American Indemnity Co. v. Ernst & Ernst

• Decision Date: 27 May 1937
• Docket Number: No. 1887.,1887.
• Citation: 106 S.W.2d 763
• Parties: AMERICAN INDEMNITY CO. v. ERNST & ERNST.
• Court: Texas Court of Appeals

106 S.W.2d 763

AMERICAN INDEMNITY CO. v. ERNST & ERNST.

No. 1887.

Court of Civil Appeals of Texas. Waco.

May 27, 1937.

Rehearing Denied June 24, 1937.

Appeal from District Court, McLennan County; D. W. Bartlett, Judge.

Suit by the American Indemnity Company against Ernst & Ernst, a copartnership. From a judgment dismissing the suit, plaintiff appeals.

Affirmed.

Nat Harris and Mabel Grey Howell, both of Waco, for appellant.

Crane & Crane and Geo. S. Wright, all of Dallas, for appellee.

ALEXANDER, Justice.

This appeal challenges the correctness of the ruling of the trial court in sustaining a plea of limitation to the cause of action as alleged by plaintiff. The American Indemnity Company sued Ernst & Ernst, a copartnership, and alleged in substance that during the fiscal year, ending August, 1926, O. P. Arrington was the tax assessor and collector of the Mexia Independent School District, and the plaintiff was the surety on his bond as such; that the Mexia Independent School District employed Ernst & Ernst, auditors, to audit Arrington's books for said year and said auditors negligently reported to the school district that Arrington's books for said year were in all things correct and that all moneys that had come into his hands as such collector had been accounted for, whereas, in fact, said Arrington had embezzled more than $5,000 of the funds belonging to said school district during said year; that said school district applied to the plaintiff for a certificate renewing Arrington's bond for another year and the bonding company, as a prerequisite to the renewal of said bond, required the school district to certify that Arrington's books for the preceding year had been audited and found correct and that he had accounted for all funds that had come into his hands during said year; that on the faith of the audit made by Ernst & Ernst said school district, through its board of trustees, made the certificate required by the bonding company, and as a result the bonding company was induced to renew Arrington's bond for another year; that during the subsequent year Arrington embezzled funds of the school district in the sum of $6,785.25, which latter amount of money the bonding company, at the end of a lawsuit [see American Indemnity Company v. Mexia Independent School District (Tex.Civ.App.) 47 S.W.(2d) 682], was required to repay to the school district as surety for Arrington. It was alleged that at the time Ernst & Ernst entered into the contract to audit said books and at the time the report of the audit was made to the school district, it was known by said auditors that the school district would furnish the results thereof to the bonding company for the purpose of inducing the bonding company to renew Arrington's bond for another year and that said bonding company would act and rely thereon and would thereby be caused to renew said bond. It was further alleged that the bonding company did actually rely on the representations contained in the report of said auditors and was induced to execute a renewal of said bond in reliance thereon and as a consequence a fraud was perpetrated on it by said auditors. It was alleged that the bonding company did not have notice of the embezzlements and defalcations on the part of Arrington until September, 1929; that suit was brought by the school district against Arrington and the bonding company for the shortage caused by said embezzlements and final judgment was not entered therein until October, 1932, and the bonding company did not pay off said judgment covering the money so embezzled by Arrington until November, 1932. This suit was brought September 18, 1934. The trial court sustained an exception raising a plea of limitation to the cause of action as alleged and then dismissed the suit because of the failure of the petition to allege a cause of action. The plaintiff appealed.

We think it apparent that plaintiff's cause of action, if any, against Ernst & Ernst does not arise by virtue of the contract between Mexia Independent School District and Ernst & Ernst, by which the latter was employed to audit the books of the tax collector, because the bonding company was not a party to the contract and the contract was not made for its benefit, and, therefore, there is no privity of contract between them. Equitable Bldg. & Loan Ass'n v. Bank of Commerce, 118 Tenn. 678, 102 S.W. 901, 12 L.R.A.(N.S.) 449, see note, 454, 12 Ann. Cas. 407. However, it has been held that where a party makes a false representation to another with the intent or knowledge that it should be exhibited or repeated to a third party for the purpose of deceiving him, the third party, if so deceived to his injury, can maintain an action in tort against the party making the false statement for the damages resulting from the fraud. 20 Tex.Jur. 103; 12 R.C.L. 326; 26 C.J. 1121, 1162; Gainesville National Bank v. Bamberger, 77 Tex. 48, 13 S.W. 959, 19 Am.St.Rep. 738; Katzenstein v. Reid, Murdock & Co., 41...