Ultramares Case Brief

Nate Swanger

Assignment 1- BLAW 511

Case Brief

Citation: Ultramares Corp. v Touche, Niven & Co. 255 N.Y. 170, 174 N.E. 441 (N.Y. Court of Appeals) January 6, 1931

Facts: The defendants, a firm of public accountants, were hired by Fred Stern & Co. in January of 1924 to prepare and certify a balance sheet exhibiting the condition of its business as of December 31, 1923. By February 26, 1924, the defendants presented an unqualified certified audit of Fred Stern & Co. showing a net worth just north of $1 million for the company. The prepared balance sheets showed capital and surplus intact. In reality both capital and surplus had been wiped out, and the company was rapidly nearing insolvency. By 1925 Stern had declared bankruptcy. Relying on the defendants certified audit, the plaintiff, Ultramares Corp. extended multiple high value loans to the company. When the company became insolvent the plaintiff was never able to secure repayment for the extended loans. Thus, the plaintiff sued the defendant for monetary damages arising from misrepresentations, negligence and fraud presented on Fred Stern & Co. balance sheet. The defendants were more then aware that various third-party creditors and investors would rely on their certified audit findings for future financial dealings.

Procedural History: The trial court found the audit to be negligent but not fraud. Thus dismissing the plaintiff’s complaint about fraud without submitting it to jury. The verdict regarding negligence was in favor of plaintiff for $187,576.32. An intermediate appellate court affirmed the fraud dismissal, but reversed the negligence and reinstated the verdict. The two parties are on cross appeals and take it to the New York court of appeals.

Issue: Should accounting firms be held responsible for third-party creditor and investor decisions based upon a submitted certified audit? Are accountants held responsible for out of privity (private contract relation between two mutually agreed upon parties) issues?

Holding: Yes the appellate court affirmed and modified the trial court ruling. The New York appellate court ruled negligence failed on the ground of privity. The judge ruled the defendants owed no duty of care to the plaintiffs because there had been no existing mutual relationship between the two parties.

Reasoning:  The dismissed fraud ruling was reasoned because fraud includes the pretense knowledge when knowledge there is none. Since the defendants had no previous knowledge of the company’s misrepresentation of inventory or insolvency of the business, the qualified audit was done without any intentional fraud. The defendants received explanation about different findings that they ruled as sufficient. Thus dismissing the motion for fraud. The next reasoning is for the negligence issue. The defendant did not negligently misguide the plaintiff directly. The plaintiff had no previous relationship with the defendant and therefore the defendant does not owe any duty of care to the plaintiff. The plaintiff should have independently audited the defendant’s work before making such large monetary decisions