Case: 19-10622 Document: 94-1 Page: 1 Date Filed: 05/29/2024
United States Court of Appeals
for the Fifth Circuit
United States Court of Appeals
Fifth Circuit
No. 19-10622
FILED
May 29, 2024
Jason Cory, Lyle W. Cayce
Clerk
Plaintiff—Appellee,
versus
Michael Stewart; Tammy O’Connor,
Defendants—Appellants,
versus
Greg Furst; Thomas Farb,
Defendants—Appellees.
Appeal from the United States
for the Northern District of Texas
USDC No. 3:16-cv-01731-B
Before Richman, Chief Judge, Higginbotham, and Willett,
Circuit Judges.
Per Curiam:
Tammy O’Connor and Michael Stewart (the Sellers) sold their
company, Red River Solutions, LLC, to Atherio, Inc., a company led by Jason
Cory, Greg Furst, and Thomas Farb (together, the Executives). The
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Membership Interest Purchase and Contribution Agreement gave the Sellers
nearly half their compensation upfront; they would get the rest—around $3.5
million—in ownership units and future payments. As things go, Atherio
bellied-up and the Sellers received none of the promised $3.5 million. So the
Sellers sued the Executives, alleging extra and intracontractual fraud under
federal securities law, Delaware common law, and the Texas Securities Act.
The district court granted summary judgment to the Executives on all claims.
The Sellers appealed. We affirm summary judgment on the extracontractual
and TSA fraud claims. But the district court erred in applying our summary-judgment standard to the federal securities law and Delaware common law
claims; we reverse the summary judgment grants on those claims and
remand.
I
Atherio was a “roll-up” company, raising cash to purchase multiple
companies that, when combined, create a sum greater than its parts. 1 To
start, Atherio secured a “middleman” lender, Prudent Capital, to spot the
nascent Atherio company-buying funds while Atherio raised investor
dollars. 2 The first stop on its “roll-up” tour—Red River.
The Sellers sold Red River to Atherio for $6.75 million: $3.25 million
upfront, a $1.5 million future payment, and $2 million worth of Atherio
ownership units. 3 The deal closed in early 2013, enshrined in the
Membership Interest Purchase and Contribution Agreement. Importantly,
1
“The mechanics [of a roll-up] are relatively simple: an investor or strategic
platform enters a fragmented industry . . . [and] buys several similar businesses in quick
succession. Soon, a marketplace of many small businesses is replaced by a larger chain or
conglomerate, and the investor has ‘rolled up’ the sector.” David Working, The Anatomy
of a Roll-Up, ZACHARY SCOTT (April 30, 2019), https://zacharyscott.com/the-anatomyof-a-roll-up/.
2
Notably, Prudent was a primary lender that gets paid back before any other
claimant once Atherio raised the necessary capital (or failed to).
3
While negotiating this deal, Atherio CEO Cory allegedly made three
extracontractual misrepresentations. Because the Sellers cannot pursue extracontractual
fraud claims, see infra section III(A), we omit the specifics.
2
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the Agreement presented Farb as Atherio’s CFO. Yet, unbeknownst to the
Sellers, Farb resigned prior to deal’s closing. 4
Things quickly went south. Like dominoes, the Executives failed to
raise the requisite capital, Atherio’s strategic plan failed, 5 it defaulted on
Prudent’s loan, 6 the Executives couldn’t pay the $1.5 million future
payment, and the Sellers’ Atherio ownership—originally worth $2 million—
became worthless. The Sellers sued Atherio and the Executives (CEO Cory,
former-CFO Farb, and COO Furst) for the $3.5 million promised-but-lost.
Their theories: extra and intracontractual fraud under (1) federal securities
law, (2) the TSA, and (3) Delaware common law. Over years of litigation, the
district court entered multiple orders; the Sellers challenge three of these
orders, all summary-judgment grants, on appeal:
1. the Sellers’ extracontractual fraud claims are barred by the
Agreement’s Disclaimer of Reliance clause;
2. the Sellers’ TSA claims are barred by the Agreement’s
Delaware Choice of Law clause; and
3. the Sellers’ intracontractual federal securities law and
Delaware common law claims don’t meet the legal
elements and fail.
II
When reviewing summary judgment, we apply Rule 56 just as the
district court did. 7 Summary judgment is proper “if the movant shows that
4
Farb did continue on for three months in a distinctly reduced role as Executive
Vice-President of Corporate Development.
5
Atherio raised less than one million dollars by year-end 2013.
6
The Sellers also allege that Cory “improperly modified” certain loan documents
for another lender. And the Sellers assert that this “borrowing base fraud is [] one reason
why Prudent Capital declared Atherio in default.” But Prudent listed four reasons for the
default, and alleged fraud was not one of them. We don’t detail this evidence because the
dispute it supports is not material.
7
Petzold v. Rostollan, 946 F.3d 242, 247 (5th Cir. 2019) (citation omitted).
3
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there is no genuine dispute as to any material fact and the movant is entitled
to judgment as a matter of law.” 8
III
A
The district court granted summary judgment to the Executives on all
extracontractual fraud claims, finding that the Sellers “clearly disclaimed
reliance on extracontractual representations.” On appeal, the Sellers
concede that the Disclaimer of Reliance clauses preclude most
extracontractual fraud claims but urge that the separate Fraud Carve-Out
clause revives the Sellers’ right to bring actual extracontractual fraud
claims—that is, fraud conducted knowingly. Therefore, the Sellers assert,
summary judgment was inappropriate for their allegations of actual
extracontractual fraud. Reviewing this purely legal question, we agree that
the Disclaimer of Reliance clauses bar all extracontractual fraud claims.
The Agreement has an enforceable and applicable Delaware choice-of-law clause. Sitting in diversity, we apply the choice-of-law rules of the
forum state; here, Texas. 9 And under Texas rules, “the law of the chosen
state must be applied”; here, Delaware. 10 But we start with what we are
applying Delaware law to. First, the Disclaimer of Reliance clauses, § 3.1(a):
Subject to Section 3.28(d) hereof, each [Seller] represents to
[Atherio] that . . . he or she is not relying on any representations
or warranties made by any person or entity in his or her
decision to enter this Agreement . . . to which he or she is a
party . . . .
8
FED. R. CIV. P. 56(a). When reviewing, we “resolve factual controversies in favor
of the nonmoving party.” Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994). But
we will not consider “conclusional allegations and unsubstantiated assertions.” Carnaby v.
City of Houston,
636 F.3d 183, 187 (5th Cir. 2011).
9
InterFirst Bank Clifton v. Fernandez, 853 F.2d 292, 294 (5th Cir. 1988) (citing
Stuart v. Spademan,
772 F.2d 1185, 1195 (5th Cir. 1985)).
10
Resolution Tr. Corp. v. Northpark Joint Venture, 958 F.2d 1313, 1318 (5th Cir.
1992) (citing DeSantis v. Wackenhut Corp.,
793 S.W.2d 670, 678 (Tex. 1990)). There is no
dispute that the Agreement’s Delaware Choice of Law clause applies to this issue.
4
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And § 3.28(c):
Each [Seller] hereby acknowledges and agrees that the
representations and warranties of [Atherio] contained in this
Agreement represent all of the representations and warranties
made by it as part of the transactions contemplated hereby and
[the Sellers are not] relying on any other representation or
warranties (express or implied) in making its decision to
consummate these transactions.
Second, the Fraud Carve-Out clause, § 3.28(d):
[Atherio] agrees that nothing contained in this Section 3.28 or
elsewhere in this Agreement shall limit the [Sellers’] right to
bring claims for actual fraud . . . .
Delaware law enforces clear disclaimer-of-reliance clauses. 11 And, as
long as the disclaimed reliance is clear, such clauses are enforceable even if
the agreement also has a fraud carve-out clause “specifically preserv[ing] the
right to assert fraud claims.” 12 When an agreement has both clauses, the
disclaimer of reliance defines “the contractual universe of information on
which a fraud-claim can be based” 13 while the fraud carve-out “clarifies” the
exact fraud remedies the parties intended “to preserve.” 14
Here, the Disclaimer of Reliance clauses are unambiguously clear. To
overcome their enforceability, the Sellers make two arguments: (1) the Fraud
Carve-Out renders the clear Disclaimer of Reliance ambiguous and
unenforceable and (2) the Fraud Carve-Out overcomes the enforceable
Disclaimer of Reliance for actual fraud claims. We find neither persuasive.
11
ChyronHego Corp. v. Wight (ChyronHego), No. CV 2017-0548-SG, 2018 WL
3642132, at *4 (Del. Ch. July 31, 2018) (“Delaware law enforces clauses that identify the
specific information on which a party has relied and which foreclose reliance on other
information.” (citation omitted)).
12
Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 141 (Del. Ch. 2009).
13
Prairie Capital III, L.P. v. Double E Holding Corp. (Prairie Capital), 132 A.3d 35,
55 (Del. Ch. 2015).
14
ChyronHego, 2018 WL 3642132, at *5.
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We address the prongs together: Delaware precedent dictates that a
clear disclaimer-of-reliance clause defines the information upon which a
fraud claim may be based. In ChyronHego, the Delaware Chancery Court
found that a disclaimer-of-reliance clause barred any extracontractual fraud
claims despite the accompanying fraud carve-out. 15 The court read the fraud
carve-out to “clarify[] the intent to preserve the remedies provided in [the
Exclusive Remedies provision],” not to preserve a remedy for
extracontractual fraud. 16 After all, the Buyers disclaimed any reliance on
extracontractual information, a prerequisite to any extracontractual fraud
claim; there was no remedy to preserve.
ChyronHego relied heavily on Prairie Capital. 17 That case similarly
held that an effective disclaimer-of-reliance clause barred extracontractual
fraud claims even though the agreement also had a fraud carve-out
provision. 18 Prairie Capital reasoned the fraud carve-out clause certainly
provided a remedy for fraud, but it “d[id] not alter the contractual universe
of information on which a fraud-claim can be based”—that universe is
controlled by the disclaimer-of-reliance clause. 19 Together, ChyronHego and
Prairie Capital hold that a clear disclaimer-of-reliance clause controls the
universe of information upon which a fraud claim can be grounded regardless
of any accompanying fraud carve-out clause. Accordingly, the Sellers’
contention—that the fraud carve-out renders the clear disclaimer of reliance
15
ChyronHego, 2018 WL 3642132, at *5 (“[Seller] and the Buyer agree that [Seller
didn’t make any representation other than in this Agreement and the Buyer did not rely on
any such representation] . . . however, . . . this Section . . . shall not preclude the Buyer
Indemnified Parties from asserting claims for Fraud [under the Exclusive Remedies provision].”
(emphasis added)).
16
Id.
17
Id. at *6.
18
Prairie Capital, 132 A.3d at 49–56.
19
Id. at 55. And, under similar facts, Novipax Holdings LLC v. Sealed Air Corp. held
“that the parties preserved a fraud claim in [the Exclusive Remedy clause], but limited that
fraud claim through the non-reliance provisions . . . .” No. CVN17C031682EMDCCLD,
2017 WL 5713307, at **11 – 12 (Del. Super. Ct. Nov. 28, 2017).
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ambiguous/unenforceable or overcomes the clause outright—is
unpersuasive.
And the Sellers’ efforts to distinguish this Agreement from those in
ChyronHego and Prairie Capital are unavailing. Like the clauses in those
cases, §§ 3.1(a) and 3.28(c) provide an explicit disclaimer of reliance on
extracontractual statements that “alter[ed] the contractual universe of
information on which a fraud-claim can be based.” 20 And because this
disclaimer is clear and enforceable, the Fraud Carve-Out clause only
“clarifies the intent to preserve” the Sellers’ right to sue for actual
intracontractual fraud. 21 The Disclaimer of Reliance clauses control what type
of fraud claims may be brought—extra versus intracontractual—by defining
what information was relied on; here, only intracontractual. So there is no
extracontractual fraud remedy for the Fraud Carve-Out to preserve because
a necessary element, reliance, is contractually precluded by the Disclaimer of
Reliance clauses. 22
At bottom, the “drafters specifically preserve[d] the right to assert
fraud claims” by including a Fraud Carve-Out clause. But they nonetheless
limited the information these claims may be based on by explicitly “say[ing]
so” through clear Disclaimer of Reliance clauses—fraud claims cannot be
based on information outside the Agreement. 23 We thus affirm the district
20
Prairie Capital, 132 A.3d at 55.
21
ChyronHego, 2018 WL 3642132, at *5 (finding that a similar Fraud Carve-Out
“clarifies the intent to preserve the remedies provided in [the Agreement] . . . . [It] signifies
careful lawyering, not surplusage or meaningless verbiage.”).
22
The Sellers’ cases all include already ambiguous disclaimer-of-reliance clauses
rendered even more unclear by a conflicting fraud carve-out clause. But when there is an
explicit disclaimer of reliance that alters the universe of actionable information, as here, no
Delaware case says that a fraud carve-out may “unalter” it. See, e.g., Anvil Holding Corp. v.
Iron Acquisition Co., No. CIV.A. 7975-VCP, 2013 WL 2249655 at *8 (Del. Ch. May 17,
2013); Airborne Health,
984 A.2d at 141; TrueBlue, Inc. v. Leeds Equity Partners IV, LP, No.
CVN14C12112WCCCCLD,
2015 WL 5968726, at *9 (Del. Super. Ct. Sept. 25, 2015).
23
Airborne Health, Inc., 984 A.2d at 141. Moreover, this reading does not render
the Fraud Carve-Out clause meaningless because the clause still clarifies the Sellers’ right
to sue for common-law intracontractual fraud within this complex Agreement. See, e.g.,
ChyronHego,
2018 WL 3642132, at *5; Prairie Capital, 132 A.3d at 49–56.
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court’s grant of summary judgment; the explicit Disclaimer of Reliance
clauses preclude all extracontractual claims. 24
B
Next, the Sellers aim their sights on the district court’s summary-judgment grant on their Texas Securities Act claims. The district court found
the Agreement’s broad Delaware Choice of Law clause enforceable and
applicable to the Sellers’ state securities fraud claim. Therefore, the court
concluded, the Sellers could only sue under the Delaware Securities Act. The
Sellers urge error, arguing they should be allowed to proceed under the more
favorable TSA because a Delaware court would allow them to sue under this
Texas statute. But the Agreement’s effective choice-of-law clause mandates
that, if the Sellers want to bring a state statutory claim, they may only access
Delaware’s statutes.
Again, we start with the contract. The Agreement’s Choice of Law
clause provides:
This Agreement and all disputes [] arising out of or relating to
this Agreement . . . shall be governed by, and construed in
accordance with, the internal laws of the State of Delaware,
without regard to the laws of any other jurisdiction that might
be applied because of the conflicts of laws principles.
And, again, we apply Texas choice-of-law rules that enforce Delaware
choice-of-law clauses. 25 In Texas, to access Texas law despite a Delaware
choice-of-law clause, the Sellers must prove the clause is either
24
We likewise find unpersuasive the supplemental authorities the Sellers have
provided us through their most recent Rule 28j Letter. See In re P3 Health Group Holdings,
LLC, No. 2021-0518-JTL, 2022 WL 15035833, at *7 (Del. Ch. Oct. 28, 2022); Partners &
Simon, Inc. v. Sandbox Acquisitions, LLC, No. 2020-0776-MTZ,
2021 WL 3159883, at *6–
7 (Del. Ch. July 26, 2021). Unlike those cases, the parties’ Disclaimer of Reliance Clause
unambiguously disclaims reliance on extracontractual representations, and their Fraud
Carve-Out Clause does not specifically except claims of fraud from those representations.
25
InterFirst Bank Clifton, 853 F.2d at 294 (citing Stuart,
772 F.2d at 1195);
Resolution Tr. Corp.,
958 F.2d at 1318 (citing DeSantis,
793 S.W.2d at 678).
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(1) unenforceable 26 or (2) inapplicable to the asserted claim. 27 But the Sellers
don’t pursue either of these lines of argument. Instead, the Sellers argue that
they should be allowed to proceed under the more favorable TSA because the
Delaware Choice of Law clause only requires us to act like a Delaware court;
it doesn’t prescribe which states’ statutes the Sellers may sue under.
This novel argument falters at the start. Under Texas choice-of-law
rules, the Agreement’s Delaware Choice of Law clause is binding—we apply
Delaware law, including the Delaware statues (i.e., the DSA), to the Sellers’
claims. 28 And whether a Delaware court may have generally allowed the
Sellers’ TSA claims is inapposite; here we have a Delaware Choice of Law
clause that precludes access to non-Delaware statutes. Consider Maynard v.
PayPal, Inc., where a Texas district court applying Texas choice-of-law rules
confronted a similar issue. 29 The Maynard agreement had an enforceable,
applicable Delaware choice-of-law clause. Nonetheless, the plaintiffs tried to
assert claims under a Texas statute. The court held: “As a result of the
application of Delaware law, plaintiffs cannot maintain claims under the
Texas statutes.” 30 So too here. The parties negotiated for this outcome; we
merely hold them to their bargain.
Under Texas rules, if the Sellers want to sue under a state statute, the
Agreement’s enforceable, applicable Delaware Choice of Law clause
mandates that state be Delaware. The Sellers contractually precluded
26
Cardoni v. Prosperity Bank, 805 F.3d 573, 581–82 (5th Cir. 2015).
27
Caton v. Leach Corp., 896 F.2d 939, 943 (5th Cir. 1990).
28
DeSantis, 793 S.W.2d at 678.
29
No. 3:18-CV-0259-D, 2019 WL 3552432, at *5 (N.D. Tex. Aug. 5, 2019).
30
Maynard, 2019 WL 3552432, at *5. And, in Pyott–Boone Electronics v. IRR Tr. for
Donald L. Fetterolf (Dated Dec. 9, 1997), a Virginia district court analyzed a Delaware
choice-of-law clause under similar Virginia choice of law rules.
918 F. Supp. 2d 532, 547
(W.D. Va. 2013). It held the plaintiffs couldn’t sue under the Virginia Securities Act
because the VSA was “virtually identical” to the DSA and, therefore, “application of the
Delaware law would not appear to deprive any Virginia citizens of the protections afforded
them by domestic law.”
Id. A similar result occurred Organ v. Byron,
435 F. Supp. 2d 388,
389–90 (D. Del. 2006) (holding that “the Delaware choice of law provision in the Merger
Agreement precludes Plaintiff from making a claim based on Illinois Securities Law”).
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themselves from the TSA. End of story. 31 We affirm the district court’s grant
of partial summary judgment barring the Sellers’ TSA claim.
C
We lastly address the Sellers’ remaining intracontractual fraud claims
under Delaware common law and federal securities law. The district court
granted the Executives summary judgment on these claims because the
requisite loss causation wasn’t met. 32 The Sellers disagree, arguing that there
is a genuine dispute whether the Executives’ intracontractual misstatement
that Farb was the CFO as of closing caused the Sellers’ loss. Construing
reasonable inferences in the Sellers’ favor, we conclude that there is a dispute
whether loss causation is met, a material legal element, and reverse the
district court’s summary judgment grant on these claims. 33
Because our holding rests heavily on our summary-judgment standard
of review, we take it from the top. American summary judgment finds its
roots in a similar device deployed by the English in their Bills of Exchange
31
Well, end of this story at least. The outcome may well be different if the TSA and
DSA were dissimilar such that only allowing access to the DSA would “thwart or offend
[Texas] public policy.” DeSantis, 793 S.W.2d at 677; see also Pyott–Boone Electronics,
918 F.
Supp. 2d at 547; Organ, 435 F. Supp. 2d at 392–93. But that is not the case here, compare
Del. Code Ann. tit. 6 § 73–605 (West 2018) (“Any person who . . . [o]ffers, sells or
purchases a security by means of any untrue statement of a material fact or any omission to
state a material fact necessary in order to make the statement made, in the light of the
circumstances under which they are made, not misleading . . . is liable to the person buying
or selling the security from or to him.”) with Tex. Rev. Civ. Stat. Ann. art. 581–33
(Vernon’s 2017) (“A person who offers or sells a security . . . by means of an untrue
statement of a material fact or an omission to state a material fact necessary in order to
make the statements made . . . not misleading, is liable to the person buying the security
from him”), and we leave this unanswered question for Texas courts.
32
The district court found that both federal securities law and Delaware common
law have the same loss-causation requirement and applied the same summary-judgment
analysis to both sets of claims. The Sellers do not dispute the district court’s finding on
appeal, and we proceed similarly.
33
The Sellers also argue that the loss-causation order is moot because the
disclaimer of reliance order was improper. But, as already discussed, the disclaimer of
reliance order was proper and therefore this argument falls flat.
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Act of 1855. 34 And summary judgment officially entered into federal
procedure in 1938 when the Federal Rules of Civil Procedure, including Rule
56, were promulgated. 35 In 1939, a federal court, for the first time, granted
summary judgment because the adjudication “left nothing further to be
tried.” 36 In 1957, a federal circuit court affirmed its first summary-judgment
grant, finding “no error” with little adieu. 37 We followed suit in 1965. 38
Today summary judgment is proper when the movant establishes
“ ‘that there is no genuine dispute as to any material fact and the movant is
entitled to a judgment as a matter of law.’” 39 We apply the same standard as
the district court upon review, “revers[ing] the grant of a summary judgment
motion if it appears from the record that there is an unresolved issue of
material fact.” 40 Importantly, we do not decide factual disputes at the
summary-judgment stage; we focus on whether there are material factual
disputes that should be decided by a factfinder. 41 And it’s the movant’s
burden to show the requisite lack of any genuine, material disputes. 42
Further, we must also “resolve factual controversies in favor of the
nonmoving party.” 43 Here, this principle carries the day for the Sellers. But,
34
10 CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FED. PRAC. & PROC. § 2711
(4th ed.).
35
Id.
36
Levinson v. Cohen, 31 F. Supp. 96, 96 (S.D.N.Y. 1939).
37
Easter v. Gates, 247 F.2d 78, 78 (D.C. Cir. 1957).
38
Moore v. Calhoon, 343 F.2d 473, 473 (5th Cir. 1965).
39
WRIGHT & MILLER, supra note 34, § 2716; Benton-Volvo-Metairie, Inc. v. Volvo
Sw., Inc., 479 F.2d 135, 139 (5th Cir. 1973).
40
WRIGHT & MILLER, supra note 34, § 2716 (cleaned up).
41
Petzold v. Rostollan, 946 F.3d 242, 247 (5th Cir. 2019).
42
Travelers Ins. Co. v. Liljeberg Enterprises, Inc., 7 F.3d 1203, 1206 (5th Cir. 1993).
43
Little, 37 F.3d at 1075; see also Labit v. Carey Salt Co.,
421 F.2d 1333, 1335 (5th
Cir. 1970) (“Accepting the facts most favorable to the plaintiff, there is no reasonable basis
on which a jury could determine that he was injured upon navigable waters or that he was
a seaman. The summary judgment was therefore proper.”).
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when the decision is this close, it’s critical that we examine the line closely,
demarcating its exact lay, before calling fair or foul.
Wright and Miller frame our summary-judgment standard like this:
“[T]he party who defended against the motion for summary judgment will
have the advantage of the court reading the record in the light most favorable
to him . . . and will receive the benefit of the doubt when [his factual]
assertions conflict with those of the movant.” 44 In other words, we “view all
the facts and draw all reasonable inferences in favor of the nonmoving
party.” 45 But our deference has a floor—reasonableness. If the nonmovant’s
assertions are mere “conclusory allegations,” “unsubstantiated assertions,”
or only supported by a “scintilla of evidence,” it would be unreasonable to
accept them over the movant’s substantiated factual assertions. 46 All this is
difficult to understand in the ether, and even more difficult to apply to these
hotly contested fraud claims. 47 But a few examples yield clarity.
Start with National Hygienics, Inc. v. South Farm Bureau Life Insurance
Co., 707 F.2d 183, 188 (5th Cir. 1983), where we reviewed a summary-judgment grant to defendants on a contractual interference claim. The law
was undisputed and, on appeal, the nonmovant plaintiff urged that there was
a factual dispute with respect to a necessary legal element. We agreed and
reversed the summary-judgment grant. To reach this end, we considered the
plaintiff’s evidence and held it could “reasonably lead to a conclusion that”
the requisite element was met. 48 In other words, the evidence “plausibly”
supported the “not implausible” finding that this element was satisfied. 49
44
WRIGHT & MILLER, supra note 34, § 2716 (citations omitted).
45
Crawford v. Metro. Gv’t of Nashville and Davidson Cnty., 555 U.S. 271, 274 n.1
(2009) (internal quotation marks omitted).
46
Little, 37 F.3d at 1075 (internal quotation marks omitted).
47
Benton-Volvo-Metairie, Inc., 479 F.2d at 138 (“[D]ecid[ing] whether the granting
of summary judgment was correct based on the evidence presented . . . is a very complex
and difficult task.”).
48
Nat’l Hygienics, Inc., 707 F.2d at 189.
49
Id.
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“[V]iewing the record in the light most favorable to [plaintiff],” we denied
summary judgment. 50
Similarly, we reversed another summary-judgment grant in Canipe v.
National Loss Control Service Corp., 736 F.2d 1055, 1061 (5th Cir. 1984). In
that case we again found a genuine factual dispute as to a necessary legal
element, despite defendant’s evidence to the contrary, relying on “evidence
in the record implying that” the element was met. Because “[i]t cannot be
disputed that [the element] might” have been satisfied, summary judgment
was improper. 51
To cap off, in Lytle v. Bexar County, 560 F.3d 404, 412 (5th Cir. 2009),
we again reversed a summary-judgment grant, adhering to the maxim, “we
are limited to assuming that any and all questions are resolved in the
plaintiff’s favor, tempered by the limits of reasonableness.” 52 Of particular
note, we stated:
The meager record at this point of the proceedings has
mandated a number of inferences, and the factual assumptions
on which we have decided this appeal might bear little
resemblance to what the factfinder ultimately determines. But
it is the job of the factfinder, not this court, to ultimately resolve
the factual disputes and make the inferences that fill the gaps
in the facts. 53
Lastly, when a nonmovant offers non-conclusory summary-judgment
evidence, we construe all reasonable interferences and assumptions from that
evidence in their favor—even if the movant offered contradictory evidence.
As long as the nonmovant’s evidence “reasonably lead[s]” to the “not
implausible” conclusion that all the necessary legal elements are (or are not)
50
Id.
51
Nat’l Loss Control Servs. Corp., 736 F.2d at 1062 (emphasis added); see also U.S.
Small Bus. Admin. v. Beaulieu,
75 F. App’x 249, 253 (5th Cir. 2003) (reversing a summary-judgment grant “[b]ecause the record does not conclusively show that [defendant’s
conduct meets a required element]”).
52
Lytle, 560 F.3d at 417.
53
Id.
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met, summary judgement is improper. 54 It is the factfinder’s job, not ours, to
“make the inferences that fill the gaps in the facts.” 55 In turn, we will affirm
a summary-judgment grant only if the record conclusively establishes that the
necessary legal elements are (or are not) met; if there is evidence (or lack a
thereof) that “implies” a material factual dispute, summary judgment is
improper. 56 And to top it all off, it’s the movant’s burden to show that
summary judgment is proper. 57
We next move to the substantive standards we apply to the Sellers’
intracontractual fraud claims. For a successful private claim under § 10(b) of
the Exchange Act and SEC Rule 10b–5 (together, federal securities law), the
Sellers must prove six elements. 58 At issue here is element number six, loss
causation. 59 “Loss causation . . . demands a causal connection between the
[alleged material] misstatement and [the Sellers’] claimed economic loss.” 60
The law is fairly clear on loss causation in the public-market context, but this
fraud case arose in the private market. Few courts have addressed how to
show loss causation in this context.
In fraud-on-the-public-market cases, plaintiffs prove loss causation by
showing (1) there was misstatement and, when the “negative ‘truthful’
information” rectifying this misstatement came to light, this “caus[ed] the
54
Nat’l Hygienics, Inc., 707 F.2d at 189.
55
Lytle, 560 F.3d at 417.
56
Beaulieu, 75 F. App’x at 253; Canipe,
736 F.2d at 1061.
57
Travelers Ins. Co., 7 F.3d at 1206.
58
Ludlow v. BP, P.L.C., 800 F.3d 674, 681 (5th Cir. 2015). Again, we are also
addressing the Sellers’ Delaware common-law claims through this 10b-5 analysis. See supra
note 32.
59
The district court found all the other elements were met, except for the
transaction reliance element—which addresses whether the Sellers would have entered the
transaction itself but for the misstatement—which the court did not reach.
60
Ludlow, 800 F.3d at 681–82 (“A plaintiff must prove that the misstatements—
not ‘other intervening causes, such as “changed economic circumstances, changed
investor expectations, new industry-specific or firm-specific facts, conditions, or other
events” ‘—were the cause of her claimed economic injury” (citation omitted)); see also
Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341 (2005).
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decrease in [stock] price” (i.e., the economic loss) and “(2) that it is more
probable than not that it was” the negative truth coming to light, “not other
unrelated negative statements, that caused a significant amount of the
decline.” 61 In other words, there was a misstatement, the truth came out, the
stock price dropped, and the plaintiffs must prove the revelation was “more
probably than not” the cause of most of the stock price’s drop. 62 But, as the
district court noted, “fraud-on-the-market cases focus on the effect a priceinflating misrepresentation and subsequent disclosure has on a security’s
price in the marketplace. Here, there was no marketplace for the disclosure
of negative truthful information to cause a price decline.”
In our private-market context, we have a misstatement in the
Agreement and a drop in the value of Atherio ownership units. There was no
“truth” revealed that affected Atherio’s stock price. And, without the
subsequent public market drop, we cannot graft our public market loss
causation analysis directly onto private market loss causation. Because we
have not dealt with loss causation in the private market before, we look to the
persuasive Third Circuit case McCabe v. Ernst & Young, LLP. for guidance. 63
In that case, the buyers (plaintiffs) bought stock in the sellers’
(defendants’) private company. 64 But, in the agreement governing this
transaction, defendants misstated that their company was not subject to
serious legal risk. 65 The company soon lost a major lawsuit; around the same
time, plaintiffs’ stock fell in value. 66 So plaintiffs sued for securities fraud.
The Third Circuit found no “genuine dispute as to loss causation” because
there was no evidence that “the falling price of [the seller’s] stock was
attributable to . . . associated threats of litigation . . . .” 67 The test it applied:
61
Greenberg v. Crossroads Sys., Inc., 364 F.3d 657, 666 (5th Cir. 2004).
62
Id.
63
494 F.3d 438–39 (3d Cir. 2007).
64
Id. at 421–22.
65
Id.
66
Id. at 422.
67
Id. at 436.
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“[W]hether [defendant’s misstatement] was a substantial factor in causing
the [] Plaintiffs’ economic loss includ[ing] considerations of materiality,
directness, foreseeability, and intervening causes.” 68
We adopt this test. “[T]o satisfy the loss causation requirement” in
the private market context, “the plaintiff must show that the . . .
[misstatement] was a substantial factor in causing . . . actual economic loss for
the plaintiff.” 69 To make this substantial-factor showing, the Sellers must
produce evidence that “certain [misstated] risks are responsible for [their]
loss” and that such evidence must “reasonably distinguish the impact of
those risks from other economic factors.” 70 Importantly, the Sellers do not
have to show loss causation for their entire loss, only “some rough proportion
of the whole loss.” 71
We’ve divined our substantive standard. Time to apply it. To start,
it’s helpful to identify what matters—the security transaction, misstatement,
and economic loss. 72
(1) Transaction: the sale of Red River to Atherio.
(2) Misstatement: Farb was Atherio’s CFO at the time of
closing. 73
68
Id.
69
Nuveen Mun. High Income Opportunity Fund v. City of Alameda, 730 F.3d 1111,
1119 (9th Cir. 2013) (emphasis added) (citing McCabe, 494 F.3d at 425–26).
70
Nuveen, 730 F.3d at 1123; see also, e.g., In re Williams Sec. Litig.-WCG Subclass,
558 F.3d 1130, 1132 (10th Cir. 2009) (stating that, to meet loss causation, the plaintiffs must
“present evidence suggesting that the declines in price were the result of . . . the truth and
not some other factor”); Lentell v. Merrill Lynch & Co.,
396 F.3d 161, 173 (2d Cir. 2005)
(“[A] misstatement . . . is the ‘proximate cause’ of an investment loss if the risk that caused
the loss was within the zone of risk concealed by the [misstatement] . . . .”).
71
Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 158 (2d Cir. 2007). Moreover,
the Sellers’ argument that a lower standard should apply to private market securities cases
than public market cases has no support. Instead we follow the Nuveen court and reject this
argument; a lower standard for private sales “collapses transaction causation with loss
causation.”
730 F.3d at 1119 (refusing to apply a lower loss causation standard in an illiquid,
inefficient market).
72
Ludlow, 800 F.3d at 681.
73
This misstatement is created by two provisions: (1) § 4.6—where Atherio
omitted its severance obligations to ex-CFO Farb along with its other “liabilities”—and
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(3) Economic loss: the unearned $1.5 million payment and
“$2 million” worth of Atherio ownership units rendered
worthless due to Atherio’s demise.
Turning to the question at hand: Did the Seller offer evidence sufficient to
generate a genuine dispute regarding whether the misstatement was a
substantial factor in some of Atherio’s devaluation? We start by pinpointing
the Sellers’ evidence, three emails from Farb stating: 74
(1) Email One: “We today acquired two IT Services
companies and go from 4 employees to 300 . . . . We have
been so focused on the deal side and the financing, we
haven’t done any planning for when we own the companies
. . . . Can’t believe we now own three companies after so
much work for so long. We have a ton to do!”
(2) Email Two: “Unfortunately, I received two big
disappointments late yesterday from John Tucker and
Patrick Flynn both of whom I thought-were high
probability to invest. Both had some commonality of
sentiment. Patrick felt with my leaving he doesn’t want to put
more in since it is a long term investment and he invests in
people . . . . John (was planning on $30k) said similar about
not investing if I am only there for a transition period.”
(2) the Agreement’s capitalization table misrepresenting Farb as the “Chief Financial
Officer.” Because there is an omission and a misrepresentation, we refer to the combined
alleged fraudulent act—misstating Farb’s CFO role—as a “misstatement.” See, e.g.,
Ludlow, 800 F.3d at 681–82 (doing the same).
74
This is the only evidence brought to the district court’s attention and we don’t
consider the Sellers’ additional evidence highlighted for the first time on appeal. Johnson
v. Talley, 243 F. App’x 10, 11 (5th Cir. 2007) (“Because these arguments are being raised
for the first time on appeal, we do not consider them.” (citing Leverette v. Louisville Ladder
Co.,
183 F.3d 339, 342 (5th Cir. 1999)). We note that the Sellers also point to Farb’s
deposition testimony where he asserts, if he had remained as CFO, he wouldn’t have joined
Cory in submitting false loan documents to a lender. Supra note 6. But the argument this
supports falls short: The Sellers’ loss, spurred by Atherio’s devaluation, was not caused in
any material part by Cory’s submission of these allegedly false documents. Atherio’s
default on its Prudent loan certainly contributed to its devaluation, but Prudent cites four
reasons for the default and Cory’s submission wasn’t one of them. Because Atherio would
have defaulted on this loan regardless of Cory’s allegedly false submission, any dispute
Farb’s testimony generates is not material.
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(3) Email Three: “We are a new company . . . [The banks]
have to feel that the numbers are solid. It is more important
than you think it is. They will poke at them. I know how to
make the numbers look better than they are. I know that if I
am given the time to put together the kind of package for them
they expect that it will greatly reduce our risk of failure. I know
that there are certain things we need to add . . . and certain
formats, that will give them confidence they have real
numbers . . . . Jason, these guys think differently than you .
. . . As much as they love you, . . . You need drab, mundane
guys like me . . . to give them confidence in the whole project.”
The district court considered this evidence, concluded that “Farb as
CFO was [not] a necessary element to Atherio’s success” and therefore loss
causation was not met, and granted the Executives summary judgment. To
start, we note that the district court erred by not construing all reasonable
inferences in the Sellers’ favor. 75 But that does not end our inquiry.
Reviewing de novo, the Sellers’ evidence creates a factual dispute whether
the Executives’ misstatement of Farb’s CFO role was a substantial factor in
some “rough proportion” of the Sellers’ $3.5 million loss. 76
With inferences drawn in the Sellers’ favor, these three emails lead to
the “not implausible” and “reasonable” conclusion that Atherio was not
75
We pause to specify a few of the district court’s errors, which the partial dissent
now repeats. For example, it stated “[i]t is unclear how [Email One] would show that
Farb’s resignation as CFO post-close would cause Atherio to collapse . . . .” But such
unclarity should have been resolved in the Seller’s favor. Lytle, 560 F.3d at 417 (it is the
factfinder’s job, not ours, to “make the inferences that fill the gaps in the facts”). And the
district court committed the same error when it found that the Sellers’ evidence was
insufficient to show “Farb’s departure caused two ‘high probability’ investors to back out,
impairing Atherio’s ability to perform the basic business functions of accumulating
capital.” The court also hypothesized reasons why the investor defections were due to
reasons other than Farb’s departure; such conjecture in favor of the Executives was
improper. Cf. Canipe,
736 F.2d at 1062. And the district court’s single-line analysis that
“Cory’s wrongful acts as CEO of Atherio would seem to be a superseding cause to the
demise of Atherio and any economic loss Plaintiffs suffered” was similarly erroneous.
Asserting that another factor “would seem to” have caused the loss is again at odds with
our mandate to construe all reasonable inferences and assumptions from the Sellers’
evidence in their favor. Cf. Lytle,
560 F.3d at 417.
76
Lattanzio, 476 F.3d at 158.
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effectively managed, had a lessened chance of success, and that two investors
backed out, all due to Farb’s resignation. 77 As a result, the emails generate a
dispute as to whether Farb’s resignation was “responsible for [some of the
Sellers’] loss” and “reasonably distinguish[able]” from other economic
factors causing some part of Sellers’ $3.5 million loss—in other words, a
substantial factor. 78 The cascading “gaps in the facts”—gaps that must be
construed in the Sellers’ favor—generate a genuine dispute as to whether the
material loss causation element was met; the Executives didn’t meet their
burden and summary judgment was improper. 79
More specifically, three emails show that, had Farb been the CFO as
promised, Atherio would have been better positioned to fundraise—
including having two more investors—and its management would have been
better prepared to execute Atherio’s strategic plan. And, if Atherio had more
capital and better preparation, it is “not implausible” that it would have been
less of a failure, reducing the Sellers’ loss. 80 To counter, both the dissent and
the Executives assert that the district court got it right because the Sellers’
evidence is too “minimal” or “insufficient” to preclude summary judgment
on loss-causation grounds. 81 But, viewing the evidence in the Sellers’ favor,
they adequately allege that at least some of Atherio’s devaluation was caused
by Farb’s non-CFO status. In other words, if Farb was the CFO as stated in
the Agreement, the Executives would have had a better team, more money,
77
Nat’l Hygienics, Inc., 707 F.2d at 189.
78
Nuveen, 730 F.3d at 1123; see McCabe, 494 F.3d at 425–26.
79
Lyle, 560 F.3d at 417.
80
Nat’l Hygienics, Inc., 707 F.2d at 189. The district court only reached a contrary
conclusion because it credited the Executives’ assertions over the Sellers’ evidence; but
weighing evidence is inappropriate at the summary-judgment stage. Davenport, 891 F.3d at
167 (“[A] judge’s function at summary judgment is not to weigh the evidence and
determine the truth of the matter but to determine whether there is a genuine issue for
trial.” (cleaned up)).
81
Notably, the Executives don’t argue that the Sellers’ two emails are too
“conclusory”—i.e., improper for consideration at the summary-judgment stage. In any
event, this line of argument is a nonstarter. Cf. Travelers Ins. Co., 7 F.3d at 1207
(highlighting that “conclusory allegations supported by a conclusory affidavit” were
improper summary-judgment evidence).
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and been more successful—all plausible inferences when the evidence is
construed in the Sellers’ favor. 82
Case-in-point: The investor-defection email, viewed in the Sellers’
favor, indicates that Atherio lost investment dollars due to Farb’s non-CFO
status—these lost dollars directly compose some of the Sellers’ loss. 83 Even
more, Farb himself stated that he alone among the Executives could put
together “the kind of [fundraising] package . . . [investors] expect that [] will
greatly reduce [Atherio’s] risk of failure.” Between the investor defections
and the management team’s downgraded capabilities without Farb, a
factfinder could certainly conclude that Farb’s departure was a “substantial
factor” in some part of Atherio’s demise and the Sellers’ corresponding
loss. 84 As cherry on top, the Executives bear the burden to show the lack of a
genuine dispute of material fact; they didn’t.
The dissent, for its part, dismisses the investor-defection email as
irrelevant for two reasons: first, because the Sellers did not provide evidence
that “potential investors in fact declined to invest” and second, because one
of the investors “was only considering a $30,000 investment” and thus their
decision not to invest could not have been “the cause of the Seller’s $3.5
million loss.” 85 Respectfully, we think this “seriously misapplies the
summary judgment standard.” 86
82
Cf. Canipe, 736 F.2d at 1061.
83
As shareholders, the Sellers’ had a right to their pro rata ownership of Atherio’s
assets, including investor dollars, subject only to creditors and preferred shareholders. See
JOHN B. GUERARD, JR. & ELI SCHWARTZ, QUANTITATIVE CORPORATE
FINANCE 413 (2007) (stating that “the stockholders own the firm” and are entitled to the
delta between the firm’s assets and liabilities). And, though one of the lost investors was
only contemplating a $30,000 investment, the other investor’s magnitude is unknown.
Further, the Executives offer no evidence that these investors actually invested; therefore,
we infer at the summary-judgment stage that these investors did in fact defect per Email
Two.
84
Nuveen, 730 F.3d at 1119 (citing McCabe, 494 F.3d at 425–26).
85
Post, at 27 (Richman, C.J., concurring in part and dissenting in part).
86
Id. at 24.
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The dissent specifically suggests that the “most” we can take from
the email is that the potential investors “were considering not investing due
to Farb’s departure, among other reasons.” 87 But the email can plausibly, if
not reasonably, be read to say more than that. As Farb stated, one of the
potential investors said that “he doesn’t want to put more in.” Construing
that expression as mere consideration to not invest more is to do precisely
what our standard of review instructs us to avoid: to make an unfavorable
inference from the nonmovant’s evidence. 88 The dissent makes the same
mistake with respect to the amount of money involved. While it is true that
the $30,000 from John Tucker is not a significant amount compared to the
Seller’s $3.8 million loss, Farb’s email does not mention how much the other
investor (Patrick Flynn) planned on investing, and it seems the dissent (again
and erroneously) draws the unfavorable inference that it was also a
comparatively insignificant amount. With the limited evidence before us, we
are not prepared to speculate how much Tucker was intending to invest, and
for that reason we also not prepared to unequivocally say, as the dissent does,
that there is no evidence “that the lack of these two investments was the
cause of the Seller’s $3.5 million loss.” 89
The dissent similarly dismisses the third email from Farb, which made
clear that “it was [his] role to make the lenders comfortable with the
company’s financial position, and that [he] was confident in his ability to do
so.” 90 This email is irrelevant, in the dissent’s view, because (1) it “is not
evidence” that Farb had put the promised financial package together for the
banks before his resignation and (2) there were “four other individuals [who]
would give the lenders confidence in the project.” 91 As far as we can tell,
there is no evidence in the record, either way, of whether Farb had the time
to “put together the [financial] package” for the banks, so the dissent seems
87
Id. at 27.
88
See supra, notes 39–57 and accompanying text.
89
Post, at 27 (Richman, C.J., concurring in part and dissenting in part).
90
Id. at 28.
91
Id.
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to take sides on this open fact question by resolving it in favor of the
Executives. 92 We also cannot downplay Farb’s role in the transaction, as the
dissent does, by pointing out that there were other individuals who could give
the banks confidence in the project. Thus, while the dissent says we cannot
make much of these emails, it simultaneously reaches the rather significant
conclusion that Farb could not have been that important after all because
some other people were offhandedly mentioned in the email. At the risk of
repeating, we cannot make these unfavorable inferences and conjectures
against the nonmoving party, especially a series of them.
Ultimately, the Sellers offer multiple emails that, with inferences
construed in their favor, show (1) two investors dropped out and (2) Atherio
was mismanaged and ill-prepared, both due in part to Farb’s not being the
CFO. This evidence “reasonably lead[s]” to the “not implausible”
conclusion that “some rough proportion” of Atherio’s devaluation, and the
Sellers’ correlated loss, is properly attributed to Farb’s non-CFO status. 93
Sure, this premise is founded on assumptions and inferences. And yes, the
record doesn’t conclusively establish that Farb’s non-CFO status was a
substantial factor in the Sellers’ loss. To be sure, there may be a web of factors
that caused Atherio’s demise. And the Sellers’ evidence in no way
distinguishes the damage to Atherio caused by all other potential business
risks versus the damage caused by Farb’s undisclosed departure. But that is
exactly why summary judgment is not appropriate: “it is the job of the
factfinder, not this court, to ultimately resolve the factual disputes and make
the inferences that fill the gaps in the facts.” 94 The Sellers offer sufficient
evidence plausibly supporting the reasonable conclusion that Farb not being
the CFO was a substantial factor in at least some of Atherio’s demise and,
therefore, the Sellers’ corresponding loss. And it is the factfinder’s role—
not ours—to sort out who is right. We therefore reverse the district court’s
92
See Lytle, 560 F.3d at 417 (stating that it is the factfinder’s role to “make the
inferences that fill the gaps in the facts”).
93
Nat’l Hygienics, Inc., 707 F.2d at 189.
94
Lytle, 560 F.3d at 417.
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summary-judgment grant on the federal securities law and Delaware
common law claims and remand. 95
IV
We AFFIRM the district court’s grant of summary judgment to the
Executives on the extracontractual and TSA claims. But we REVERSE the
district court’s summary-judgment grant to the Executives on the federal
securities law and Delaware common-law claims and REMAND these
claims to the district court for further proceedings consistent with this
opinion.
95
The district court did not address either the transaction-reliance element of the
Sellers’ claims or Cory’s alternative argument that he is not a party to the contract. On
remand, the district court may consider whether the Sellers relied on the Executives’
misstatement of Farb as CFO and any alternative argument on this issue that has been
properly preserved. Ludlow, 800 F.3d at 681–82.
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Priscilla Richman, Chief Judge, concurring in part, dissenting in part:
I would affirm the district court’s judgment across the board.
Accordingly, I concur in affirming the district court’s grant of summary
judgment to Jason Cory, Greg Furst, and Thomas Farb (the Executives) on
the extracontractual and Texas Securities Act claims brought by Tammy
O’Connor and Michael Stewart (the Sellers), and I dissent from the reversal
of the district court’s grant of summary judgment on the intracontractual
fraud claims under federal securities law and Delaware common law.
The panel majority opinion seriously misapplies the summary
judgment standard. The party moving for summary judgment “bears the
initial responsibility of informing the district court of the basis for its motion,
and identifying those portions of [the record] which it believes demonstrate
the absence of a genuine issue of material fact.” 96 But the initial burden is
“only [to] point out the absence of evidence supporting the nonmoving
party’s case.” 97 The movant is not required to negate the elements of the
nonmovant’s claim. 98 Instead, if the initial burden is met, “the nonmovant
must go beyond the pleadings and designate specific facts showing that there
is a genuine issue for trial.” 99 The Executives, who moved for summary
judgment, asserted there was no evidence of loss causation. They pointed
out there was no evidence that two particular investors declined to invest
when they learned Tom Farb would not be the CFO indefinitely, but only for
a transition period. The Sellers did not meet this assertion with evidence that
these two potential investors did not, in fact, invest. The panel’s majority
opinion improperly says that we must “infer” that the potential investors did
not invest. Such an inference cannot be made from the emails cited by the
majority opinion. The majority panel then compounds its error by expressly
96
Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).
97
Skotak v. Tenneco Resins, Inc., 953 F.2d 909, 913 (5th Cir. 1992) (internal
quotation marks omitted) (quoting Latimer v. Smithkline & French Labs.,
919 F.2d 301, 303
(5th Cir. 1990)) (alteration in original).
98
Celotex, 477 U.S. at 323.
99
Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (citing Celotex,
477
U.S. at 324).
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and erroneously holding not only that the Sellers were not required to come
forward with evidence to respond to a “no evidence” assertion, but also
holding that the moving party must come forward with evidence to negate an
element of the plaintiffs’ claim, saying: “the Executives offer no evidence that
these investors actually invested; therefore, we infer at the summary
judgment stage that these investors did in fact defect per Email Two.” 100
This is flatly wrong.
I
The Executives asserted in the district court and maintain on appeal
that there is no evidence of loss causation. The district court granted
summary judgment in favor of the Executives. In determining whether the
district court erred, “we are required to view all facts and draw all reasonable
inferences in favor of the nonmoving part[ies],” 101 who in the present case
are the Sellers. “We do not, however, in the absence of any proof, assume
that the nonmoving part[ies] could or would prove the necessary facts.” 102
The Sellers’ “burden is not satisfied with some metaphysical doubt as to the
material facts, by conclusory allegations, by unsubstantiated assertions, or by
only a scintilla of evidence.” 103 “The test is identical to that used for a
directed verdict: whether the evidence presents a sufficient disagreement to
require submission to a jury or whether it is so one-sided that one party must
prevail as a matter of law.” 104 If the Sellers fail to meet this burden, the
Executives’ motion for summary judgment was properly granted. 105
100
Ante, at 20 n.83 (emphasis added).
101
Crawford v. Metro. Gov’t of Nashville and Davidson Cnty., 555 U.S. 271, 274 n.1
(2009) (internal quotation marks omitted) (quoting Brosseau v. Haugen,
543 U.S. 194, 195
n.2 (2004) (per curiam)).
102
Little, 37 F.3d at 1075.
103
Id. (internal citations and quotation marks omitted).
104
Skotak v. Tenneco Resins, Inc., 953 F.2d 909, 913 (5th Cir. 1992) (internal
quotation marks omitted) (quoting Chiari v. City of League City,
920 F.2d 311, 314-15 (5th
Cir. 1991)).
105
Little, 37 F.3d at 1076.
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Appling this standard, we are left with the substantive issue: Did the
Sellers offer sufficient evidence to generate a genuine dispute regarding
whether the Executives’ misstatement of Farb’s role as CFO was a
substantial factor in the Sellers’ $3.5 million loss? The Sellers’ evidence
consists of three emails from Farb. The majority opinion concludes that,
after drawing all reasonable inferences in the Sellers’ favor, the emails create
a factual dispute as to whether the misstatement was a substantial factor in
the Sellers’ loss. I disagree.
In the first email, Farb states in pertinent part:
We today acquired two IT Services companies and go from 4
employees to 300 . . . . We have been so focused on the deal
side and the financing, we haven’t done any planning for when
we own the companies . . . . Can’t believe we now own three
companies after so much work for so long. We have a ton to
do!
This is an admission that, even with Farb on board, the Executives had
not “done any planning for when [they] own the companies.” The email
does not state or even imply that Farb was necessary to run the company, or
that the management team was not prepared to run the company without
him. Accordingly, the email is not evidence, and does not support a
reasonable inference, that the Sellers’ loss was caused by Farb stepping down
as CFO.
The Sellers argue that a second email from Farb to Cory is evidence
that two “high probability” individuals declined to invest in the company
because of Farb’s resignation. The relevant passages in the email are set
forth in the margin. 106 Farb informs Cory that two individuals “had some
106
The August 10, 2013 email composed by Farb said:
Unfortunately, I received two big disappointments late yesterday from
John Tucker and Patrick Flynn both of whom I thought were high
probability to invest. Both had some commonality of sentiment. Patrick
felt with my leaving he doesn’t want to put more in since it is a long term
investment and he invests in people. I obviously told him I am not leaving
for a while and the company has a great board. He also is puzzled as to
why Mark hasn’t joined full-time yet and concerned. Doesn’t look like the
experienced team in the deck is there. He had heard several times Mark
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No. 19-10622
commonality of sentiment” about “not investing if I am only there for a
transition period.” In addition, one of the individuals was concerned that
“Mark” had not yet joined the management team full time. That potential
investor was also “very put off” by a press release. The email reflects that
Farb urged the individuals to go forward with the investments. In response
to Farb’s email, Cory wrote back that he would also talk to these two potential
investors.
At most, this exchange of emails shows that the individuals were
considering not investing due to Farb’s departure, among other reasons. As
the district court recognized, the Sellers have not offered any evidence that
the individuals actually declined to invest. While we draw reasonable
inferences in the Sellers’ favor, we do not assume, without evidence, that the
Sellers would be able to prove that the potential investors in fact declined to
invest. We simply do not know one way or another whether the individuals
invested. Further, one individual was only considering a $30,000
investment. The amount the other was considering investing is unknown.
The exchange of emails does not support a reasonable inference that the
individuals did not invest or that the lack of these two investments was the
cause of the Sellers’ $3.5 million loss. The Sellers have not raised a genuine
dispute.
The panel’s majority opinion states that because “the Executives
offer no evidence that these investors actually invested . . . we infer at the
was going to join and it seems elusive. I assured him it would happen. He
thinks highly of you and Greg but it is not the balanced team that he
thought he was investing in. Jason, I think there is a message here -- pull
your team together and get Mark firmly in the company.
John (was planning on $30k) said similar about not investing if I am only
there for a transition period. He was also very put off by the press release
he saw on Prudent. He asked me if I had been involved in the press release,
which I hadn’t. He said he thought so because Tom Farb would never
have let that press release go out. He said looked like one sent by sales
guys -- superlatives and lacking in content. He worked for me as head of
sales, by the way, so he is a sale guy himself. By the way, if you want me to
assist in raising funds and I have an EVP title, I would have liked to have
had input on that press release.
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summary judgment stage that these investors did in fact defect.” 107
However, as noted, this misapplies the proper summary judgment burden.
There is no burden on the Executives to show that the individuals actually
invested, or that even if they did not invest, only de minimis amounts were at
issue. Instead, the Sellers have the burden to produce evidence to raise a
genuine dispute as to whether the potential investors backed out. Either they
did or they did not. We cannot infer that they did. The Sellers have not met
their burden.
II
Nor does the final email support that the company had a lower chance
of success without Farb as CFO. The email, sent seven months prior to
Farb’s resignation, states:
We are a new company . . . . [The banks] have to feel that the
numbers are solid. It is more important than you think it is.
They will poke at them. I know how to make the numbers look
better than they are. I know that if I am given the time to put
together the kind of package for them they expect that it will
greatly reduce our risk of failure. I know that there are certain
things we need to add . . . and certain formats, that will give
them confidence they have real numbers . . . . Jason, these guys
think differently than you . . . . As much as they love
you, . . . You needd [sic] drab, mundane guys like me (and
Mark and Greg and Michael and John), to give them
confidence in the whole project.
The email establishes that it was Farb’s role to make the lenders
comfortable with the company’s financial position, and that Farb was
confident in his ability to do so. However, the email is not evidence that when
Farb resigned, seven months later, he had not had “time to put together the
kind of package” the banks expect, or that the company would no longer be
effectively managed without him. In fact, Farb listed four other individuals
that would give the lenders confidence in the project. A reasonable inference
107
Ante, at 20 n.83.
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cannot be drawn from this email that the Sellers’ loss was due to Farb’s
resignation.
The evidence offered by the Sellers does not raise a genuine dispute
regarding whether the Executives’ misstatement was a substantial factor in
the Sellers’ $3.5 million loss. Therefore, I would affirm the district court’s
grant of summary judgment on the intracontractual federal securities law and
Delaware common law claims.
…
I respectfully concur in part and dissent in part.
29
