Arthur Andersen & Co. v. Perry Equipment Corp.
945 S.W.2d 812, 1997 Tex. LEXIS 47, 40 Tex. Sup. Ct. J. 591 (1997)
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Rule of Law:
Under the Texas Deceptive Trade Practices Act (DTPA), a plaintiff seeking damages for misrepresentation in the purchase of a business must prove direct damages by establishing the asset's value at the time of sale, and may not recover the entire purchase price without distinguishing between direct and consequential losses. Furthermore, attorney's fees awarded under the DTPA must be a specific dollar amount proven to be reasonable and necessary, not merely a percentage of the recovery.
Facts:
- Perry Equipment Corporation (PECO), a manufacturer, sought to acquire Maloney Pipeline Systems to expand its business.
- As a condition of the sale, PECO required an audit of Maloney's financial statements.
- Maloney retained the accounting firm Arthur Andersen to conduct the audit for the specific purpose of the sale to PECO.
- Arthur Andersen's audit favorably reported Maloney's financial condition, showing it to be a profitable business.
- Relying on the audit, on August 23, 1985, PECO purchased Maloney's stock from its owner, Ramteek II, for $4,088,287.
- In reality, the audit contained serious errors and Maloney was suffering substantial losses.
- Soon after the purchase, Maloney experienced serious financial decline, requiring a $400,000 cash advance from PECO.
- Fourteen months after the purchase, Maloney filed for bankruptcy, resulting in a total loss of PECO's investment.
Procedural Posture:
- Perry Equipment Corporation (PECO) sued Arthur Andersen in a Texas trial court, alleging violations of the Deceptive Trade Practice Act (DTPA), fraud, and negligence, among other claims.
- A jury found Arthur Andersen 51% at fault and awarded PECO $5,449,468 in damages.
- PECO elected to recover under the DTPA, and the trial court rendered a final judgment for PECO totaling $9,297,601.20, which included damages, interest, and attorney's fees.
- Arthur Andersen, as appellant, appealed the judgment to the court of appeals.
- The court of appeals affirmed the trial court's judgment in favor of PECO, the appellee.
- Arthur Andersen, as petitioner, filed an application for writ of error to the Supreme Court of Texas, which was granted.
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Issue:
Under the Texas Deceptive Trade Practices Act, may a plaintiff who purchased a business in reliance on a faulty audit recover the entire purchase price as damages without presenting evidence of the business's value at the time of sale?
Opinions:
Majority - Cornyn, Justice.
No. A plaintiff may not recover the entire purchase price as damages without providing evidence to distinguish between direct damages measured at the time of sale and subsequent consequential damages. The court reasoned that damages for misrepresentation under the DTPA align with common law principles, which recognize two types of direct damages: out-of-pocket (price paid minus value received) and benefit-of-the-bargain (value as represented minus value received). Both are measured at the time of the sale. To recover the full purchase price, PECO would have had to prove Maloney's stock was valueless when it was purchased. Allowing recovery of the entire investment as consequential damages without proving it was worthless at the outset would improperly shift the entire risk of the investment to the defendant, effectively making the defendant an insurer. Because the jury charge failed to instruct on the proper measure of direct damages and distinguish them from consequential damages, it was a reversible error. The court also held that PECO was a 'consumer' under the DTPA because the audit was specifically required by and intended to benefit PECO, even though Maloney paid for it. Finally, the court held that attorney's fees under the DTPA cannot be awarded as a percentage of recovery; the plaintiff must prove the fees are reasonable and necessary and request a specific dollar amount.
Analysis:
This decision significantly clarifies the method for calculating damages in misrepresentation cases under the Texas DTPA. It establishes that a plaintiff cannot simply claim the entire investment as a loss without proving the asset's value (or lack thereof) at the time of the transaction, thus preventing defendants from becoming de facto insurers for failed business ventures. The ruling reinforces the distinction between direct damages measured at the time of sale and consequential damages that occur later. Additionally, it sets a crucial precedent for fee-shifting statutes in Texas by invalidating percentage-based attorney fee awards in favor of requiring specific, evidence-based proof of reasonableness, which impacts how attorneys must present fee evidence to juries.
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