TBG, INC. v. Bendis
| Decision Date | 21 December 1993 |
| Docket Number | Civ. A. No. 89-2423-EEO. |
| Citation | 841 F. Supp. 1538 |
| Parties | TBG, INC., Plaintiff, v. Richard A. BENDIS, et al., Defendants. |
| Court | U.S. District Court — District of Kansas |
COPYRIGHT MATERIAL OMITTED
J.D. Lysaught, Mustain, Higgins, Kolich, Lysaught & Tomasic, Chartered, Kansas City, KS, Herbert E. Milstein, Lisa M. Mezzetti, Daniel S. Sommers, Cohen, Milstein, Hausfeld & Toll, Washington, DC, for TBG, Inc.
Bruce Keplinger, John Benge, Michael G. Norris, Michael B. Lowe, Payne & Jones, Chtd., Overland Park, KS, for Richard A. Bendis.
Karen J. Halbrook, John R. Cleary, Husch & Eppenberger, Kansas City, MO, for W. Terrance Schreier.
Anthony F. Rupp, Shughart, Thomson & Kilroy, Overland Park, KS, John M. Kilroy, R. Lawrence Ward, Shughart, Thomson & Kilroy, P.C., Kansas City, MO, Emmett E. Eagan, Jr., Ernst & Young, Cleveland, OH, for Ernst & Whinney.
J.D. Lysaught, Mustain, Higgins, Kolich, Lysaught, Tomasic, Chartered, Kansas City, KS, Herbert E. Milstein, Lisa M. Mezzetti, Daniel S. Sommers, Cohen, Milstein, Hausfeld & Toll, Washington, DC, Martin E. Karlinsky, Scheffler, Karlinsky & Stein, New York City, for Richard S. Masinton, Continental Healthcare Systems, Inc.
J.D. Lysaught, Mustain, Higgins, Kolich, Lysaught & Tomasic, Chartered, Kansas City, KS, M. Michael Gill, Tamara Wilson Setser, Julia A. Riggle, Hillix, Brewer, Hoffhaus, Whittaker & Wright, Kansas City, MO, Herbert E. Milstein, Lisa M. Mezzetti, Daniel S. Sommers, Cohen, Milstein, Hausfeld & Toll, Washington, DC, for Paul R. Billington.
J.D. Lysaught, Mustain, Higgins, Kolich, Lysaught, Tomasic, Chartered, Kansas City, KS, Herbert E. Milstein, Lisa M. Mezzetti, Cohen, Milstein, Hausfeld & Toll, Washington, DC, for George A. Bridgmon.
This matter is before the court on numerous motions for summary judgment. The court has considered the voluminous material submitted by all parties and is now prepared to rule. For convenience, the court provides an index of the pending matters.
The facts pertinent to the instant motions are as follows. This case arises out of the June 10, 1986, acquisition of Continental Healthcare Systems, Inc. ("CHSI") by plaintiff TBG, Inc. ("TBG"). CHSI was a computer software company specializing in developing and marketing computer-based information systems for hospitals and other health care providers. TBG was one of over forty companies within the Thyssen-Bornemisza Group1 which employed approximately 13,700 employees worldwide in 1985. TBG's reported assets for fiscal 1985 were approximately $1.15 billion and group sales totalled $1.84 billion.
TBG alleges that defendants Richard A. Bendis (CHSI CEO), Terrance Schreier (CHSI COO), and Ernst and Whinney (CHSI's outside accounting firm) made material misrepresentations and omissions both: 1) during the period when TBG was making inquiries about CHSI from January 1, 1986, to June 10, 1986, the date the acquisition closed; and 2) in public filings by CHSI with the SEC immediately before the purchase (including the fiscal 1985 Form 10-K, the fiscal 1986 first quarter Form 10-Q and related financial statements), the May 20, 1986, proxy statement, and defendant Ernst and Whinney's comfort letter.
TBG alleges misrepresentations and omissions concerning: 1) the status of completion of CHSI products; 2) the prospects for CHSI's future business; 3) the terms of CHSI contracts; 4) the status of purported sales of CHSI products; 5) revenue recognized by CHSI; 6) CHSI's financial statements; and 7) the employment status of certain CHSI officers and employees.
On January 26, 1986, TBG and CHSI reached an agreement in principle for TBG to purchase CHSI at $9.00 per share, subject to the results of TBG's due diligence review. As preconditions to the acquisition, TBG required representations and warranties from CHSI, Bendis, and Schreier concerning: the employment status of CHSI employees, the accuracy of CHSI's financial statements, and the completion status of CHSI products. TBG also required a comfort letter from Ernst and Whinney, CHSI's independent accountant.
TBG was not a novice investor. During the three years surrounding the acquisition of CHSI, TBG completed eight acquisitions (two of which were software companies) and conducted due diligence investigations as a part of several of those acquisitions. TBG began its due diligence investigation of CHSI in January 1986 which continued, at some level, until the deal closed June 10, 1986, at a total cost for the due diligence investigation alone of $445,000.
TBG assembled a due diligence team consisting of over fifteen members of TBG's corporate staff and employees of TBG's subsidiary companies. In addition, TBG employed the following outside consultants to assist in the due diligence review and advise TBG regarding the acquisition: 1) the international accounting firm of Price Waterhouse; 2) the New York law firm of Cravath, Swain, and Moore ("Cravath"); 3) the national marketing consulting firm Boston Consulting Group; and 4) the management consulting firm John Arnold Executrak Systems, Inc. TBG also consulted with Sheldon Dorenfest and Associates, a healthcare software consulting firm.
TBG's due diligence investigation was not designed to detect fraudulent misconduct by the sellers or their agents. Nonetheless, according to TBG's expert Cyril Moscow, an experienced corporate attorney, the due diligence conducted by TBG was "within a customary range of business investigations for businesses of this type."
TBG hired Price Waterhouse to conduct a special "businessman's review" of CHSI in February 1986. The businessman's review was not a full audit, but was intended to provide TBG with an understanding of selected components of the balances on CHSI's October 31, 1985, financial statements, the accounting principles used by CHSI in arriving at those balances, and any significant changes in the management or financial operations of CHSI through January 31, 1986.
As a part of its review, Price Waterhouse sought information about CHSI's financial position and the accuracy of representations by CHSI's management. Price Waterhouse read CHSI's financial statements and Ernst and Whinney's corresponding reports for the fiscal year ending October 31, 1985, and the five preceding fiscal years. TBG did not conduct, or have Price Waterhouse conduct, a complete audit of CHSI's financial statements and thus, TBG maintains, it relied on Ernst and Whinney's audit of CHSI's statements.
Price Waterhouse summarized the findings of the businessman's review in a written report to TBG, dated February 28, 1986. In the report, Price Waterhouse opined that Ernst and Whinney performed "sufficient field work to render an opinion in accordance with generally accepted auditing standards." Price Waterhouse advised TBG that CHSI's revenue recognition policies were very aggressive and reported that CHSI's billing cycle did not coincide with its revenue recognition practices. Price Waterhouse also advised TBG that CHSI's aggressive revenue recognition policies led to significant unbilled receivables at year-end.2
As a part of the review, Price Waterhouse representatives interviewed key CHSI management officials, primarily, Richard Bendis (CEO), W. Terrance Schreier (COO), Richard Masinton (CFO), and Paul Billington (Controller) about how CHSI's accounting policies were implemented with respect to specific contracts. Specifically, a representative of Price Waterhouse, Richard Cutler (TBG's Senior Vice President...
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