Appeal from an order of the United States District Court for the Southern District of New York, Henry F. Werker, Judge, granting summary judgment dismissing a third-party complaint on grounds of collateral estoppel. Reversed and remanded.
Before Moore, Newman and Kearse, Circuit Judges.
This is an appeal from a judgment in one of several lawsuits arising out of the bankruptcy of Bermec Corporation ("Bermec"). Defendant-third-party-plaintiff Arthur Andersen & Co. ("Andersen") challenges an order of the United States District Court for the Southern District of New York, Henry F. Werker, Judge, granting summary judgment dismissing its third-party complaint against Herman L. Meckler ("Meckler"), Bermec's former chairman and chief executive officer, on grounds of collateral estoppel. For the reasons below, we reverse.
The lawsuits relate to the alleged embezzlement by Jack R. Dick prior to July 1968 of substantial amounts of money from Black Watch Farms, a cattle tax shelter.*fn1 From 1961 to 1968 Black Watch Farms was a New York limited partnership engaged in buying, breeding, and selling purebred Aberdeen Angus cattle for its own account and the accounts of others. Dick was the principal stockholder, president, and chief executive officer of B. W. Farms, Inc., a corporation that owned a 50% equity interest in Black Watch Farms as its general partner, and an additional 7% interest as a limited partner.
On July 11, 1968, pursuant to an agreement of June 21, 1968, Bermec, through its subsidiary Black Watch Farms, Inc. (hereinafter sometimes "Black Watch"), acquired a controlling interest in Black Watch Farms (the limited partnership) by purchasing the general partner's interest and 14% of the limited partners' interests, in exchange for a substantial amount of Bermec stock. On September 11, 1968, Andersen certified that the financial statements of Bermec and Black Watch Farms, Inc. for the fiscal year ending June 30, 1968, fairly presented the financial positions of those firms in accordance with generally accepted accounting principles. Between December 1968 and February 1969, Black Watch Farms, Inc. acquired the remaining limited partnership interests in Black Watch Farms.
Sometime during 1970 it came to light that Black Watch's cattle inventory and accounts and notes receivable were greatly overstated, and that it had cash flow problems that were insurmountable. In September 1970, Black Watch petitioned for an arrangement under Chapter XI of the Bankruptcy Act, and in April 1971 was adjudicated a bankrupt. Subsequently Bermec itself filed a petition for reorganization under Chapter X of the Bankruptcy Act.
Meckler was chairman and chief executive officer of Bermec from September 1967 through 1970, and chairman of Black Watch from 1968 through 1970.
The present action was commenced against Andersen in 1973 by and on behalf of persons who purchased Bermec securities between September 26, 1968, and November 1, 1969. The complaint, invoking the Securities Act of 1933, 15 U.S.C. §§ 77a et seq. (1976) ("1933 Act"), and the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a et seq. (1976) ("1934 Act"), charged Andersen with fraud in connection with its certification of the Bermec and Black Watch financial statements for the year ending June 30, 1968. Plaintiffs alleged that if Andersen had used proper auditing procedures it would have discovered Dick's embezzlement and would have known that the Bermec and Black Watch financial statements materially overstated the net income of these corporations. Plaintiffs claim that they purchased Bermec securities at inflated prices in reliance on the false financial statements certified by Andersen. Andersen is the only defendant in this action.
Andersen filed an answer controverting the central allegations of the complaint, and, pursuant to Fed.R.Civ.P. 14(a) ("Rule 14(a)"),*fn2 filed third-party complaints against Meckler, Empire National Bank ("Empire"),*fn3 and others. Andersen alleged that Meckler had knowledge prior to July 1968 of Dick's defalcations, and that he both concealed this information from Andersen and made misrepresentations to it. Andersen sought indemnification or contribution from Meckler and others as follows:
38. In the event defendant Andersen is held liable to plaintiffs for damages arising from Andersen's alleged failure to discover, in connection with its examination of Black Watch Farms' financial statements for the year ending June 30, 1968, the embezzlement or misappropriation of funds by Dick (as described in Paragraph 14 herein) or the claims or potential claims by herdowner-customers (as described in Paragraph 17 herein), then Andersen is entitled to recover such damages or to obtain contribution from one or more or all of third-party defendants Bonura, Empire National Bank, Dick and Meckler by reason of their fraud and deceit upon Andersen, as hereinafter set forth.
(Third-Party Complaint P 38.)
In 1980 Meckler moved for summary judgment on the basis of res judicata and collateral estoppel as a result of a jury verdict and judgment in his favor in another action arising out of the Black Watch-Bermec troubles, State Mutual Life Assurance Co. v. Arthur Andersen & Co., 71 Civ. 4036 (S.D.N.Y.), aff'd, 581 F.2d 1045 (2d Cir. 1978) ("State Mutual " action).*fn4
B. The State Mutual Action
The State Mutual action was commenced against Andersen in September 1971 by four insurance companies ("insurance companies") that had made loans to Black Watch between November 22, 1968, and early 1970 totaling approximately $10 million. Alleging violations of § 17(a) of the 1933 Act and § 10(b) of the 1934 Act, these plaintiffs charged that Andersen, in auditing Black Watch for the fiscal years ending June 30, 1968, and June 30, 1969, knew or should have known that the Bermec and Black Watch financial statements it certified were materially false and misleading in not disclosing Dick's defalcations.
Andersen, initially the only defendant sued by the insurance companies, denied the central allegations of the complaint, and filed a third-party complaint against Meckler, Empire, and others. Andersen alleged that Meckler had knowledge of Dick's defalcations, and that he both concealed them from Andersen and made ...