Escott v. BarChris Construction Corp

Bowling alley construction business, BarChris Construction Corp., had multiple financing agreements that they used in the sale of alleys to purchasers. Triangular sales and sale-leaseback agreements were regularly used. Continuous replacement of working capital became a need for BarChris due to the nature of the sales. In 1961, BarChris issued 15 year debentures to increase capital. Following the law, a registration statement was created, containingBarChris’ assets for 1960 and the first quarter of 1961, this statement, however, includingabundant mistakes. It utterlyexaggeratedsales, net income, and earnings per share while not revealing particular unpaid debts, customers’ misbehaviors, and specific operative facets of BarChris. BarChris ultimately filed for bankruptcy after going broke. A class of the debentures buyers filed a suit seeking recessionary damages under § 11 of the Securities Act, with several defendants moving to dismiss. [The Court looked into every defendant very thoroughly, with a summation as follows: Kircher was the treasurer and CFO for BarChris, he was aware that a part of the 1960 auditing numbers were wrong; that there was a customer misbehavior problem, among many other items of note, he was cognizant of the pertinent facts. Birnbaum was house counsel and assistant secretary, whom signed amendments to the statement. He depended on Kircher for the nonaudited segments of the statement but with no privateunderstanding of the books or monetary transactions. Auslander was a nonofficer-director who signed amendments to the statement without first reading them, depending on theaffirmations of Kircher that they were accurate. The director and outside attorney for BarChris, Grant, drafted the registration statement, relying on numbers from an audit by Peat, Marwick. In regards to nonaudited numbers, he depended on the word of multiple BarChris officers as to the authenticity. He never began an investigation of the books or contracts. Drexel & Co was the main underwriter; Coleman was director of BarChris and partner of Drexel & Co; and Ballard, a Drexel attorney, all were dependent on Kircher’s affirmations as to the truth of the nonaudited portions of the statement, without making an independent inquiry. Peat, Marwick was the auditor of the 1960s figures. It failed to observe its own internal standards or even regularly recognized auditing standards. It did not realize that one venture had not been purchased, and thus that sales had been exaggerated and liabilities minimized.]