Liberty Financial Management Corp. v. Beneficial Data Processing Corp.

• Court: Missouri Court of Appeals
• Writing for the Court: STEPHAN; SIMON, P.J., and GAERTNER
• Citation: Liberty Financial Management Corp. v. Beneficial Data Processing Corp., 670 S.W.2d 40 (Mo. App. 1984)
• Decision Date: 20 March 1984
• Docket Number: No. 44446,44446
• Parties: 38 UCC Rep.Serv. 1471 LIBERTY FINANCIAL MANAGEMENT CORPORATION, Plaintiff-Respondent, v. BENEFICIAL DATA PROCESSING CORPORATION, Defendant-Appellant.

Page 40

670 S.W.2d 40

38 UCC Rep.Serv. 1471

LIBERTY FINANCIAL MANAGEMENT CORPORATION, Plaintiff-Respondent, v. BENEFICIAL DATA PROCESSING CORPORATION, Defendant-Appellant.

No. 44446.

Missouri Court of Appeals,

Eastern District,

Division One.

March 20, 1984.

Motion for Rehearing or Transfer

Denied April 20, 1984.

Application to Transfer Denied

June 19, 1984.

David Wells, St. Louis, for defendant-appellant.

Thomas M. Carney, St. Louis, for plaintiff-respondent.

STEPHAN, Judge.

Beneficial Data Processing Corporation (Bencom) appeals from a jury verdict and judgment of the Circuit Court of St. Louis County, awarding Liberty Financial Management Corporation (Liberty) $1,712,276.00 on Liberty's actions against Bencom for breach of contract and misrepresentation. The judgment is reversed and the cause remanded.

Bencom contends the trial court erred in (1) removing from the jury's consideration the contract's limitation on liability clause; (2) allowing Liberty to seek damages which accrued to other corporations; (3) admitting evidence of the financial condition of Bencom's parent corporation, Beneficial Finance Corporation (Beneficial); (4) receiving into evidence a survey of Liberty's employees; (5) receiving into evidence at the behest of Liberty the affidavit of one of its former officers; (6) allowing Liberty to claim damages for employee time, overhead expenses, executives' salaries, loss of management information, lost profits, and amounts paid by Liberty to Bencom during the first six months of the contract; (7) refusing to declare a mistrial when Liberty's counsel referred to a verdict in another case; and, (8) submitting various instructions.

Liberty is a wholly owned subsidiary of Liberty Loan Corporation (LLC). In addition to Liberty, LLC operated over 100 subsidiaries in approximately 30 states. LLC and its subsidiaries (Liberty Loan corporate network) are in the business of making consumer loans. LLC provides a central managerial function and arranges financing for the lending operations. The subsidiaries, with the exception of Liberty, lend money to consumers through branch offices, with each subsidiary owning one or more branch offices. Liberty operated a personnel office which was responsible for the employment of all persons in the Liberty Loan corporate network and provided the organization with accounting and legal services, statistical analyses, and most importantly for the present case, data processing.

In its role as provider of data processing services, Liberty was obligated to provide both on-line and off-line data processing. On-line data processing refers to a system by which one communicates directly with the computer and obtains immediate responses from the computer, via computer terminals, provided that one's communications are in a format which the computer is programmed to understand. An off-line data processing system exists where data is entered by means of punch cards or computer tapes rather than directly by a computer terminal. In the consumer finance industry, the on-line system is used to transact business with customers and to record the transactions on magnetic tapes. The off-line system uses the magnetic tapes to provide periodic statistical reports.

Liberty, until well after it had contracted with Bencom, provided its own off-line processing, but contracted with another company, Dial Finance Company, for on-line services. In 1976, Liberty became dissatisfied with its then supplier of on-line services and began negotiations with two other vendors, Control Data Corporation and Bencom.

Bencom, like Liberty, is a wholly owned subsidiary of a company which is engaged in the consumer finance business. Bencom supplies data processing services to its parent corporation, Beneficial, and to the rest of the Beneficial corporate network. Unlike Liberty, however, Bencom operates its own on-line data processing and sells its on-line data processing services to other corporations which are referred to as subscribers.

Liberty first negotiated with Control Data Corporation in early 1976. Gerald Holm, president of Bencom, learned that Liberty desired to convert to a different on-line system and asked Colonel Edgar Higgins, then president of Beneficial, to call Stephen Friedrich, president of LLC, to see if Liberty would consider switching to Bencom.

Col. Higgins called Friedrich on March 11, 1976. Col. Higgins told Friedrich that Beneficial had learned that Liberty was considering changing data processing suppliers, that Beneficial wanted to help save Liberty from bankruptcy, and that Bencom had a large organization which was capable of making the conversion by Liberty's July 1, 1976 deadline. Despite some reservations, Friedrich agreed to have Liberty personnel listen to Bencom's presentation.

The next week, Holm and Joe Yankauskas, a Bencom vice president, paid a two day visit to Liberty's headquarters in St. Louis. They had several meetings during which they discussed the possibility of Liberty's conversion to Bencom's system. Liberty personnel who attended one or more of these meetings included: Martin Starr, vice president and treasurer of Liberty; Kenneth Levin, vice president of financial controls; Dan Tobin, director of data processing; and Friedrich.

During the course of persuading Liberty to convert to Bencom, Holm and Yankauskas made various representations as to the capabilities of Bencom and its on-line data processing system. Holm and Yankauskas assured Liberty that Bencom could provide additional services, called enhancements, which Liberty's then current data-processing vendor could not provide. Holm and Yankauskas also told Liberty that because of the size and expertise of Bencom, a conversion could successfully take place by July 1, 1976.

Liberty decided in mid-April, 1976, to subscribe to Bencom's system. The written agreement between the parties was not signed, however, until May 26, 1976.

Bencom's planning and performance of the conversion were less than adequate. For example, expert testimony indicated that at least nine months should have been dedicated to Liberty's conversion; Bencom devoted less than three months. Furthermore, Bencom's conversion efforts should have been subjected to one or more tests: (1) a test of each computer program; (2) a string test, in which a group of related programs are tested; (3) a systems test, which tests the entire system; (4) a pilot test, in which the user, Liberty here, would be brought in; and (5) a parallel test, in which the existing system and the new system are compared. None of these tests was performed.

By far the biggest error committed by Bencom was the "fourth reel substitution." The conversion from the Dial to the Bencom system required Bencom to copy records of Liberty's accounts which records Dial had kept on six reels of magnetic computer tape. Two sets of the records were provided to Bencom by Liberty, which had obtained the two sets from Dial. Although the two sets contained identical information, it could not be assumed that each reel within a set was identical to the correspondingly numbered reel of the other set. Bencom decided to copy the first set of tapes. When Bencom's computer had trouble reading the fourth reel, Bencom decided to substitute the fourth reel from the second set of tapes without making sure that the two fourth reels were identical. There was evidence that unfortunately the reels were in fact not identical.

Probably as a result of the ill-advised fourth reel substitution, 5000 accounts were missing and 20,000 were duplicated. Although this was the primary problem, there were many others. Among them, the computer system was plagued with much "down-time," i.e., time during which the system was not functioning. In addition, Bencom had obligated itself to provide progress reports, which were daily, weekly and monthly statistical compilations and analyses, to Liberty; however, Bencom's progress reports contained so many errors that they were unreliable and hence useless. Liberty encountered many other difficulties with the Bencom system.

Although many of the problems in the system were eventually corrected, Liberty remained dissatisfied with Bencom's performance and initiated the instant lawsuit. The twelve-week jury trial resulted in the verdict and judgment from which Bencom now appeals.

I.

Bencom's first point contends that the trial court erred in withdrawing from the jury's consideration the contract's limitation of liability clause. We agree.

The contract contains three paragraphs which purport to limit the parties' liabilities:

12. LIABILITY

A. In the event of a willful act directed towards Subscriber [Liberty] individually, or gross negligence by an agent or employee of Bencom of such an unusual or high degree that it would be beyond that which would ordinarily be assumed by Subscriber in providing for itself the services to be performed hereunder Bencom will compensate Subscriber any and all of its out-of-pocket losses but not any loss of business losses and will hold Subscriber harmless from and [sic, any] and all claims of loss by a third party as a result of such willful act or gross negligence.

B. In the event of an error or omission by any agent or employee of Subscriber, Subscriber will hold Bencom harmless from any and all claims of loss by a third party as a result of such error or omission.

C. In any event not covered by 12.A or 12.B. herein above, the costs and expenses of each party shall be borne by the party which incurs them.

The trial court, however, refused to give effect to paragraph 12 and removed it from the jury's consideration by Instruction No. 6:

Paragraph 12 of the Agreement between the parties (including that portion of the letter of June 4, 1976 modifying paragraph 12), introduced in Plaintiff's Exhibit 11, is withdrawn from the case and you are not to consider such paragraph in arriving at your verdict.

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