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 2014.
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, 2014.
On November 15, 2014, 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. How-ever, Risk Capital insisted on audited statements for 2014. The contract that was made avail-able 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.

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?

  • CreatedOctober 27, 2014
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