Credit Alliance Corporation v. Arthur Andersen & Company

New York Court of Appeals · 1985 · Torts

65 N.Y. 536 (1985)

Updated July 23, 2026

Tortsaccountant negligenceeconomic lossprivityaccountant liabilitynegligent misrepresentationnear privityUltramares

Facts

In Credit Alliance, lenders alleged that Arthur Andersen audited Smith's financial statements and certified them as conforming with auditing and accounting standards, and the lenders relied on those statements in extending major financing to Smith. After Smith later went bankrupt and defaulted on millions of dollars in obligations, the lenders sued Andersen for negligence and fraud, alleging Andersen knew or should have known the statements would be shown to them to induce credit. In European American, a bank alleged that Strauhs & Kaye audited Majestic Electro while knowing the bank was its principal lender and relied on the audits to determine loan amounts. The bank further alleged direct oral and written communications and meetings with the accountants, including repeated direct representations about inventory and receivables, before Majestic Electro defaulted and later entered bankruptcy.

Issue

Whether an accountant may be held liable in negligence to a noncontractual party who relied on a negligently prepared financial report, and what limits govern that liability. Also, whether the allegations in these two cases were sufficient to show a relationship approaching privity, and whether Credit Alliance adequately pleaded fraud.

Rule

Before accountants may be held liable in negligence to noncontractual parties who rely on inaccurate financial reports, three prerequisites must be satisfied: (1) the accountants must have been aware that the reports were to be used for a particular purpose or purposes; (2) a known party or parties must have been intended to rely in furtherance of that purpose; and (3) there must have been some conduct by the accountants linking them to that party or parties, evincing the accountants' understanding of that reliance. This preserves the New York requirement of a relationship so close as to approach privity, rather than mere foreseeability.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Buffalo, Nova Ledger LLP audited Harbor Steel Supply for its annual statements. The accountants knew Harbor might show the statements to prospective lenders, but they never asked who those lenders were, never sent any report to a lender, and had no communications with any lender. After seeing the statements from Harbor, Lakefront Finance extended credit and suffered loss when Harbor collapsed.

Under New York law as stated by the majority, is Lakefront Finance most likely able to recover from Nova Ledger LLP for negligent misrepresentation?

Explanation. The majority rejected foreseeability alone. A nonclient may recover only if the accountants knew the reports would be used for a particular purpose, knew a specific relying party, and engaged in linking conduct showing understanding of that reliance. Here the accountants knew only that unspecified lenders might see the statements, which is the kind of general business use deemed insufficient.