Reves v. Ernst & Young
United States Supreme Court
507 U.S. 170, 113 S. Ct. 1163, 122 L. Ed. 2d 525 (1993)
- Written by Angela Patrick, JD
Facts
Jack White borrowed $4 million from the Farmer’s Cooperative of Arkansas and Oklahoma, Inc. (the co-op) to construct a gasohol plant named White Flame Fuels, Inc. (White Flame). The plant was built in 1979. In fall 1980, the co-op agreed to buy White Flame in exchange for forgiving White’s debt. The parties backdated the sale to February 1980. In 1981, the co-op hired an accounting firm that later became part of Ernst & Young (the firm) (defendant) to perform an audit. The firm used both existing documents and statements that it created from the co-op’s data. Because the co-op had acquired White Flame after it was built, accounting principles required that White Flame be valued using its fair market value on the acquisition date, which was $1.5 million or less. This valuation meant the co-op would be considered insolvent. However, White Flame had a fixed-asset value of $4.5 million, which would be an acceptable valuation if the co-op had owned White Flame while it was being built. The auditor declared that the co-op had acquired White Flame in 1979 and used the $4.5 million fixed-asset valuation, which made the co-op appear solvent. The firm did not tell the co-op about the invented acquisition date or that the co-op’s solvency claim depended on that acquisition date. In 1984, the co-op’s insolvency became clear, and the co-op entered bankruptcy proceedings. Bankruptcy trustee Bob Reves (plaintiff) sued the firm. Among other claims, Reves alleged that the firm’s fraudulent auditing activity qualified as conducting racketeering activity through the co-op in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO) § 1962(c). Reves requested civil damages from the firm as compensation. The district court granted summary judgment for the firm, finding that the firm could not be liable under § 1962(c) because it had not participated in the co-op’s operation or management. The court of appeals affirmed. The United States Supreme Court granted certiorari.
Rule of Law
Issue
Holding and Reasoning (Blackmun, J.)
Dissent (Souter, J.)
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