Scottish Heritable Trust, PLC v. Peat Marwick Main & Co.
| Decision Date | 30 April 1996 |
| Docket Number | No. 94-10952,94-10952 |
| Citation | 81 F.3d 606 |
| Parties | The SCOTTISH HERITABLE TRUST, PLC and SHT Holdings (US), Inc., Plaintiffs-Appellees Cross-Appellants, v. PEAT MARWICK MAIN & CO., a partnership and KPMG Peat Marwick, a partnership, Defendants-Appellants Cross-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Timothy W. Mountz, Cynthia Keely Timms, Morris Harrell, Locke Purnell Rain Harrell, P.C., Dallas, TX, David Mark Pyke, Radar, Campbell, Fisher & Pyke, Dallas, TX, Anthony Joseph Costantini, Sutherland, Asbill & Brennan, New York City, for defendants-appellants cross-appellees.
Appeals from the United States District Court for the Northern District of Texas.
Before REYNALDO G. GARZA, WIENER and STEWART, Circuit Judges.
Defendant-Appellant Peat Marwick Main & Co. (Peat Marwick) appeals from an adverse judgment following a jury verdict that Peat Marwick is liable to a third party for negligent misrepresentations contained in audit reports. Concluding that Texas law does not permit the plaintiffs to recover in these particular circumstances, we reverse the district court's judgment and render a take-nothing judgment in favor of Peat Marwick.
The plaintiffs in this case are The Scottish Heritable Trust, PLC (SHT/PLC) and SHT Holdings (US), Inc. (SHT(US)) (collectively, SHT). SHT/PLC is a British conglomerate based in York, England. SHT/PLC owns many diverse businesses around the world and has generated annual sales in excess of $200 million. SHT(US) is a wholly-owned subsidiary of SHT/PLC which holds companies that have been acquired in the United States.
Through a series of stock purchases made in 1988, SHT acquired a controlling interest in Rangaire Corporation. Based in Cleburne, Texas, Rangaire's principal business is lime production. The stock of Rangaire is publicly traded on the National Association of Securities Dealers Automated Quotation System (NASDAQ).
SHT's investment in Rangaire ultimately proved to be unsuccessful. SHT now seeks to hold Peat Marwick--the auditor of Rangaire's financial statements from 1962 to 1990--liable for this loss. SHT claims that the audit reports with respect to the fiscal years ended July 31, 1987 and July 31, 1988 were deficient in that Peat Marwick issued an unqualified opinion on financial statements that materially overstated the net book value 1 of Rangaire's fixed assets. SHT further claims that its justifiable reliance on these faulty audit reports caused the loss which it sustained on the Rangaire stock.
The background and timing of SHT's stock purchases are important to this case. In 1985, Rangaire hired an investment banker for the purpose of locating a buyer for the company. Unable to find a willing buyer, Rangaire instead conducted a tender offer in which its Employee Stock Ownership Plan (ESOP) purchased stock from Rangaire's stockholders. The only evidence that Rangaire was for sale following this August 1986 tender offer consists of testimony from a former employee that some of the "major players" in the industry toured the plant facilities as prospective purchasers. 2
Peat Marwick issued the audit reports in question on the following dates:
Report for Date
the Fiscal Report
Year Ended Issued
July 31, 1987 October 7, 1987
July 31, 1988 September 30, 1988
SHT acquired its controlling interest in Rangaire in the following series of transactions:
Percentage Total
of Rangaire Percentage
Date Purchased Owned
August 8, 1988 28% 28%
September 30 &
October 11, 1988 5% 33%
December 14 & 15, 1988 17% 50%
SHT's initial purchase of Rangaire stock was from the bankruptcy estate of Rangaire's founder and Chairman, Eugene Roberts. Roberts had filed for bankruptcy in December 1987, several months after Peat Marwick issued the 1987 audit report. SHT had learned of the availability of the Roberts' stock in June 1988, from an investment banker who it had retained for the purpose of locating a publicly-traded U.S. company in which to acquire a block of stock.
After SHT and its investment banker made their own independent evaluation of Rangaire, SHT acquired Roberts' 28 percent interest in the company from the bankruptcy trustee. That was on August 8, 1988, approximately 11 months after Peat Marwick issued the 1987 audit report. It is undisputed that Peat Marwick had no actual knowledge of this transaction before an agreement had been reached between SHT and Roberts' bankruptcy estate.
Following this initial purchase, Robin Garland, the Chief Executive Officer of SHT/PLC, was elected to the Rangaire board of directors. As a result, Garland had access to Rangaire's internal financial records and began to receive detailed financial data. Garland was troubled to learn of certain accounting practices which had the effect of increasing the book value of the fixed assets as reflected on the financial statements. Concerned that this might be the "tip of the iceberg," Garland directed Robert Elliot--a partner with SHT/PLC's English auditors, Moores & Rowland--specifically to investigate, among other things, the fixed assets on Rangaire's books.
Elliot prepared a report dated September 20, 1988, which suggested that Rangaire's In late September and October 1988--after the Elliot report had been completed--SHT acquired an additional 5 percent of Rangaire. This purchase was made from Eugene Roberts' family and was described by SHT as a "courtesy," whatever that may mean.
financial statements overstated the proper net book value of the fixed assets. The report recommended that SHT obtain an appraisal of the fixed assets to confirm (1) their existence and (2) their cost, and advised that any related write-offs would probably be treated as a prior period adjustment. This recommendation apparently was not heeded, as SHT took no immediate action on this matter
As the months passed, SHT became increasingly dissatisfied with the management of Rangaire. In an effort to oust Joseph Hill, Rangaire's President and Chief Operating Officer, SHT decided to purchase enough additional Rangaire stock to give SHT a controlling interest in the company. This final purchase occurred in December 1988 and brought SHT's ownership in Rangaire to approximately 50 percent. As with SHT's initial purchase, it is undisputed that Peat Marwick had no actual knowledge of any of SHT's subsequent purchases of Rangaire stock prior to their respective consummations.
In January 1989, shortly after SHT had acquired a controlling interest, SHT successfully ousted Hill and named Stephen McBride, the Chief Financial Officer of SHT/PLC, to be Rangaire's President and Chief Executive Officer. During his six-month tenure as President, McBride made significant changes in the company's operations. McBride also instituted accounting policy changes. These accounting changes conformed with SHT's home office policies and had the effect of reducing the net book value of the fixed assets.
During the fiscal year ended December 31, 1989, 3 Rangaire wrote off millions of dollars of fixed assets which had been reflected on prior year financial statements. During its 1989 audit, Peat Marwick agreed that generally accepted accounting principles (GAAP) permitted Rangaire to take a $12.1 million write-off. A dispute arose, however, as to whether these write-offs were properly attributable to 1989 or if instead they were attributable to errors made in prior years. McBride contended that almost all of the write-offs were the correction of prior year accounting errors. 4 Rangaire's Audit Committee, however, disagreed and concluded that most of the write-offs were properly recorded in 1989. Consequently, Rangaire decided that it was not necessary to amend its prior year financial statements that Peat Marwick had audited. From 1989 through 1992, Rangaire republished the July 31, 1987, 1988, and 1989 financial statements four times without any changes. Indeed, Rangaire's new auditors, Aronson, Fetridge, Weigle & Stern, sent Peat Marwick a "comfort letter" in 1990, as well as in 1991 and 1992, stating that it had no information to indicate that Rangaire's previous financial statements needed to be restated.
The $12.1 million write-off was publicly disclosed in October 1989. Rangaire's stock price, however, did not significantly change during the several weeks following this disclosure. During the year 1990, though, Rangaire's stock price spiraled steadily downward, and SHT suffered a substantial loss on its investment when it eventually sold the stock.
It was only then that SHT brought suit against Peat Marwick, claiming security law violations and negligent misrepresentations. The jury determined that Peat Marwick was not liable for any security law violations. On the negligent misrepresentation claim, however, the jury found against Peat Marwick and awarded $8,500,000 in damages.
Peat Marwick then moved for judgment as a matter of law or, in the alternative, for a new trial. SHT moved to strike Peat Marwick's motion for judgment as a matter of law on grounds that Peat Marwick failed to make a motion for judgment at the close of all the evidence pursuant to Rule 50(b) of the Federal Rules of Civil Procedure and that Peat Marwick's objections to the jury charge did not cure this omission.
The district court denied both SHT's motion to strike and Peat Marwick's motion for a new trial. Concluding that there was insufficient evidence to support some of the damages awarded by the jury, the district court granted in part Peat Marwick's motion for judgment as a matter of law, reducing the judgment to $4,725,000.
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