) of the Agreement that, among other things, it had no outstanding stock rights or "agreements of any character" obligating Atherio to issue stock. However, as discussed in Part III.A.i., supra , the Court finds Plaintiffs failed to plead a fraud claim with respect to this section. The Court will not reach the parties' other arguments related to this section.
c. Capitalization Table
Plaintiffs last allege that Defendants misrepresented Farb's employment status as Atherio's CFO in a capitalization table provided in disclosures before the transaction closed. Doc. 156, Pls.' Resp., 42-43. With its disclosures for the Purchase Agreement, Defendants provided *550capitalization tables representing the outstanding and issued equity interests of Atherio to Plaintiffs. Id. In one of the tables, entitled "Ownership by Management Post Mezzanine Financing," the executives of Atherio are listed with their corresponding titles and equity interests; Farb is listed as Chief Financial Officer. Id. (citing Doc. 156-4, Pls.' App'x, 496). Plaintiffs argue this was a misrepresentation because Farb was no longer Atherio's CFO on June 26, 2013, one day before the transaction's mezzanine financing came in, and Plaintiffs were never told this fact. Id.
Cory argues a different side to the story. He asserts that, despite sending his resignation letter on June 6, 2013, Farb never considered changing his CFO title until June 26, 2013. Doc. 165, Cory's Reply, 20. Cory stresses that even though the transaction was not funded until June 27, 2013, the effective closing date was June 25, 2013 (the date listed on the Agreement). Id. (citing Doc. 145, Cory's App'x, 9, and expert testimony). Thus, Cory concludes that Farb was CFO through the close of the Agreement and the capitalization table was not a misrepresentation. Id. Further, Cory asserts that Farb continued to act as CFO of Atherio until September 2013 when a new controller was hired. Id.
The Court will not grant summary judgment on this ground. Whether, as Cory claims, Farb was the CFO at the close and was expected to continue as CFO after the close is an issue replete with factual disputes. The Court believes Plaintiffs have brought forth sufficient evidence on this issue.
ii. Reliance
Cory argues that Plaintiffs have not shown evidence of justifiable reliance. Doc. 144, Cory's Br. Summ. J., 37. Plaintiffs do not respond to this argument. Doc. 156, Pls.' Resp. Under Rule 56(e), when a party fails to properly address another party's assertion of fact as required by Rule 56(c), the Court may: (1) give an opportunity to respond; (2) consider the fact undisputed for purposes of the motion; (3) grant summary judgment if the motion and supporting materials show that the movant is entitled to it; or (4) issue any other appropriate order. Fed. R. Civ. P. 56(e).
Because the Court is granting summary judgment on other grounds, the Court will not reach Cory's reliance argument.
iii. Loss Causation
Defendants assert that Plaintiffs have failed to prove loss causation. Because the parties dispute the proper loss-causation standard to apply here, the Court will briefly review the law.
There are two separate prongs of causation a plaintiff must prove in a securities-fraud case: transaction causation and loss causation. See Ludlow v. BP, P.L.C. ,
Transaction causation is often equated to reliance, and typically involves proof of "but-for" causation-i.e, a plaintiff proves transaction causation "by showing that, but for the claimed misrepresentations or omissions, the plaintiff would not have entered into the detrimental securities transaction." Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc. ,
Loss causation, on the other hand, is "[a]kin to a concept of proximate causation in tort law." Ludlow ,
Loss causation is required, but not defined, by statute. See 15 U.S.C. § 78u-4(b)(4). A consistent principle in securities-fraud cases is that the required proof for loss causation should not overlap with reliance evidence used to show transaction causation or reliance. See Halliburton I ,
Here, Defendants argue that Plaintiffs have failed to prove loss causation because the misrepresentations they allege could not have caused their purported harm. Plaintiffs counter that they have satisfied the loss-causation requirement because they have showed that they were "duped" into investing in Atherio at a price that was higher than represented. Doc. 156, Pls.' Resp., 49. Plaintiffs also point to evidence that they argue shows that Atherio's post-close failures and the subsequent price drop of their shares were caused, at least in part, by Farb's resignation as CFO. Id. at 49-50. Defendants reply that Plaintiffs impermissibly conflate loss causation with transaction causation and that Plaintiffs' evidence does not satisfy the proper standard for loss causation. Doc. 165, Cory's Reply, 23-28; Doc. 167, Farb & Furst's Reply, 7-11.
The Court will first discuss the proper loss-causation standard to apply here. To do so, it is important to note the distinction some courts have made between cases involving the sale of publicly traded securities *552on an efficient market with cases dealing with privately traded securities. This case falls into the latter bucket.
The largest swath of cases from the Supreme Court and Fifth Circuit dealing with loss causation are fraud-on-the-market cases decided at the pleading stage.
Thus, Dura generally directs that a plaintiff must prove loss causation in a 10b-5 action and that loss causation is not shown simply by alleging that the misrepresentation inflated the stock's price. But the Court constrained its holding in Dura to overruling the Ninth Circuit's loss causation test in fraud-on-the market cases. See
Decisions from the Fifth Circuit also seem to provide little guidance on what is needed to show loss causation outside the fraud-on-the-market context. Before Dura , the Fifth Circuit held that, at the summary-judgment stage, a plaintiff can prove loss causation in a fraud-on-the-market case by showing that truthful corrective disclosures were related to previous *553misrepresentations and that the corrective disclosures resulted in price decreases. Greenberg v. Crossroads Sys., Inc. ,
(1) that the negative "truthful" information causing the decrease in price is related to an allegedly false, non-confirmatory positive statement made earlier and (2) that it is more probable than not that it was this negative statement, and not other unrelated negative statements, that caused a significant amount of the decline.
Greenberg v. Crossroads Sys., Inc. ,
The Court therefore lacks binding precedent on the issue of what is needed to show loss causation in a securities-fraud case not involving the purchase of publicly traded securities on an efficient market. Cf. Livid Holdings Ltd. v. Salomon Smith Barney, Inc. ,
Courts in other circuits have considered this issue. The Third Circuit labels cases like this "non-typical § 10(b) actions"-compared to "typical" fraud-on-the-market § 10(b) actions. McCabe ,
The Third Circuit ultimately held that the general standard was the same for typical and nontypical cases: to prove loss causation, "the plaintiff must show that the *554defendant misrepresented or omitted the very facts that were a substantial factor in causing the plaintiff's economic loss."
A summary of the facts in McCabe is useful because it is fairly similar to the case at hand. In McCabe , plaintiffs were shareholders of a closely-held company that was acquired by another company.
Plaintiffs sued the acquiring company and Ernst & Young for securities fraud under § 10(b), common-law fraud, and negligent misrepresentation.
Following McCabe , the Ninth Circuit has also distinguished between securities-fraud cases involving fraud on the market and those involving private sales. In Nuveen , the Ninth Circuit affirmed summary judgment against a plaintiff's securities-fraud claim for failing to prove loss causation. Nuveen Mun. High Income Opportunity Fund v. City of Alameda, Cal. ,
*555The Ninth Circuit rejected Nuveen's argument that "but for" causation was sufficient to prove loss causation, even in a case involving the sale of securities in an inefficient market.
From these cases, the Court is persuaded that, in this case, the proper showing for loss causation-i.e. , the one that is most in line with the principles set forth in Dura and the above authority-is whether the plaintiff can show that the very facts the defendant misrepresented or omitted were a substantial factor in causing the plaintiff's economic loss.
Applied here, the Court finds Plaintiffs have not created a fact issue on loss causation. First, Plaintiffs argue that the Court should find they can satisfy loss causation "simply by showing [they were] duped into investing in a business that was less valuable than represented." Doc. 156, Pls.' Resp., 49 (quoting EP Medsystems, Inc. v. EchoCath, Inc. ,
*556McCabe ,
Plaintiffs alternatively argue that Defendants' misrepresentations were "at least partly" the cause of Plaintiffs' loss because they went to the viability of Atherio as a business. Doc. 156, Pls.' Resp., 49-50. Plaintiffs cite a few pieces of evidence to support their argument:
(1) Atherio failed to properly manage its debt without Farb as CFO;
(2) If Farb had stayed on as CFO, Atherio would not have lost two purported investors, which contributed to Atherio's collapse; and
(3) If Farb was CFO he would have prevented Cory from committing fraud and damaging the company.
Turning to the relevant misrepresentations, the Court first considers Plaintiffs' allegation that Defendants misrepresented Farb's continued role with Atherio post-close. For Plaintiffs to show loss causation as to this misrepresentation, Plaintiffs must show that Farb's resignation as CFO was at least a substantial factor in bringing about their economic loss-i.e. , the devaluation of Atherio. Nuveen ,
Plaintiffs' additional evidence that Farb's alleged resignation was the cause of Atherio's collapse is likewise unavailing. Plaintiffs contend that "Farb's departure caused two 'high probability' investors to back out, impairing Atherio's ability to perform the basic business functions of *557accumulating capital." Doc. 156, Pls.' Resp., 50. Plaintiffs support this with an email from Farb to Cory relaying Farb's discussions with potential investors. Doc. 151-4, Pls.' App'x, 590-91. While Farb did tell Cory that one investor was "high probability to invest" but he appeared to be backing out with Farb leaving, Farb also told Cory the investor was concerned that another officer, Mark Dinkel, appeared to be backing out.
Plaintiffs next argue that Farb would have prevented Cory from committing bank fraud if he were CFO at the time Cory submitted inflated receivables to their lender. Doc. 156, Pls.' Resp., 50. The Court notes, again, that this position contradicts Plaintiffs' previously stated position that Farb fraudulently prepared financial statements in violation of GAAP, see id. at 51, and concealed monetary obligations from Plaintiffs. Furthermore, the Court finds Plaintiffs' contention that "Farb would have prevented" Cory from submitting fraudulent documents to Sun Trust highly speculative. The deposition testimony Plaintiffs cite for this argument actually reveals that Farb was aware of Cory's actions and "went and counseled Jason repeatedly to go to the banks immediately, advise them that we were in default, which we're required to do." Doc. 151-5, Pls.' App'x, 720 (Dep. of Thomas Farb). And Farb then testified that he resigned because of Cory's behavior and reported his actions to "the board and Prudent and Sun Trust." Id. Thus, Farb never testified, as Plaintiffs claim, that he would have prevented Cory from committing fraud; instead, Farb did as he said, and resigned as CFO because he was unwilling to help Cory. Further, it is merely speculative that Farb would have done anything different as CFO of the company, compared to his position as an executive vice president at the time Cory committed the alleged fraud.
Lastly, the Court finds Plaintiffs' weakest argument supporting loss causation relates to the hypothetical severance obligation owed to Farb. As discussed in the background section, it is clear that Farb and Atherio entered into an agreement to shift the amount of severance he was owed to another Atherio entity. There is a fact issue over why this was done. But even if the Court assumes the worst-that the severance obligation was fraudulently concealed from Atherio's books to facilitate the close of the Agreement-it is equally clear that this severance obligation was never paid. And because the obligation to Farb was never paid, Atherio's value could not have been affected by it. Thus, the *558facts underlying the fraud-the existence of this undisclosed liability-could not have been a substantial factor in causing Plaintiffs' economic loss. Plaintiffs argue, without evidence, that the fact that this obligation wasn't paid is proof that Atherio was poorly managed, unable to meet its obligations, and heading towards failure with Cory at the helm. Doc. 156, Pls.' Resp., 50. But "bare assertions, conclusory allegations or suspicions" are not sufficient to create a fact issue. See Celotex Corp. v. Catrett ,
Because Plaintiffs have not brought forth evidence that creates a genuine issue of material fact as to loss causation, the Court grants Defendants' motions for summary judgment on Plaintiffs' securities-fraud claim.
iv. Damages
Defendants Farb and Furst argue Plaintiffs have failed to prove damages for their securities-fraud claim. Doc. 140, Farb & Furst's Mot. Summ. J., 19-20. They claim this is so because Plaintiffs have not provided admissible evidence on the value of the Atherio shares they received when they sold their company. Farb and Furst further contend that Plaintiffs' nonretained experts are not qualified to testify on Atherio's valuation.
The Court will not reach the issues of which damages theory is appropriate here or of whether Plaintiffs have adduced sufficient evidence of damages to survive summary judgment because it has already found that Plaintiffs have failed to show Defendants' alleged acts caused them any loss.
C. Common-Law Fraud Claim
A fraud claim under Delaware law has similar elements to a securities-fraud claim.
*559Vichi v. Koninklijke Elec., N.V. ,
Defendants make the same arguments and cite the same evidence for summary judgment on the Delaware fraud claim that they do for the securities-fraud claim. Based on the similarity of the law, the Court finds its analysis of Defendants' respective arguments against Plaintiffs' 10b-5 claim equally applicable here. The Court thus grants summary judgment on Plaintiffs' common-law fraud claim on the grounds that Plaintiffs have no evidence that Defendants' misrepresentations caused their loss. See Part III.B.iii. supra.
D. Affirmative Defenses
Although the Court has granted summary judgment on Plaintiffs' securities and common-law fraud claims, the Court addresses the following affirmative defenses. The Court will not grant summary judgment on these defenses.
i. Statute of Limitations-10b-5 Claim
Cory moves for summary judgment on the ground that Plaintiffs' securities-fraud claim is barred by the statute's two-year limitations period. Doc. 144, Cory's Br. Summ. J., 42-43. Cory argues this is the case because there is evidence that shows Plaintiffs were aware or should have been aware that Farb was no longer the CFO of Atherio in 2013-more than two years before they filed suit in 2016. Id. at 43. In response, Plaintiffs point to conflicting evidence that seems to indicate that they did not learn that Farb had resigned until a separate proceeding was initiated in January 2015, which would be within the two-year limitations period. Doc. 156, Pls.' Resp., 47.
Private securities-fraud claims under Rule 10b-5 must filed within two years after the discovery of a violation.
Cory points to portions of Plaintiffs' depositions as evidence that Plaintiffs were aware, or should have been aware with reasonable diligence, of the facts constituting the violation. First, Cory cites Stewart's deposition as evidence Stewart knew Farb had resigned shortly after the close in July 2013. Doc. 144, Cory's Br. Summ. J., 51. When asked when he learned that Farb was no longer CFO of Atherio, Stewart stated: "Probably July [2013] when they couldn't pay our bills. We knew that we didn't have anyone running the financial back office of Atherio.... [A]nd they told us he had left and they were looking for a controller." Doc. 145-13, Cory's *560App'x, 280-81 (Stewart's Dep.). And when asked "so almost immediately after the close, you learned that Farb was no longer CFO," Stewart responded: "I was told Farb wasn't there, that he had resigned and he was gone. And they immediately started falling apart."
Cory next points to portions of O'Connor's deposition. When asked when she learned of Farb's resignation, O'Connor responded: "Let's see. We sold at the end of June 2013. I can't specifically give you a date and time. Potentially that fall. I honestly-again, it was five years ago. I honestly don't know the answer to it."
In response to this, Plaintiffs provide contradictory testimony from Stewart's deposition. When asked when he learned that Farb resigned, he testified: "We figured out he resigned somewhere at the beginning of the 202 [proceeding] when we started reading his resignation papers." Doc. 156-5, Pls.' App'x, 863. Because that proceeding was initiated in January 2015, Plaintiffs argue the lawsuit was timely. Stewart also testified he never learned about the "side agreements" involving Farb's severance obligation until discovery during this litigation.
Reviewing the arguments and evidence presented by the parties, the Court finds there is a genuine fact issue as to when this cause of action accrued. This issue is best reserved for the factfinder, and the Court therefore will not grant summary judgment on the limitations defense.
ii. Cory's Release Defense
Cory next insists that he alone is entitled to summary judgment because Plaintiffs released their claims against him in a previous agreement (the "Release"). Doc. 144, Cory's Br. Summ. J., 12-17. Plaintiffs, in response, argue that they are not bound by the Release because they never signed it or agreed to be bound by it, and that they never gave anyone authority to sign it on their behalf. Doc. 156, Pls.' Resp., 47-48. Cory counters that (1) Furst had both actual and apparent authority to enter into the Release on Plaintiffs' behalf and (2) Plaintiffs should be bound by the Release because they had knowledge of and accepted benefits from that agreement. In their surreply, Plaintiffs argue that (1) Furst's testimony is inadmissible and should be not be considered and (2) while they may have had knowledge that an agreement was being reached to allow Cory to depart from Atherio, they did not know it involved a release of claims. Doc. 174-1, Pls.' Surreply.
The Court will not reach this issue at this time. Because the Court is granting summary judgment against Plaintiffs' claims and because Cory has a counterclaim remaining based on the Release (Doc. 161) that the Court is unwilling to resolve on these motions, the Court will instruct the parties, in an order to follow, on how to proceed with this issue.
E. Claims Sounding in Contract, Not Tort
Farb and Furst's final argument is that Plaintiffs' claims should be dismissed because they sound in contract, not tort. Doc. 140, Farb & Furst's Mot. for Summ. J., 20-21. Plaintiffs respond first by noting that the parties contractually agreed that Plaintiffs could bring a fraud claim without being subject to a "bootstrapping" argument. Doc. 156, Pls.' Resp., 55-56. Plaintiffs respond second by asserting that their fraud claims arise from Defendants breach of a separate tort-law duty.
IV.
CONCLUSION
For these reasons, the Court GRANTS Defendants' motions for summary judgment (Doc. 140 & 142). Specifically, the Court rules as follows:
1. The Court GRANTS summary judgment against Plaintiffs' securities-fraud claim because they failed to show that Defendants were the legal cause of their alleged loss. See Part III.B.iii. supra.
2. The Court GRANTS summary judgment against Plaintiffs' common-law fraud claim because they failed to show that Defendants were the legal cause of their alleged loss. See Part III.C. supra.
3. The Court GRANTS Defendants' motions on Plaintiffs' equitable-fraud claim and against Plaintiffs' fraud claims as they relate to § 4.3 of the Agreement because Plaintiffs have failed to adequately plead such claims. See Part III.A.i-ii. supra.
4. The Court does not grant summary judgment on the affirmative defenses raised by Defendants.
Though the Court has refused to grant summary judgment on the defenses raised by Defendants, the result of this Order is that all Plaintiffs' claims are DISMISSED .
Additionally, in relation to this Order, Defendant Cory's Motion to Exclude the Testimony of Plaintiffs' Expert Beverly Byers (Doc. 155) is DENIED . Cory's Motion for Leave to File Evidence included in the Appendix to his Reply Brief (Doc. 175) is GRANTED . Plaintiffs' Motion to Strike, For Leave to File Surreply, and to Add Additional Evidence (Doc. 174), is GRANTED, in part, and DENIED, in part -the Court will not strike Cory's Reply, but grants Plaintiffs' leave to file their surreply and additional evidence attached to Doc. 174.
SO ORDERED.
This factual history is drawn from the summary-judgment evidence, provided in the pending summary-judgment briefing and the briefing from the Rule 56(f) Order. Factual disputes are noted.
Plaintiffs dismissed Atherio, Inc. in their amended complaint. Doc. 37, 2d Am. Compl.
While the Agreement is dated June 25, 2013, Doc. 118-2, Pls.' App'x, 7, Plaintiffs assert there is a fact issue as to when the transaction actually closed. See Doc. 129, Pls.' Reply, 4.
In the alternative, Cory alleges that even if certain statements were misrepresentations, they were not material. The Court finds that Cory's materiality complaints have been mooted by the Rule 56(f) Order because the challenged statements were extracontractual.
Generally Accepted Accounting Principles ("GAAP") are adopted by the Federal Accounting Standards Board ("FASB"). As courts have noted, "[t]he term generally accepted accounting principles ... is a term of art encompassing a wide range of acceptable procedures, such that an ethical, reasonably diligent accountant may choose to apply any of a variety of acceptable accounting procedures when that accountant prepares a financial statement." Lovelace v. Software Spectrum, Inc. ,
As discussed, the closing date is disputed.
Plaintiffs, for the first time in response briefing, argue that Defendants' alleged failure to disclose a $250,000 note also violated § 4.6(b) of the Agreement because it was an undisclosed liability. But the second amended complaint nowhere alleges that Atherio breached this section by failing to disclose this note. Doc. 37, 2d Am. Compl.; Doc. 167, Farb & Furst's Reply, 16-17. The Court therefore disregards any arguments related to the note. See Pierce v. Hearne Indep. Sch. Dist. ,
Cory has moved to exclude the testimony of Byers, Doc. 155, and objects to the consideration of her testimony at summary judgment under Rule 56(c)(2). Doc. 166. Cory makes a number of objections to her testimony, including that it is irrelevant, misleading, unreliable, conclusory, and based on improper legal conclusions. Doc. 155, Cory's Mot. to Exclude, 2. The Court DENIES this motion as it finds that Cory's issues with Byers' testimony could be sufficiently cured at trial with cross examination and rebuttal testimony on the requirements of GAAP.
Plaintiffs make this argument in response to Cory's claim that Farb never resigned. The Court finds it factually applicable to Cory's argument that § 4.6 is not a misrepresentation and will thus consider the argument here, as well.
In the alternative to having the appendix of Cory's summary-judgment reply brief struck, Plaintiffs requested leave to file a surreply (Doc. 174). The Court grants Plaintiffs leave and will consider their arguments.
In Basic Inc. v. Levinson , the Supreme Court held that when "public information is reflected in the market price of the security ... it can be assumed that an investor who buys or sells stock at the market price relies upon the statement." Stoneridge ,
The Court notes that a pending petition for certiorari before the Supreme Court may affect the loss-causation standard and thus this case. See First Solar, Inc. et al. v. Mineworker's Pension Scheme et al. , No. 18-164. Courts can stay cases pending a higher court's ruling that may affect the case at hand. See Rezko v. Xbiotech Inc. ,
See Dura ,
Like securities-fraud claims, Delaware courts require plaintiffs to show two forms of causation: (1) factual causation (or but-for causation) and (2) legal causation (or proximate causation). See Vichi ,