Georgia High Court to Review Ruling on Sale of Scrap Metal Company

The Georgia Supreme Court has agreed to review a lower court ruling that reinstated a $44 million verdict against BDO Seidman in regards to the sale of Mindis Consolidated.

The case dates to 1993, when Attwoods plc, a British company, hired BDO to audit the inventory of Mindis Consolidated Corp., a scrap metal company. Relying in part on the BDO audit for Attwoods, a Georgia-based buying group, Mindis Acquisition Corp., bought Mindis for $40 million. However, a subsequent audit by Mindis Acquisition -- two officers of which had started the scrap metal company before selling it to Attwoods -- showed that BDO had overestimated the value of Mindis' inventory by $70 million, according to a Jan. 18 decision by the Georgia Court of Appeals.

This significantly lower number ruined the buying group's plans to rebuild the company, Mindis lawyers argued.

Mindis Acquisition sued BDO in Fulton Superior Court for negligent misrepresentation, and in 1999 a jury awarded the company $44 million.

But in late 1999, the Fulton Superior Court granted BDO a judgment notwithstanding the verdict. The court held that Mindis Acquisition was not justified in relying on BDO's figures because the buying group's officers who used to own Mindis knew or should have known BDO's estimate was questionable.

But an appeals court decision reinstated the award. In an opinion the court wrote that while the evidence could have supported a verdict for BDO, the question of whether Mindis Acquisition should have protected itself by the exercise of further diligence was for the jury to decide.

The Georgia Supreme Court, in granting BDO's petition of certiorari, appeared not to be interested in the question of liability but did mention specifically the issue of how to measure damages, which lawyers have said was a question of first impression.

Damages in most negligence matters are measured by a plaintiff's out-of-pocket losses, according to the opinion. Using the out-of-pocket measure, a Mindis lawyer said the company would have been entitled to approximately $24 million -- calculated by subtracting the $16 million inventory from the $40 million Mindis Acquisition paid for the company.

Peter J. Anderson, a Sutherland, Asbill & Brennan partner representing Mindis, said out-of-pocket damages would amount to nothing, since he argued that the company was worth at least $40 million.

But the court added that negligent misrepresentation cases should be viewed as fraud cases, in which damages are in terms of what the plaintiff expected by relying on the bad information.

Using that measure, termed "benefit of the bargain damages," Mindis Acquisition said the difference between what it expected the company was worth and what it actually received was $44 million, which is what the jury awarded in 1999.

In its petition for certiorari, BDO urged the justices to take the case because it affects how much liability professionals -- doctors, lawyers, accountants and others -- could be subjected to if their negligent misrepresentations are valued the way fraud damages are.

Negligent misrepresentation damages should not be calculated the same way as fraud damages, the BDO team wrote, because there is a distinction between intentional misrepresentations that have occurred in fraud cases and unintentional mistakes that have occurred in negligence cases.

"The Court of Appeals' failure to acknowledge this important distinction changes Georgia law in a critical, dangerous way," wrote the BDO lawyers. "It creates in Georgia the policy that an honest, unintentional tortfeasor should be punished to the same degree as a knowing defrauder."

Along with the Chicago-based firm, national and state accounting associations had urged the justices to take the case, in which a buying group claims a faulty BDO audit misled the group into paying too much for a scrap metal company.

At issue in the argument, set for September, will be how courts should measure damages in negligent misrepresentation cases. Fulton County Daily Report