Ultramares Corp. v. Touche, Nivens & Co. Ct. Of App. Of N.Y.,

Facts

D, a firm of public accountants, were employed by Stern to prepare and certify a balance sheet exhibiting the condition of its business as of December 31, 1923. The clients required extensive credit and borrowed large sums of money from banks and other lenders. All this was known to the D. D also knew that the balance sheet when certified would be exhibited by the Stern company to banks, creditors, stockholders, purchasers or sellers, according to the needs of the occasion, as the basis of financial dealings. D supplied the Stern company with thirty-two copies certified with serial numbers as counterpart originals. Nothing was said as to the persons to whom these counterparts would be shown or the extent or number of the transactions in which they would be used. No mention was made of P which till then had never made advances to the Stern company, though it had sold merchandise in small amounts. The audit stated assets in the sum of $2,550,671.88 and liabilities other than capital and surplus in the sum of $1,479,956.62, thus showing a net worth of $1,070,715.26. In reality, both had been wiped out, and the corporation was insolvent. The books had been falsified by those in charge of the business so as to set forth accounts receivable and other assets which turned out to be fictitious. Stern approached P with a request for loans of money to finance the sales of rubber. Up to that time, the dealings between the two houses were on a cash basis and trifling in amount. P insisted that it receive a balance sheet certified by public accountants, and in response to that demand, it was given one of the certificates signed by D and then in Stern's possession. P made a loan which was followed by many others to a sum of $165,000. Eventually, Stern was declared a bankrupt. D knew that a $706,000 item representing a fictitious accounts receivable still needed to be verified before D could make the statement it did about Fred Stern & Co. A junior accountant, Seiss, was assigned by D to perform the work. The total of the accounts receivable for December 1923, as thus posted by Seiss from the entries in the journal, was $644,758.17. Romberg, an employee of the Stern company, who had general charge of its accounts, placed below that total another item to represent additional accounts receivable growing out of the transactions of the month. This new item, $706,843.07, Romberg entered in his own handwriting. The sales that it represented were, each and all, fictitious. Siess saw the entries and included the new item in making up his footings, with the result of an apparent increase of over $700,000 in the assets of the business. Siess thought the work of audit or verification might come later, and put it off accordingly. Verification was never done. It was not disputed that an adequate examiner would have found that the entry in the ledger was not supported by any entry in the journal. If from the journal, he had gone to the book from which the journal was made up, described as 'the debit memo book,' support would still have failed. Going farther, he would have found invoices, seventeen in number, which amounted in the aggregate to the interpolated item, but scrutiny of these invoices would have disclosed suspicious features in that they had no shipping number nor a customer's order number and varied in terms of credit and other respects from those usual in the business. A mere glance reveals the difference. Ultramares (P) sued D for negligent and fraudulent misrepresentation. P sued D to recover the loss suffered by P in reliance upon the audit, was in its inception one for negligence. The jury, precluded by the trial judge from considering a fraud cause of action, returned a verdict in plaintiff's favor based on the auditor's negligence in conducting the audit. P got the verdict for $187,576.32. The judge granted a motion for dismissal. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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