Opinion ID: 2404736
Heading Depth: 1
Heading Rank: 6

Heading: The 1972 Audit

Text: The trial court denied defendants' motion to dismiss the plaintiffs' claims of fraud and negligence ascribable to the 1972 audit. The defendants contend that the plaintiffs had already signed and were bound by the merger contract executed on March 9, 1972 at the time the audit was issued in April 1972. Therefore, the defendants argue that there could be no causal relationship between defendants' alleged fraud and negligence and the plaintiffs' damage. However, the merger agreement contained a Giant representation and warranty that there would be no material adverse change in its business, property or assets at the time of the closing. We cannot say on this record that disclosures of the true Giant situation exposed by a non-negligent audit would not have justified the plaintiffs' refusal to consummate the deal. There is a factual dispute over whether the plaintiffs relied on the 1972 audit. We do note that there is evidence in the depositions that the plaintiffs expected to receive the 1972 audited figures before the closing and would have refused to consummate the transaction if these data had reflected a material adverse change in Giant's business. Moreover, adequate disclosures might have exposed a fraud on the part of Giant that would have justified rescission of the contract. A contractual obligation alone does not require one to close a financially disastrous transaction when valid grounds exist to disavow the contract. Irrespective of whether the defendants had actual knowledge of Giant's proposed use of the 1972 audit in connection with the merger, it was reasonably foreseeable that Giant would use the audited statement in connection with the merger and its consummation. This is particularly so since the defendants were familiar with the merger agreement and had been engaged by Giant to audit the books and records of the plaintiffs' enterprises for the purpose of the merger. The trial court properly denied defendants' motion. The judgment granting defendants' motion for partial summary judgment with respect to the 1971 financial statements is reversed and that denying defendants' motion for partial summary judgment with respect to the 1972 financial statements is affirmed. The cause is remanded to the trial court for further proceedings consistent with this opinion. For reversal and remandment  Chief Justice WILENTZ and Justices CLIFFORD, SCHREIBER, HANDLER, POLLOCK, O'HERN and GARIBALDI  7. For affirmance  None.