Escott v. BarChris Construction Co.
283 F.Supp. 643


PROCEDURE: Plaintiffs brought an action under § 11 of the Securities Act of 1933, 15 U.S.C.S. 77- that a registration statement with respect to debentures contained false statements and material omissions. The United States District Court for the Southern District of New York issued its findings of fact and conclusions of law in accordance with Fed. R. Civ. P. 52(b).

FACTS: BarChris Construction Corporation (D) built large bowling centers that contained bars and restaurant facilities. The advent of the automatic pin-setting machine, caused BarChris's (D) sales to increase dramatically because of the increased interest in bowling. In 1956, BarChris's sales were approximately $800,000, but by 1960, they had jumped to more than $9,165,000. BarChris had to expend large sums of money to finance construction projects before it received reimbursement. As a result, BarChris was in need of an ever-increasing amount of money to finance its operations. In 1959, BarChris offered stock for sale to the public at $3 per share. Peter Morgan & Company underwrote the stock issue. In early 1961, BarChris needed additional working capital and decided to sell 5.5 percent convertible subordinated fifteen-year debentures. The company filed the required registration statement with the SEC on March 30, 1961, and filed amendments to the statement on May 11 and May 16. The closing occurred on May 24. By this time, BarChris was having difficulty collecting payment from its customers. By 1962, the company was in serious trouble. The bowling industry was overbuilt, and many alleys were closing. In May 1962, BarChris made a last attempt to raise money by selling common stock. It filed a registration statement for the stock sale with the SEC and then later withdrew it.

ISSUE: Must a false or misleading fact be material in order to incur general liability under Section 11? Can the duty to make a reasonable investigation be delegated?

RULE:If false statements made in a registration statement or omitted facts
that should have been included are material, the registration statement is misleading.


HOLDING:The District Court, held that the prospectus contained material falsities and omissions, and that defendants failed to sustain burden of proving the due diligence defenses asserted or that damage suffered by each plaintiff had been caused by factors other than the material falsities and omissions.

Analysis: The court denied various motions by the parties made a trial, issued findings of fact and conclusions of law in respect to certain issues, and retained jurisdiction for the resolution of cross claims and other remaining issues and claims peculiar to particular plaintiffs.