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16 UCLA L. Rev. 177 (1968-1969)
Escott v. Barchris Construction Corp.: Due Diligence Defenses under Section 11 of the Securities Act of 1933

handle is hein.journals/uclalr16 and id is 179 raw text is: ESCOTT v. BARCHRIS CONSTRUCTION CORP.:' DUE DILIGENCE DEFENSES UNDER SECTION 11 OF THE SECURITIES ACT OF 19332 The BarChris Construction Corporation was the smallest of three major bowling alley construction firms.' Although its sales had increased from eight hundred thousand dollars in 1956 to over nine million dollars in 1960, as with most construction firms, lack of cash was a constant problem. Thus, in late 1959, the company was forced to go public in an effort to obtain needed cash. Warrants were issued with the 1959 offering, and, in January 1961, the com- pany filed a registration statement covering these warrants. Subse- quently, in the spring of 1961, the company issued five and one half percent convertible subordinate debentures. The registration state- ment covering these debentures was little more than an inadequately updated version of the previous registration statement. Although not stated in the registration statement, the actual purpose of the 1961 issue was to help solve the company's critical cash problem and to repay loans made by directors to the company.4 However, the cash raised by these debentures was inadequate and by October 1961 the company was forced to petition for an arrangement under Chapter XI of the Bankruptcy Act. The salient feature of these facts is the rapidity with which BarChris met its demise. Statements which were true in the January 1961 registration statement had become materially misleading by May 1961. As a result, the purchasers of the debentures sued the corporation, its nine directors and controller, the auditors, and the eight underwriters under Section 11 of the Securities Act of 1933. The attorney primarily responsible for the registration statement and a partner in the underwriting firm were sued as directors. The court, denying the defendant's motion to dismiss, held that the fail- ure to discover the material misstatements and omissions indicated that none of the individual defendants had exercised due diligence. Since Congress specifically delineated the legal standard it 1 283 F. Supp. 643 (S.D.N.Y. 1968). 2 15 U.S.C. § 77a-aa (1964). 3 American Mach. & Foundry Corp. and Brunswick Corp. held 97% of the business in this field. 283 F. Supp. at 653. 4 This was a material omission of one of the facts required in the registration statement. Securities Act of 1933, Schedule A(13), 15 U.S.C. § 77aa(13) (1964).

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