Not a Lexis Advance subscriber? Try it out for free.

Credit Alliance Corp. v. Arthur Andersen & Co.

Court of Appeals of New York

May 29, 1985, Argued ; July 2, 1985, Decided

No Number in Original

Opinion

 [*541]  [**111]  [***436]    OPINION OF THE COURT

The critical issue common to these two appeals is whether an accountant may be held liable, absent privity of contract, to a party who relies to his detriment upon a negligently prepared financial report and, if so, within what limits does that liability extend.

In Credit Alliance Corp. v Andersen & Co. ("Credit Alliance"), plaintiffs are major financial service companies engaged primarily in financing the purchase of capital equipment through installment sales or leasing agreements. Defendant, Arthur Andersen & Co. ("Andersen"), is a national accounting firm. Plaintiffs' complaint and affidavit 1 allege that prior to 1978, plaintiffs had provided financing to L. B. Smith, Inc. of Virginia ("Smith"), a capital intensive enterprise that regularly required financing. During 1978, plaintiffs advised Smith that as a condition to extending additional major financing, they would insist upon examining an [****14]  audited financial statement. Accordingly, Smith provided plaintiffs with its consolidated financial statements, covering both itself and its subsidiaries, "For The Years Ended December 31, 1977 and 1976" (the "1977 statements"). These statements contained an auditor's report prepared by Andersen stating that it had examined the statements in accordance with generally accepted auditing standards ("GAAS") and found them to reflect fairly the financial position of Smith in conformity with generally accepted accounting principles ("GAAP"). In reliance upon the 1977 statements, plaintiffs provided substantial amounts in financing to Smith through various extensions of credit. Thereafter, in 1979, as a precondition to continued financing, plaintiffs requested and received from Smith the consolidated financial statements "For The Years Ended February 28, 1979 and December 31, 1977" (the "1979 statements"). Again, Andersen's report vouched for its examination of the financial statements and the financial position of  [*542]  Smith reflected therein. Relying upon these certified statements, plaintiffs provided additional substantial financing to Smith.

 [****15]  It is alleged that both statements overstated Smith's assets, net worth and general  [***437]  financial health, and that Andersen failed to conduct investigations in accordance with proper auditing standards, thereby failing to discover Smith's precarious financial condition and the serious possibility  [**112]  that Smith would be unable to survive as a going concern. Indeed, in 1980, Smith filed a petition for bankruptcy. By that time, Smith had already defaulted on several millions of dollars of obligations to plaintiffs.

Read The Full CaseNot a Lexis Advance subscriber? Try it out for free.

Full case includes Shepard's, Headnotes, Legal Analytics from Lex Machina, and more.

65 N.Y.2d 536 *; 483 N.E.2d 110 **; 493 N.Y.S.2d 435 ***; 1985 N.Y. LEXIS 15157 ****

Credit Alliance Corporation et al., Respondents, v. Arthur Andersen & Co., Appellant; European American Bank and Trust Company, Respondent, v. Strauhs & Kaye et al., Appellants

Prior History:  [****1]  Appeal, in the first above-entitled action, by permission of the Appellate Division of the Supreme Court in the First Judicial Department, from an order of said court, entered May 3, 1984, which affirmed an order of the Supreme Court at Special Term (Edward J. Greenfield, J.; opn 122 Misc 2d 1045), entered in New York County, (1) granting a motion by plaintiffs to reargue so much of a prior order of that court as granted a motion by defendant to dismiss the first cause of action in plaintiffs' complaint and, upon reargument, denying defendant's motion to dismiss plaintiffs' first cause of action, and (2) denying a motion by defendant for reargument of so much of the prior order of that court as denied defendant's motion to dismiss plaintiffs' second cause of action. The following question was certified by the Appellate Division: "Was the order of the Supreme Court, as affirmed by this Court, properly made?"

Appeal, in the second above-entitled action, by permission of the Appellate Division of the Supreme Court in the First Judicial Department, from an order of said court, entered June 28, 1984, which (1) reversed, on the law, an order of the Supreme Court at Special Term (Burton [****2]  S. Sherman, J.), entered in New York County, granting a motion by defendants to dismiss the complaint for failure to state a cause of action, (2) denied the motion, and (3) reinstated the complaint. The following question was certified by the Appellate Division: "Was the order of this Court, which reversed the order of the Supreme Court, properly made?"

 Credit Alliance Corp. v Andersen & Co., 101 AD2d 231.

 European Am. Bank & Trust Co. v Strauhs & Kaye, 102 AD2d 776.

Disposition: In Credit Alliance Corp. v Andersen & Co.: Order reversed, etc.

In European Am. Bank & Trust Co. v Strauhs & Kaye: Order affirmed, etc.

CORE TERMS

parties, privity, audit, cause of action, financial statement, allegations, nonprivy, principles, partnership, lending, financial report, certificate, financing, inventory, buyer, loans, plaintiffs', Auditor's, weighers, prepare, courts, seller, privity of contract, particular purpose, induce, notice, direct communication, motion to dismiss, indeterminate, approaching

Torts, Malpractice & Professional Liability, Professional Services, Contracts Law, Consideration, Enforcement of Promises, General Overview, Elements, Duty, Contract Formation