255 N.Y. 170, Ultramares Corporation v. Touche

Citation:255 N.Y. 170
Party Name:ULTRAMARES CORPORATION, Appellant and Respondent, v. GEORGE A. TOUCHE et al., Copartners under the Firm Name of TOUCHE, NIVEN & COMPANY, Respondents and Appellants.
Case Date:January 06, 1931
Court:New York Court of Appeals

Page 170

255 N.Y. 170

ULTRAMARES CORPORATION, Appellant and Respondent,


GEORGE A. TOUCHE et al., Copartners under the Firm Name of TOUCHE, NIVEN & COMPANY, Respondents and Appellants.

New York Court of Appeal

January 6, 1931

Argued December 3, 1930.

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Herbert R. Limburg, Martin Conboy, David L. Podell, Joseph L. Weiner and Lionel S. Popkin for plaintiffs, appellants and respondents. Defendants are liable to plaintiff for the loss occasioned by defendants' negligence. (Glanzer v. Shepard, 233 N.Y. 236; International Products Co. v. Erie R. R. Co., 244 N.Y. 331; Doyle v. Chatham & Phoenix Nat. Bank, 253 N.Y. 369; Cole v. Vincent, 229 A.D. 520; Eaton, Cole & Burnham Co. v. Avery, 83 N.Y. 31; Bank of Batavia v. N.Y. Lake Erie & Western R. R. Co., 106 N.Y. 195; Carpenter v. Blake, 75 N.Y. 12; MacPherson v. Buick Motor Co., 217 N.Y. 382; Junkermann v. Tilyou Realty Co., 213 N.Y. 404; Statler v. Ray Mfg. Co., 195 N.Y. 478.) The identity of the borrower need not be known in advance. (Eaton v. Avery, 83 N.Y. 31; Ottinger v. Bennett, 144 A.D. 525; 203 N.Y. 554; Bystrom v. Villard, 175 A.D. 433; 188 A.D. 964; 230 N.Y. 588; Downey v. Finucane, 205 N.Y. 251; Brackett v. Griswold, 112 N.Y. 454; Kujek v. Goldman, 150 N.Y. 176.) The court erred in dismissing the fraud cause of action. (Matter of City of


New York, 224 N.Y. 454; Fifth Avenue Bank v. 42d St. & Grand St. Ferry, 137 N.Y. 231; Gleason v. Seaboard Airline Ry. Co., 278 U.S. 349; Lloyd v. Grace, [1912] A. C. 716; Hanover Bank v. American Dock & Trust Co., 148 N.Y. 612; Jarvis v. Manhattan Beach Co., 148 N.Y. 652; Nowack v. Metropolitan St. Ry. Co., 166 N.Y. 433.)The assertion that defendants had made a reasonably careful audit was an assertion of fact for which the defendants are liable even if defendants believed that such audit had been reasonably carefully made. (Ottinger v. Bennett, 144 A.D. 525; 203 N.Y. 554; Bystrom v. Villard, 175 A.D. 433; 188 A.D. 964; 230 N.Y. 588; Hadcock v. Osmer, 153 N.Y. 604; Churchill v. St. George Development Co., 174 A.D. 1; Kuelling v. Lean Mfg. Co., 183 N.Y. 78; Downey v. Finucane, 205 N.Y. 251.)

Samuel Untermyer, John W. Davis and James Marshall for defendants, respondents and appellants. The defendants were under no duty to the plaintiff to use care in the preparation of the balance sheet, and their negligence, if any, gives rise to no cause of action in favor of the plaintiff. (Palsgraf v. Long Island R. R. Co., 248 N.Y. 339; Landell v. Lybrand, 264 Penn. St. 406; Jaillet v. Cashman, 115 Misc. 383; 202 A.D. 805; 239 N.Y. 511; Seneca Wire, etc., Co. v. Leach, 247 N.Y. 1; Weld-Blundell v. Stevens, [1920] A. C. 956; Derry v. Peek, [1889] 14 A. C. 337; Glanzer v. Shepard, 233 N.Y. 236; MacPherson v. Buick Motor Co., 217 N.Y. 382; Savings Bank v. Ward, 100 U.S. 195; Matter of Cushman, 95 Misc. 9; Thomas v. Guarantee Title & Trust Co., 81 Ohio St. 432; Day v. Reynolds, 23 Hun, 131; Glawatz v. People's Guarantee Search Co., 49 A.D. 465; National Iron & Steel Co. v. Hunt, 312 Ill. 245; Le Lievre v. Gould, [1893] 1 Q. B. 491; Heaven v. Pender, [1883] L. R. 11 Q. B. D. 503; Kahl v. Love, 37 N. J. L. 5; Moch Co. v. Rensselaer Water Co., 247 N.Y. 160; Robins Dry Dock & Repair Co. v. Flint, 275 U.S. 303.) The fraud

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cause of action was properly dismissed. (Deyo v. Hudson, 225 N.Y. 602; Henry v. Allen, 151 N.Y. 1; Credit Alliance Corp. v. Sheridan Theatre Co., 241 N.Y. 216; Martin v. Gotham Nat. Bank, 248 N.Y. 313; Reno v. Bull, 226 N.Y. 546; Kountze v. Kennedy, 147 N.Y. 124; Ellis v. Andrews, 56 N.Y. 83; Van Slochem v. Villard, 207 N.Y. 587; Mecum v. Mooyer, 166 A.D. 793; Barr v. Sofranski, 130 A.D. 783; Morris v. Talcott, 96 N.Y. 100.)

Roger S. Baldwin, J. Harry Covington and Kenneth McEwen for American Institute of Accountants, amicus curiae. There is no liability without either privity of contract or direct relationship. (MacPherson v. Buick Motor Co., 217 N.Y. 382; P. G. Poultry Farm v. Newtown B.-P. Mfg. Co., 248 N.Y. 293; Glanzer v. Shepard, 233 N.Y. 236; International Products Co. v. Erie R. R. Co., 244 N.Y. 331; Doyle v. Chatham & Phoenix Nat. Bank, 253 N.Y. 369.)


The action is in tort for damages suffered through the misrepresentations of accountants, the first cause of action being for misrepresentations that were merely negligent and the second for misrepresentations charged to have been fraudulent.

In January, 1924, the defendants, a firm of public accountants, were employed by Fred Stern & Co., Inc., to prepare and certify a balance sheet exhibiting the condition of its business as of December 31, 1923.They had been employed at the end of each of the three years preceding to render a like service. Fred Stern & Co., Inc., which was in substance Stern himself, was engaged in the importation and sale of rubber. To finance its operations, it required extensive credit and borrowed large sums of money from banks and other lenders. All this was known to the defendants. The defendants knew also that in the usual course of business the balance sheet when certified would be exhibited by the Stern company to banks, creditors, stockholders, purchasers or

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sellers, according to the needs of the occasion, as the basis of financial dealings. Accordingly, when the balance sheet was made up, the defendants 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. In particular there was no mention of the plaintiff, a corporation doing business chiefly as a factor, which till then had never made advances to the Stern company, though it had sold merchandise in small amounts. The range of the transactions in which a certificate of audit might be expected to play a part was as indefinite and wide as the possibilities of the business that was mirrored in the summary.

By February 26, 1924, the audit was finished and the balance sheet made up. It 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. Attached to the balance sheet was a certificate as follows:


'Public Accountants

'Eighty Maiden Lane

'New York

'February 26, 1924.

'Certificate of Auditors

'We have examined the accounts of Fred Stern & Co., Inc., for the year ending December 31, 1923, and hereby certify that the annexed balance sheet is in accordance therewith and with the information and explanations given us. We further certify that, subject to provision for federal taxes on income, the said statement, in our opinion, presents a true and correct view of the financial condition of Fred Stern & Co., Inc., as at December 31, 1923.


'Public Accountants.'

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Capital and surplus were intact if the balance sheet was accurate. 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. The plaintiff maintains that the certificate of audit was erroneous in both its branches. The first branch, the asserted correspondence between the accounts and the balance sheet, is one purporting to be made as of the knowledge of the auditors. The second branch, which certifies to a belief that the condition reflected in the balance sheet presents a true and correct picture of the resources of the business, is stated as a matter of opinion. In the view of the plaintiff, both branches of the certificate are either fraudulent or negligent. As to one class of assets, the item of accounts receivable, if not also as to others, there was no real correspondence, we are told, between balance sheet and books, or so the triers of the facts might find. If correspondence, however, be assumed, a closer examination of supporting invoices and records, or a fuller inquiry directed to the persons appearing on the books as creditors or debtors, would have exhibited the truth.

The plaintiff, a corporation engaged in business as a factor, was approached by Stern in March, 1924, 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. As a condition of any loans the plaintiff 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 the defendants and then in Stern's possession. On the faith of that certificate the plaintiff made a loan which was followed by many others. The course of business was for Stern to deliver to the plaintiff documents described as trust receipts which in effect were executory assignments of the moneys payable by purchasers

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for goods thereafter to be sold. When the purchase price was due, the plaintiff received the payment, reimbursing itself therefrom for its advances and commissions. Some of these transactions were effected without loss. Nearly a year later, in December, 1924, the house of cards collapsed. In that month, plaintiff made three loans to the Stern company, one of $100, 000, a second of $25, 000, and a third of $40, 000. For some of these loans no security was received. For some of the earlier loans the security was inadequate. On January 2, 1925, the Stern company was declared a bankrupt.

This action, brought against the accountants in November, 1926, to recover the loss suffered by the plaintiff in reliance upon the audit, was in its inception one for negligence. On the trial...

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