claim survived dismissal because the district court found that the plaintiffs had pled sufficient facts to pierce the corporate veil. Id. at 1250. Because the plaintiffs had stated a sufficient claim to disregard the corporate form, the officers of the company were the actual parties to the agreement. Hence, Killian does not support the position of Plaintiffs.
We have found no Pennsylvania case in which the limitation set forth in comment g to section 549 of the Restatement has been rejected, and the language in Delahanty supports a strict interpretation of benefit of the bargain type damages. In particular, the court stated that the Pennsylvania courts are reluctant to award lost profits, and that "this kind of damage is usually seen in the context of a breach of contract." Delahanty, 464 A.2d at 1258. We hold that the Pennsylvania Supreme Court would adopt comment g to section 549 of the Restatement of Torts and restrict recovery of actual damages for fraud against a third party to out-of-pocket losses.
We also note that it is within our discretion to fashion the remedy in a Rule 10b-5 action to do equity in the circumstances of this case. "It is for the district judge, after becoming aware of the nature of the case, to determine the appropriate measure of damages in the first instance." Blackie v. Barrack, 524 F.2d 891, 909 (9th Cir. 1975), cert. denied, 429 U.S. 816, 50 L. Ed. 2d 75, 97 S. Ct. 57 (1976). The court's function in determining the appropriate remedy in a Rule 10b-5 action is "to fashion the remedy best suited to the harm." Nye v. Blyth, Eastman, Dillon & Co., 588 F.2d 1189, 1198 (8th Cir. 1978). See also Sowell, 926 F.2d at 297 (noting that "damages may be measured in several ways"); Gottlieb v. Sandia Am. Corp., 452 F.2d 510, 516 (3d Cir.), cert. denied, 404 U.S. 938, 92 S. Ct. 274, 30 L. Ed. 2d 250 (1971).
Similarly, Pennsylvania law allows the trial court to apply a measure of damages to suit the facts of the case. In Neuman, the Pennsylvania Supreme Court observed that, "while formulated rules relating to the appropriate measure of damages in varying circumstances have to some extent become fixed, they are by no means immutable but bend to the exigencies of the particular case in order that just compensation may be ascertained and awarded." Neuman, 51 A.2d at 766. Accordingly, we hold that the DeBartolo Plaintiffs are limited to recovering their out-of-pocket losses in their Rule 10b-5 and common law fraud claims against Coopers.
Our conclusion is grounded on several factors. First, the Court of Appeals has held that, while damages may be measured in several ways in Rule 10b-5 and fraud cases, "the proper measure of damages to reflect the loss proximately caused by the defendants' deceit is the out-of-pocket rule. That rule is the traditional measure of damages in a Rule 10b-5 action." Sowell, 926 F.2d at 297. Second, Coopers was not a party to the lease agreements between the DeBartolo Plaintiffs and Phar-Mor. Third, damages should be limited to an amount that will make a plaintiff whole, under these circumstances. Fourth, section 28(a) of the Securities Act and state law limit a plaintiff's recovery to actual damages. Fifth, Coopers received little or no direct benefit from the transactions. Sixth, Coopers will be neither unjustly enriched nor shielded from appreciable liability to the defrauded investors. And seventh, the goals of the federal securities laws and Pennsylvania common law will be preserved.
Applying the out-of-pocket rule, the Court of Appeals has measured Rule 10b-5 damages as the difference between what the defrauded buyer paid for the stock and what he/she would have paid had there been no fraudulent conduct. Sharp, 649 F.2d at 190, citing Huddleston, 640 F.2d at 554-55. The value of a security absent the fraud is its fair market value at the time of the initial purchase. Huddleston, 640 F.2d at 556. The DeBartolo Plaintiffs urge us to depart from this rule and measure their damages at the date of discovery of the fraud, rather than the date of the transaction. We decline to do so.
In support of their argument, the DeBartolo Plaintiffs rely on comment c to section 549 of the Restatement (Second) of Torts, and cases that apply its reasoning. Comment c observes that the value of an article transferred in connection with a misrepresentation may be difficult to ascertain where the misrepresentation affects the market price of the article. If others are influenced by the same misrepresentations, an artificial market is created, and "it is not until the existence of the fraudulent conduct is known that the true value of the securities can be ascertained." Esplin v. Hirschi, 402 F.2d 94, 104-05 (10th Cir. 1968), cert. denied, 394 U.S. 928, 22 L. Ed. 2d 459, 89 S. Ct. 1194 (1979); see also Harris, 523 F.2d at 224-27; Restatement (Second) of Torts § 548A.
However, the cases relied upon by the DeBartolo Plaintiffs are distinguishable from the instant case. In those cases, subsequent changes in financial or business conditions, in conjunction with the falsity of the misrepresentation caused the post-investment decline in the value of the security. In contrast, Coopers' conduct in this case constituted a series of distinct misrepresentations that occurred each time Coopers issued a clean audit opinion. The value of the securities declined each year that Coopers recklessly stated that it had performed a GAAS audit.
When the DeBartolo Plaintiffs purchased Phar-Mor stock, they relied on Coopers' audit statements for that year and previous years. They could not rely on audit statements for future years. Accordingly, the misrepresentations that caused the decline in the value of the shares occurred after the DeBartolo Plaintiffs purchased the securities. In Trio, we held that shareholders have no direct cause of action for the diminution in the value of their shares. Trio v. Coopers & Lybrand, C.A. No. 94-1002, slip op. at 7-10 (August 31, 1994). Because the value in the DeBartolo Plaintiffs' shares declined after they became shareholders, the cause of action inured to Phar-Mor, Inc. Id. We therefore hold that the DeBartolo Plaintiffs' measure of damages on their Rule 10b-5 claims is the price paid less the actual value of the stock on the date of the initial purchase.
Finally, we disagree with the DeBartolo Plaintiffs that their damages include lost future rents. Although "actual loss" under Pennsylvania law may include such benefit of the bargain type damages, see Delahanty, 464 A.2d at 1257, as we have concluded, the DeBartolo Plaintiffs are limited to recovery of their out of pocket losses from Coopers in this non-privity situation.
An appropriate order will follow denying the motion of Coopers for a new trial and granting the motion for judgment as a matter of law in part.
DATED: June 11, 1996
Donald E. Ziegler
ORDER OF COURT
AND NOW, this 11th day of June 1996, in accordance with the accompanying opinion,
IT IS ORDERED that the motion of Coopers & Lybrand, and a class of partners and principals of the firm, for judgment as a matter of law be and hereby is granted with respect to the claims of the DeBartolo Plaintiffs set forth at No. II, 1, 2 and 3 of the DeBartolo Plaintiffs Interrogatories to Jury, and based on the audited financial statements for the years 1984, 1985 and 1986.
IT IS FURTHER ORDERED that the motion of Coopers & Lybrand, and a class of partners and principals of the firm, for judgment as a matter of law be and hereby is denied with respect to the claims of the DeBartolo Plaintiffs set forth at No I, 1 and 2, and No. II, 4-27 of the DeBartolo Plaintiffs Interrogatories to Jury.
IT IS FURTHER ORDERED that the motion of Coopers & Lybrand, and a class of partners and principals of the firm, for a new trial be and hereby is denied.
Donald E. Ziegler