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Ultramares Corporation v. Touche | 174 N.E. 441 (N.Y. 1931)
If a company hires an employee to review and make statements regarding the company’s financial condition and that work’s done negligently, who can sue the employee? Is it just the employer, or can third parties harmed by the negligence also file suit? What if the employee acts fraudulently rather than negligently? We explore that question in the 1931 case Ultramares Corporation versus Touche.
Fred Stern Company, Incorporated, which we’ll refer to as Stern, imported and sold rubber. Stern hired Touche, a public accounting firm, to prepare and certify a balance sheet regarding Stern’s financial condition. Touche generally knew that Stern would show the balance sheet to others, such as bankers and creditors, in the course of its business. Touche didn’t know, however, the identity of those Stern would show the balance sheet to. Touche prepared and certified a balance sheet that showed Stern was worth approximately one million dollars. The books that Touche relied on had been falsified by Stern. In reality, Stern was insolvent.
Stern then sought several loans from Ultramares Corporation. Ultramares relied on Touche’s balance sheet in loaning Stern money. Stern later declared bankruptcy, leaving several of Ultramares’s loans unpaid.
Ultramares filed suit against Touche, alleging that the accounting firm negligently or fraudulently prepared and certified the balance sheet. The trial court dismissed the fraud claim. The trial court reserved ruling on Touche’s motion to dismiss the negligence claim and submitted the matter to the jury. The jury returned a verdict in Ultramares’s favor, but the trial court then granted Touche’s motion to dismiss the negligence claim.
Ultramares appealed to the New York Appellate Division, which affirmed the trial court’s dismissal of the fraud claim but reversed the trial court’s dismissal of the negligence claim. The parties then cross-appealed to the New York Court of Appeals.
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