negligent misrepresentations

Osborne Computer Corporation was founded in 1980 by entrepreneur Adam Osborne and began manufacturing the Osborne I portable personal computer for the mass market, with shipments starting in 1981. By fall 1982, sales of the company's sole product had reached $10 million per month, making the company one of the fastest growing enterprises in the history of American business. In 1981 and again in 1982, the company retained Arthur Young & Company to audit its financial statements and issue audit reports. Arthur Young issued unqualified audit opinions on the company's 1981 and 1982 financial statements. The 1982 opinion was issued on February 11, 1983, appeared on Arthur Young's letterhead addressed to the company, and 100 copies of the professionally printed opinion were personally delivered to the company. The 1982 financial statements reported a modest net operating profit of $69,000 on sales of more than $68 million. In late 1982 the company postponed a planned initial public offering and instead issued warrants to investors in exchange for bridge financing loans or letters of credit. Plaintiffs, a group that included individuals as well as pension and venture capital funds, invested in the company in early 1983; one plaintiff, Robert Bily, purchased 37,500 shares of stock from Adam Osborne for $1.5 million. With one exception, plaintiffs testified that they made their investments in reliance on Arthur Young's unqualified 1982 audit opinion. After the warrant transaction closed on April 8, 1983, sales declined sharply because of manufacturing problems with the company's new Executive model computer, the public offering never occurred, and the company filed for bankruptcy on September 13, 1983, causing plaintiffs to lose their investments. Plaintiffs brought separate lawsuits against Arthur Young in Santa Clara County Superior Court that were consolidated for trial. Plaintiffs' expert witness identified more than 40 deficiencies in the 1982 audit amounting to gross professional negligence, including an understatement of liabilities by approximately $3 million that turned the reported $69,000 profit into a loss of more than $3 million, and testified that Arthur Young had discovered but failed to disclose material weaknesses in the company's internal accounting controls. After a 13-week trial the jury returned a verdict for plaintiffs on the professional negligence claim and awarded approximately $4.3 million in compensatory damages, but found for Arthur Young on the fraud and negligent misrepresentation claims. The trial court granted Arthur Young's motion for judgment notwithstanding the verdict on the negligence claim. The Court of Appeal reversed the judgment in favor of Arthur Young. The Supreme Court of California granted review.

From 1946 through 1967, Ernst & Ernst, an accounting firm, was retained by First Securities Company of Chicago, a small brokerage firm and member of the Midwest Stock Exchange and the National Association of Securities Dealers, to perform periodic audits of the firm's books and records. Ernst & Ernst prepared for filing with the Securities and Exchange Commission the annual reports required of First Securities under § 17(a) of the 1934 Act. It also prepared responses to the financial questionnaires of the Midwest Stock Exchange. Respondents were customers of First Securities who invested funds in a fraudulent securities scheme perpetrated by Leston B. Nay, president of the firm and owner of 92% of its stock. From 1942 through 1966, with the majority of the transactions occurring in the 1950s, Nay induced respondents to invest in escrow accounts that he represented would yield a high rate of return. In fact, there were no escrow accounts, as Nay converted respondents' funds to his own use immediately upon receipt. These transactions were not in the customary form of dealings between First Securities and its customers. They were not reflected on the books and records of First Securities. They were not shown on its periodic accounting to respondents or included in First Securities' filings with the Commission or the Exchange. The fraud came to light in 1968 when Nay committed suicide, leaving a note that described First Securities as bankrupt and the escrow accounts as spurious. Respondents subsequently filed this action for damages against Ernst & Ernst in the United States District Court for the Northern District of Illinois under § 10(b) of the 1934 Act. The complaint charged that Nay's escrow scheme violated § 10(b) and Rule 10b-5. It also charged that Ernst & Ernst had aided and abetted Nay's violations by its failure to conduct proper audits of First Securities. As revealed through discovery, respondents' cause of action rested on a theory of negligent nonfeasance. The premise was that Ernst & Ernst had failed to utilize appropriate auditing procedures in its audits of First Securities. This failure prevented discovery of internal practices of the firm said to prevent an effective audit. The practice principally relied on was Nay's rule that only he could open mail addressed to him at First Securities or addressed to First Securities to his attention. Respondents specifically disclaimed the existence of fraud or intentional misconduct on the part of Ernst & Ernst. After extensive discovery the District Court granted Ernst & Ernst's motion for summary judgment and dismissed the action. The Court of Appeals for the Seventh Circuit reversed and remanded. The Supreme Court granted certiorari to resolve the question whether a private cause of action for damages will lie under § 10(b) and Rule 10b-5 in the absence of any allegation of scienter.

On July 22, 1981, a fire began in the Port Newark freight yard of defendant Consolidated Rail Corporation when ethylene oxide manufactured by defendant BASF Wyandotte Company escaped from a tank car owned by defendant Union Tank Car Company and leased to BASF. The tank car was punctured during a coupling operation with another rail car and ignited. The municipal authorities evacuated the area within a one-mile radius surrounding the fire, which included the North Terminal building of Newark International Airport where plaintiff People Express Airlines’ business operations are based. People Express employees were prohibited from using the North Terminal for twelve hours, although the feared explosion never occurred. The plaintiff contends that it suffered business-interruption losses as a result of the evacuation. These losses consisted of cancelled scheduled flights and lost reservations because employees were unable to answer the telephones to accept bookings. Fixed operating expenses allocable to the evacuation period were incurred and paid despite the offices being closed. No physical damage to airline property and no personal injury occurred. According to the original complaint, each defendant acted negligently and these acts proximately caused the plaintiff’s harm. An amended complaint alleged additional counts of nuisance and strict liability. Conrail moved for summary judgment. The trial court granted the motion on the ground that absent property damage or personal injury economic loss was not recoverable in tort. The trial court also granted summary judgment motions by BASF and Union Car on the same reasoning. The Appellate Division reversed the trial court’s order granting summary judgment and remanded the cause to the trial court. This Court granted defendant Union Car’s petition for certification, in which Conrail and BASF joined. Plaintiff asserted at oral argument that at least some of the defendants were aware from prior experiences that ethylene oxide is a highly volatile substance. Further, emergency response plans in case of an accident had been prepared. When the fire occurred that gave rise to this lawsuit, some of the defendants’ consultants helped determine how much of the surrounding area to evacuate.

Curtis Publishing Co. published an article in the Saturday Evening Post in 1962 accusing Wally Butts, athletic director of the University of Georgia and a former head football coach, of disclosing Georgia's offensive plays and defensive patterns to Alabama coach Paul Bryant one week before the teams played. Butts, who was employed by the private Georgia Athletic Association rather than the state, filed a diversity libel action in federal district court in Georgia seeking $5 million in compensatory damages and $5 million in punitive damages. The complaint was filed and the trial completed before the Supreme Court handed down its decision in New York Times, and the only defense raised by petitioner Curtis was one of substantial truth. The evidence showed that Burnett had indeed overheard a conversation between Butts and the Alabama coach, but the content of that conversation was hotly disputed. Expert witnesses supported Butts by analyzing Burnett's notes and the films of the game itself. The Saturday Evening Post's version of the game and of the players' remarks about the game was severely contradicted. The jury returned a verdict for $60,000 in general damages and for $3,000,000 in punitive damages. The trial court reduced the total to $460,000 by remittitur. Soon thereafter the Supreme Court handed down its decision in New York Times and Curtis immediately brought it to the attention of the trial court by a motion for new trial. The trial judge rejected Curtis' motion on two grounds. He first held that New York Times was inapplicable because Butts was not a public official. He also held that there was ample evidence from which a jury could have concluded that there was reckless disregard by defendant of whether the article was false or not. Curtis appealed to the Court of Appeals for the Fifth Circuit which affirmed the judgment of the District Court by a two-to-one vote. The majority there did not reach the merits of petitioner's constitutional claim, holding that Curtis had clearly waived any right it may have had to challenge the verdict and judgment on any of the constitutional grounds asserted in Times, 351 F. 2d 702, 713, on the basis of Michel v. Louisiana, 350 U. S. 91. Judge Rives dissented, arguing that the record did not support a finding of knowing waiver of constitutional defenses. Rehearing was denied, 351 F. 2d, at 733, and the Supreme Court granted certiorari. Separately, on September 30, 1962, the Associated Press distributed a news dispatch giving an eyewitness account of events on the campus of the University of Mississippi when a massive riot erupted because of federal efforts to enforce a court decree ordering the enrollment of James Meredith as a student. Walker was a private citizen at the time of the riot and publication. He had pursued a long and honorable career in the United States Army before resigning to engage in political activity. Walker initiated this libel action in the state courts of Texas, seeking a total of $2,000,000 in compensatory and punitive damages. A verdict of $500,000 compensatory damages and $300,000 punitive damages was returned. The trial judge found no evidence to support the jury's answers that there was actual malice and refused to enter the punitive award. Both sides appealed and the Texas Court of Civil Appeals affirmed both the award of compensatory damages and the striking of punitive damages. The Supreme Court of Texas denied a writ of error, and the Supreme Court granted certiorari.