Agreements and would not have happened if E & Y had not concealed
JWP's violation of GAAP.
E & Y responds that the Businessland acquisition did not
violate the Note Agreements because the acquisition was in two
stages, each of which was permissible even if JWP was in default
of the Note Agreements. It contends that Stage 1, the purchase of
51% of the shares of Businessland, was an "investment"
specifically permitted by the Note Agreements (e.g., PX 134A, pp.
39-40) and that Stage 2, the takeout of the minority stockholders
of Businessland by exchanging JWP shares for their Businessland
shares and the merger of Businessland into JWP's I/S Division,
was also expressly permitted (e.g., PX 134A, ¶ 6G(c)). Plaintiffs
counter that it is a violation of the intent of the Note
Agreements to break the transaction down into two stages, as E &
Y argues should be done, because from the outset a full merger,
including both stages, was contemplated.
The Note Agreements do not unambiguously confirm the contract
construction urged by either side. Parol evidence would therefore
have been admissible to determine the intent of the contracting
parties. However, there was no occasion for the introduction of
such evidence at the trial because plaintiffs did not allege
anywhere in their detailed 86-page complaint that the
Businessland acquisition was a violation of the Note Agreements.
Neither did they introduce at trial any evidence concerning the
intent of the contract provisions in question, nor make any such
argument in their post-trial briefs. It was first suggested in
one of several hundred Supplemental Proposed Findings, which was
plaintiffs' final post-trial submission, to which E & Y did not
have the right to reply.
It would be grossly unfair to permit that contention to be
raised now and deprive E & Y of the opportunity to introduce
evidence bearing on the issue, and we therefore rule that this
contention has been waived. In this ruling, we are reinforced by
the belief that the issue is not a winning one for plaintiffs in
any event. The fact is that JWP did proceed with the
Businessland acquisition, despite being in default of the Note
Agreements' covenant to keep its books in accordance with GAAP.
If E & Y could not persuade Ernest Grendi to fulfill JWP's
obligation under the Note Agreements by keeping an honest set of
books, there is no reason to believe it could have persuaded him
to abstain from the biggest business deal of his life just
because those same Note Agreements provided that JWP could not
enter into a merger while it was in violation of GAAP. Moreover,
if the merger was indeed a violation of the Note Agreements, that
should have made it all the more unforeseeable by E & Y.
Our review of the evidence in this case has led inexorably to
the same conclusion: that if it had not been for JWP's
acquisition of Businessland and the crushing financial burden
that it imposed, JWP would have paid all of the interest and
principal due on plaintiffs' notes. When E & Y certified JWP's
1990 financials, it could not possibly have foreseen such an
acquisition. E & Y did know that JWP was dressing up its
financials to inflate its reported net income by a minor
percentage. But it also knew that under that frosting there was a
lot of cake, and that there was no real threat that JWP would be
unable to discharge all its debt obligations. JWP's acquisition
strategy had gone well. The company was strong and steadily
getting stronger. Its executives had no reason to splurge in
high-risk gambles to rescue a failing company or hide their
accounting manipulations. They proudly viewed JWP as a real
success story. They obviously thought they had gotten away with
their deceptions and did not expect that they would ever be
exposed. There were no portents that could have forewarned E & Y
of the possibility that within the year JWP would make by far its
ever; that the acquired company would be a financial basket case;
that the acquisition would cause a cash hemorrhage, which would
be exacerbated by a price war; and that JWP would be unable to
supply the transfusion of cash necessary to keep the company
alive because of a recession in commercial construction. To find
that E & Y should have foreseen any such compound catastrophe,
rivaling the woes of Job, merely because JWP had stretched its
reported earnings by 11% and had thereby become less risk averse,
would be to charge auditors with a power of precognition not
possessed by other mortals.
Without allowing hindsight to dominate our determination of
predictability, we are compelled to find that plaintiffs' loss on
their investments in JWP's notes was not a foreseeable result of
E & Y's complicity in JWP's misrepresentations but of post-audit
developments that could not have been anticipated.
For the reasons stated, plaintiffs' complaint is dismissed in
all respects with prejudice.
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