Ultramares Corp. v. Touche

New York Court of Appeals · 1931 · Torts

TortsNegligent misrepresentationFraudPrivitynegligent misrepresentationaccountant liabilityprivityindeterminate class

Facts

Defendant accountants were hired by Fred Stern & Co. to prepare and certify a 1923 balance sheet, knowing the certified statement would be shown to banks, creditors, and others in future financial dealings, and they supplied thirty-two certified copies. Plaintiff, a factor not specifically identified to defendants, later insisted on a certified balance sheet before making loans to Stern and then advanced money in reliance on one of defendants' certificates. The balance sheet showed the company solvent, but in reality the books had been falsified and major accounts receivable were fictitious. Evidence permitted a finding that the audit was negligently performed and that defendants certified correspondence between the balance sheet and the books without actually knowing that such correspondence existed.

Issue

Whether accountants who negligently prepare and certify a balance sheet for their client owe a duty of care in negligence to an unidentified third-party lender who later relies on the certificate. Also, whether the accountants may be liable in fraud or deceit for certifying as true to their own knowledge that the balance sheet corresponded with the books when a jury could find they lacked such knowledge.

Rule

Negligent words are not actionable by a third party unless they are uttered directly, with knowledge or notice that they will be acted on, to a person to whom the speaker is bound by some relation of duty arising out of contract, public calling, or otherwise; thus, absent privity or a bond so close as to approach privity, accountants are not liable in negligence to an indeterminate class of persons who may rely on an audit. By contrast, one who certifies a fact as true to his own knowledge may be liable for deceit if the statement is false, even if honestly believed, and gross negligence or blindness may support an inference of fraud.

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

In Cleveland, Orion Ledger Group audited Lakefront Metals, Inc. and gave the company 20 signed copies of a certified financial statement. Orion knew Lakefront would show the statements to whatever banks, suppliers, or investors it chose while seeking financing, but no recipient was identified; months later, Harbor Finance LLC relied on one copy and lost money when the figures proved carelessly overstated.

Can Harbor Finance recover from Orion in negligence?

Explanation. Under the majority rule, foreseeability alone is not enough. Accountants are not liable in negligence to an indeterminate class of future lenders, creditors, or investors lacking privity or a bond so close as to approach it. Here the audit was prepared for the client's general business use, with no specifically identified recipient, so negligence liability does not extend to Harbor Finance. (Derived from Ultramares Corp. v. Touche (1931).)