## Facts

- Fred Stern & Co., Inc., a rubber importer, retained Touche, Niven & Co., public accountants, to audit and certify a balance sheet as of December 31, 1923.
- The accountants knew Stern depended on extensive credit and that the certified balance sheet would be shown to banks and other lenders and business counterparties in financial dealings.
- The accountants delivered 32 certified, serially numbered copies of the balance sheet, each stating the auditors had examined Stern’s accounts and that the balance sheet conformed to the accounts and explanations provided.
- Stern’s records were falsified and the company was insolvent; the audit work was found sufficiently deficient to support a finding of negligence (including inadequate verification of key items).
- Ultramares Corporation, a factoring company, required a certified balance sheet before extending substantial credit to Stern and relied on one of the certified copies.
- Stern soon collapsed into bankruptcy, leaving Ultramares with large unpaid advances.
- Ultramares sued the accountants in tort for (1) negligent misrepresentation and (2) fraudulent misrepresentation, alleging the certification was intentionally false or so reckless as to amount to fraud.

## Issues

1. Whether accountants who certify financial statements, knowing they will be used to obtain credit, owe a negligence duty to non-privity third parties who rely on the statements for lending decisions.
2. Whether the evidence permitted liability for fraud (including reckless disregard for the truth treated as fraud) to a third party that relied on the certification.

## Decision

- The New York Court of Appeals held that Ultramares could not recover for negligent misrepresentation because the accountants owed no negligence duty to Ultramares absent a relationship approaching privity.
- The court reasoned that recognizing negligence liability on these facts would expose accountants to liability “in an indeterminate amount for an indeterminate time to an indeterminate class.”
- The court held that a fraud claim could proceed and ordered a new trial on the fraud theory, allowing Ultramares to attempt to prove intentional misrepresentation or recklessness equivalent to fraud.

## Legal Principles

- Negligence liability for purely economic loss from inaccurate professional statements generally requires privity or a relationship so close as to approach privity; foreseeability that statements will circulate to lenders is not, by itself, enough.
- Courts may deny negligence recovery to avoid exposing defendants to boundless liability to a broad, undefined class of potential claimants.
- Fraud liability may extend to third parties who rely on a misrepresentation; proof may include intentional deceit or conduct so reckless and indifferent to truth that it is treated as fraud.

## Conclusion

The court barred a negligence claim by a lender that relied on audited financial statements where the lender lacked privity or a near-privity relationship with the accountants, but preserved the possibility of recovery on a fraud theory if the plaintiff could prove intentional or recklessly indifferent misrepresentation.


Ultramares Corp. v. Touche, 255 N.Y. 170 (N.Y. 1931)