Escott v. BarChris Construction Corp.
Citation: 283 F. Supp. 643 (S.D.N.Y. 1968)
Facts
BarChris Construction, a bowling alley builder, filed a registration statement containing material misstatements and omissions about its financial condition. When the company went bankrupt, investors sued all signatories to the registration statement under Securities Act § 11.
Issue
What constitutes a sufficient due diligence defense for each category of defendants under § 11?
Holding
All defendants liable. The court analyzed each defendant’s due diligence defense individually based on their role and expertise. None adequately investigated the registration statement’s accuracy. The underwriter’s reliance on management without independent investigation was insufficient.
Rule
Section 11 liability: All signatories, directors, underwriters, and experts bear strict liability for material misstatements in a registration statement as to the parts they are responsible for. The due diligence defense requires: (1) for experts (as to their expertised portions) — reasonable investigation meeting reasonable-man standard; (2) for non-experts (as to expertised portions) — reasonable reliance on experts without red flags; (3) for non-experts (as to non-expertised portions) — reasonable investigation, same standard as experts.
Key rule: Underwriters cannot simply rely on management representations; they have an independent duty to investigate.
Significance
- Leading case on § 11 due diligence obligations; still the primary teaching case
- Established that underwriters bear significant independent verification obligations (not just reliance on issuer’s representations)
- “BarChris defense” became shorthand for inadequate due diligence
- Encouraged the development of thorough due diligence processes in securities offerings