Escott v. Bar Chris Construction Corp PDF

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Haik Gavadian Sandor Samuels BLAW 308 18 April 2018 Escott v. BarChris Construction Corp. Facts: BarChris Construction Co. constructed bowling alleys. For them to finance their operation, BarChris sold debentures. They began to struggle financially, and their registration statement of the debentures had inaccurate statements and omissions. Both sales and operating income reported had a minimal difference from the true value. However, when reporting the balance sheet, the current assets were reported to be 16% more than it actually was, and the liabilities were also understated by 43%. BarChris’s registration statement contained material misstatements and omitted material facts. Thus, investors filed a suit against; BarChris’s founders, CFO, attorney, accountant, and other directors and drafters of the registration statement, on the grounds of incorrect statements and omissions in the registration statement. These individuals either did not question or did not do their duty of due diligence to verify the accuracy of information provided. The BarChris filed motions to the complaints. Issue: Whether Trilling, Auslander, and Peat, Marwick have proved their due diligence defense. Rule: The rule is section 11 of the 1933 Liability Provisions Act. This provides civil liability for damages when a registration statement on its effective date misstates or omits a material fact. Section 11 Defense states; a defendant can escape liability by proving that the purchaser knew of the misstatements at the time of purchase. There is also the Due diligence defense. This requires the defendant to prove that he was not negligent.

Analysis: Trilling was not a member of the executive committee, a minor figure of the company and was unaware of several of the inaccuracies in the prospectus. The defendant argued that he must have known of some of them. He was careless in his works and this I why he did not know at the time of BarChris’s liability on Type B lease transactions was greater than the prospectus stated. Trilling also failed to prove as to the parts of the prospectus not expertise by Marwick, that he made a reasonable investigation which afforded him a reasonable investigation. Trilling did what he was asked and no more and assumed that everyone else took proper care of supplying accurate data. Under section 11 Defenses nonexperts meet their due diligence defense for parts contributed by experts if they had no reason to believe and did not believe that the expertise parts misstated or omitted any material fact. Does not require the nonexpert to investigate the accuracy of the expert’s work.

Auslander was an outside director, not an officer of BarChris. He was a chairman of the board of Valley Stream National Bank in Valley Stream. Auslander was elected a director on April 17, 1961. The registration statement in its original form had already been filed, without his signature. On May 10, 1961 he signed a signature page for the first amendment to the registration statement that was filed with the SEC on May 11, 1961. This was a separate sheet without any document attached. Auslander did not know that it was a signature page for a registration statement. He vaguely understood that it was something “for the SEC.” Auslander never saw a copy of the registration statement in its final form. Section 11 imposes liability upon a director no matter how new he is. Auslander has not established his due diligence defense.

Peat, Marwick work was in charge of a member of the firm and was indeed an expert in 1960. To ascertain whether or not Marwick established his due diligence defense we must look at the S-1 review. Berardi made the S-1 review in May 1961. Berardi devoted sufficient time in drafting it yet, did not discover any of the errors or omissions pertaining the state of affairs in 1961, all of which were material. Berardi asked questions and received answers which he considered satisfactory and conducted no further investigation. Since he knew nothing about the notes of the executive committee meetings, he did not learn that the delinquency situation had worsen. There had been a material alteration for the worse in BarChris’s financial position. That change was sufficiently serious so that the failure to disclose it made the 1960 figures misleading. His S-1 was useless. Berardi’s review did not meet the standard. Enough evidenced and signals were present in the materials which he had reviewed yet no action was taken thereafter. Here again, the burden of proof is on Marwick, and that burden was found not satisfied. Marwick did no establish its due diligence defense. Conclusion: Judgement for Escott and the other purchasers.

This case was much harder than the others assigned. I struggled not in understanding what was going on, but how to do the case in the format of an IRAC. I understood the standards both experts and non-experts must meet. What had me troubled was the information pertaining to

the 1960 audit, and also why Marwick a member of the firm was held liable for the misconducted work done by Berardi. I suppose it is because of Respondeat superior. But also, I feel as this case was done in a complicated manner. Could the board not have been held liable due to their negligence alone and their breach of fiduciary duties?...