Leasco Corp. v. Taussig
473 F.2d 777 (1972)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A contract for the sale of a business cannot be rescinded on grounds of mutual mistake regarding future earnings when both parties were aware of the uncertainty of such projections and the buyer assumed the risk. Rescission for negligent misrepresentation is also unavailable where the buyer is a sophisticated insider with full access to financial information and the contract contains a specific disclaimer of financial warranties.
Facts:
- Leasco Corporation decided to sell its subsidiary, McCreary-Koretsky International, Inc. (MKI), an international civil engineering firm.
- Peter T. Taussig, a lawyer and engineer who was a vice president of MKI and a liaison to Leasco, offered to purchase the company.
- In late December 1970, Taussig and Leasco negotiated a purchase price based on Taussig's own estimate that MKI would have pre-tax earnings of approximately $200,000 in the upcoming fiscal year.
- On February 26, 1971, the parties signed a formal agreement for the sale of MKI to Taussig, which included a clause explicitly disclaiming any representations and warranties by Leasco regarding MKI's business except for those expressly set forth in the agreement.
- After the agreement was signed, Taussig reviewed a January 1971 financial statement for MKI that showed earnings consistent with projections.
- This January statement, however, failed to account for a substantial loss caused by a recently discovered design error on the Fruitvale Bridge project.
- The financial statement for February 1971, which Taussig received in March, revealed a net loss for MKI resulting from an adjustment for the Fruitvale Bridge error.
- On the closing date of May 28, 1971, Taussig refused to complete the purchase of MKI.
Procedural Posture:
- Leasco Corporation sued Peter T. Taussig in the U.S. District Court for the Southern District of New York, seeking specific performance or damages for breach of contract.
- Taussig raised the defenses of mutual mistake and misrepresentation, seeking to rescind the agreement.
- The district court denied Leasco's motion for summary judgment.
- Following a non-jury trial, the district court ruled in favor of Leasco, finding that Taussig had breached the contract without justification.
- The district court ordered Taussig to specifically perform the contract at a reduced price or, in the alternative, to pay $669,000 in damages.
- When Taussig failed to perform, a final judgment for $669,000 was entered against him.
- Taussig (appellant) appealed the judgment to the U.S. Court of Appeals for the Second Circuit.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a buyer in a corporate acquisition have the right to rescind a contract based on mutual mistake or negligent misrepresentation regarding the target company's projected earnings, when the buyer was a sophisticated insider with access to the company's financial data and the contract contained a specific disclaimer of financial warranties?
Opinions:
Majority - Timbers, Circuit Judge
No. A buyer cannot rescind a contract under these circumstances because he assumed the risk of uncertainty in the earnings projections and was not justified in relying on the negligently prepared financial statements. For the claim of mutual mistake, the court reasoned that both parties knew the projected earnings of $200,000 for a risky civil engineering business were a hope, not a certainty. Citing precedent, the court stated that when parties know a matter is doubtful and contract on that basis, they assume the risk that the facts may not accord with their wishes. Taussig, an insider with deep knowledge of MKI's business, could not have been certain about the projection and thus assumed the risk it would not be realized. For the claim of misrepresentation, the court held that while the January financial statement was misleading due to MKI's negligence, Taussig's reliance on it was not justifiable. Taussig was a sophisticated insider with full access to MKI's books, records, and personnel and was aware of its accounting practices. Furthermore, the contract contained an explicit disclaimer of warranties regarding MKI's financial condition, which allocated the risk of such inaccuracies to Taussig. The error itself was also deemed not material, as the affected project constituted only about 5% of MKI's total projected annual revenues.
Analysis:
This case establishes a high bar for sophisticated parties, particularly corporate insiders, seeking to rescind a contract based on mistake or misrepresentation. It underscores the power of specific contractual disclaimers and 'no-representation' clauses to allocate risk between parties in a commercial transaction. The ruling serves as a strong precedent that a buyer's access to information and opportunity for due diligence can defeat a claim of justifiable reliance on a seller's misstatements. For future transactions, this decision reinforces that courts will enforce the bargain struck between knowledgeable parties, holding them to the risks they contractually assumed, rather than reallocating losses after a business venture proves less profitable than hoped.
