escrow

From 1946 through 1967, Ernst & Ernst, an accounting firm, was retained by First Securities Company of Chicago, a small brokerage firm and member of the Midwest Stock Exchange and the National Association of Securities Dealers, to perform periodic audits of the firm's books and records. Ernst & Ernst prepared for filing with the Securities and Exchange Commission the annual reports required of First Securities under § 17(a) of the 1934 Act. It also prepared responses to the financial questionnaires of the Midwest Stock Exchange. Respondents were customers of First Securities who invested funds in a fraudulent securities scheme perpetrated by Leston B. Nay, president of the firm and owner of 92% of its stock. From 1942 through 1966, with the majority of the transactions occurring in the 1950s, Nay induced respondents to invest in escrow accounts that he represented would yield a high rate of return. In fact, there were no escrow accounts, as Nay converted respondents' funds to his own use immediately upon receipt. These transactions were not in the customary form of dealings between First Securities and its customers. They were not reflected on the books and records of First Securities. They were not shown on its periodic accounting to respondents or included in First Securities' filings with the Commission or the Exchange. The fraud came to light in 1968 when Nay committed suicide, leaving a note that described First Securities as bankrupt and the escrow accounts as spurious. Respondents subsequently filed this action for damages against Ernst & Ernst in the United States District Court for the Northern District of Illinois under § 10(b) of the 1934 Act. The complaint charged that Nay's escrow scheme violated § 10(b) and Rule 10b-5. It also charged that Ernst & Ernst had aided and abetted Nay's violations by its failure to conduct proper audits of First Securities. As revealed through discovery, respondents' cause of action rested on a theory of negligent nonfeasance. The premise was that Ernst & Ernst had failed to utilize appropriate auditing procedures in its audits of First Securities. This failure prevented discovery of internal practices of the firm said to prevent an effective audit. The practice principally relied on was Nay's rule that only he could open mail addressed to him at First Securities or addressed to First Securities to his attention. Respondents specifically disclaimed the existence of fraud or intentional misconduct on the part of Ernst & Ernst. After extensive discovery the District Court granted Ernst & Ernst's motion for summary judgment and dismissed the action. The Court of Appeals for the Seventh Circuit reversed and remanded. The Supreme Court granted certiorari to resolve the question whether a private cause of action for damages will lie under § 10(b) and Rule 10b-5 in the absence of any allegation of scienter.

Plaintiffs, who are some of the beneficiaries under the will of Eugene H. Emmick, deceased, brought this action for damages against defendant L. S. Hamm, an attorney at law who had been engaged by the testator to prepare the will. They have appealed from a judgment of dismissal entered after an order sustaining a general demurrer to the second amended complaint without leave to amend. The allegations of the first and second causes of action are summarized as follows. Defendant agreed with the testator, for a consideration, to prepare a will and codicils thereto for him by which plaintiffs were to be designated as beneficiaries of a trust provided for by paragraph Eighth of the will and were to receive 15 per cent of the residue as specified in that paragraph. Defendant prepared testamentary instruments containing phraseology that was invalid by virtue of section 715.2 and former sections 715.1 and 716 of the Civil Code. Paragraph Eighth of these instruments transmitted the residual estate in trust and provided that the trust shall cease and terminate at 12 o’clock noon on a day five years after the date upon which the order distributing the trust property to the trustee is made by the Court having jurisdiction over the probation of this will. After the death of the testator the instruments were admitted to probate. Subsequently defendant advised plaintiffs in writing that the residual trust provision was invalid and that plaintiffs would be deprived of the entire amount unless they made a settlement with the blood relatives of the testator under which plaintiffs would receive a lesser amount. As a result, plaintiffs were compelled to enter into a settlement under which they received a share of the estate amounting to $75,000 less than the sum which they would have received pursuant to testamentary instruments drafted in accordance with the directions of the testator. The third cause of action alleges that after admission of the will and codicils to probate, Harold Houghton Emmick, Walton Russell Emmick, Delta Inez Spelman, and Retha Newell instituted a will contest. The executors, defendant, and the contestants reached a settlement agreement under which $10,000 would be paid to the contestants from the assets of the estate in return for releases. Defendant caused to be executed releases which did not preclude the contestants from a subsequent attack upon the validity of the testamentary instruments. As a consequence, the contestants joined in a legal attack upon the validity of the residual clause and plaintiffs would have received an additional sum of $15,000 from the estate if the releases had been prepared in accord with good legal practice. The trial court sustained a general demurrer to the second amended complaint without leave to amend and entered a judgment of dismissal from which the plaintiffs appealed.

Dallas Masterson and his wife Rebecca owned a ranch as tenants in common. On February 25, 1958, they conveyed it to Medora and Lu Sine by a grant deed. The deed reserved unto the grantors an option to purchase the property on or before February 25, 1968 for the same consideration as being paid heretofore plus the depreciation value of any improvements the grantees might add after two and a half years from the date. Medora is Dallas's sister and Lu's wife. Since the conveyance Dallas has been adjudged bankrupt. His trustee in bankruptcy and Rebecca brought this declaratory relief action to establish their right to enforce the option. The case was tried without a jury. Over defendants' objection the trial court admitted extrinsic evidence that by the same consideration as being paid heretofore both the grantors and the grantees meant the sum of $50,000 and by depreciation value of any improvements they meant the depreciation value of improvements to be computed by deducting from the total amount of any capital expenditures made by defendants grantees the amount of depreciation allowable to them under United States income tax regulations as of the time of the exercise of the option. The court also determined that the parol evidence rule precluded admission of extrinsic evidence offered by defendants to show that the parties wanted the property kept in the Masterson family and that the option was therefore personal to the grantors and could not be exercised by the trustee in bankruptcy. The court entered judgment for plaintiffs, declaring their right to exercise the option, specifying in some detail how it could be exercised, and reserving jurisdiction to supervise the manner of its exercise and to determine the amount that plaintiffs will be required to pay defendants for their capital expenditures if plaintiffs decide to exercise the option. Defendants appeal.

In November 1969 the City Bureau of Buildings declared the single-family residence rented on a month-to-month basis for $100 per month by appellants Donald and Edna Lindsey and other tenants from appellee Normet unfit for habitation because of substandard conditions including rusted gutters, broken windows, broken plaster, missing rear steps, and improper sanitation. The tenants requested repairs which the landlord refused except for one minor item. After paying the November rent they withheld the December rent. On December 15 the landlord's attorney sent a letter threatening court action unless the accrued rent was paid immediately. On January 7, 1970, before any state eviction proceedings had begun, the tenants filed suit in the United States District Court for the District of Oregon under 42 U.S.C. § 1983 seeking a declaratory judgment that the Oregon Forcible Entry and Wrongful Detainer Statute, Ore. Rev. Stat. §§ 105.105-105.160, was unconstitutional on its face and an injunction against its continued enforcement. A three-judge district court was convened. It issued a temporary restraining order and ordered the tenants to pay rent into an escrow account during the proceeding. The parties entered a lengthy stipulation of facts, submitted exhibits and depositions, and the district court granted the landlord's motion to dismiss the complaint. The Oregon statute established a summary procedure for resolving disputes over possession of real property. Service of the complaint on the tenant must be not less than two nor more than four days before the trial date. A tenant may obtain a two-day continuance, but grant of a longer continuance is conditioned on the tenant's posting security for the payment of any rent that may accrue if the plaintiff ultimately prevails. The suit may be tried to either a judge or a jury, and the only issue is whether the allegations of the complaint are true. A defendant who loses such a suit may appeal only if he obtains two sureties who will provide security for the payment to the plaintiff, if the defendant ultimately loses on appeal, of twice the rental value of the property from the time of commencement of the action to final judgment. The district court upheld the validity of the statutes under both the Due Process and Equal Protection Clauses of the Fourteenth Amendment. The tenants appealed directly to the Supreme Court, which noted probable jurisdiction.