Common Law Liability Exposure. Risk Capital Limited, a Delaware corporation, wasconsidering the purchase of a substantial investment in Florida Sunshine Corporation, aclosely held corporation. Initial discussions with the Florida Sunshine Corporation beganlate in 2017.Wilson and Wyatt, Florida Sunshine’s auditor, regularly prepared quarterly and annualunaudited financial statements. The most recently prepared financial statements were for theyear ended September 30, 2017.On November 15, 2017, after extensive negotiations, Risk Capital agreed to purchase100,000 shares of no par, class A capital stock of Florida Sunshine at $12.50 per share.However, Risk Capital insisted on audited statements for 2017. The contract that was madeavailable to Wilson and Wyatt specifically provided that Risk Capital shall have the rightto rescind the purchase of said stock if the audited financial statements of Florida Sunshineshow a material adverse change in the financial condition of the corporation. The audited financial statements furnished to Florida Sunshine by Wilson and Wyattshowed no such material adverse change. Risk Capital relied on the audited statements andpurchased the investment in Florida Sunshine. It was subsequently discovered that, as of thedate of the financial statements, the audited statements were misstated and that in fact therehad been a material adverse change in the corporation’s financial condition. Florida Sunshine is insolvent, and Risk Capital will lose virtually its entire investment.Risk Capital seeks recovery against Wilson and Wyatt.Required:Assuming that only ordinary negligence is proved, will Risk Capital prevaila. Under a privity of contract standard?b. Under a primary beneficiary standard?c. Under a foreseen parties standard?
Common Law Liability Exposure. Risk Capital Limited, a Delaware corporation, was
considering the purchase of a substantial investment in Florida Sunshine Corporation, a
closely held corporation. Initial discussions with the Florida Sunshine Corporation began
late in 2017.
Wilson and Wyatt, Florida Sunshine’s auditor, regularly prepared quarterly and annual
unaudited financial statements. The most recently prepared financial statements were for the
year ended September 30, 2017.
On November 15, 2017, after extensive negotiations, Risk Capital agreed to purchase
100,000 shares of no par, class A capital stock of Florida Sunshine at $12.50 per share.
However, Risk Capital insisted on audited statements for 2017. The contract that was made
available to Wilson and Wyatt specifically provided that Risk Capital shall have the right
to rescind the purchase of said stock if the audited financial statements of Florida Sunshine
show a material adverse change in the financial condition of the corporation.
The audited financial statements furnished to Florida Sunshine by Wilson and Wyatt
showed no such material adverse change. Risk Capital relied on the audited statements and
purchased the investment in Florida Sunshine. It was subsequently discovered that, as of the
date of the financial statements, the audited statements were misstated and that in fact there
had been a material adverse change in the corporation’s financial condition. Florida Sunshine is insolvent, and Risk Capital will lose virtually its entire investment.
Risk Capital seeks recovery against Wilson and Wyatt.
Required:
Assuming that only ordinary negligence is proved, will Risk Capital prevail
a. Under a privity of contract standard?
b. Under a primary beneficiary standard?
c. Under a foreseen parties standard?
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