The defendants, a firm of accountants, were employed by the Pelz-Greenstein Company to examine the books of the company and to prepare a certified balance sheet of its financial position. To *Page 124 their employers they owed a duty to perform their work with care and with the skill which they represented they had, as professional accountants. They owed no such duty to persons who might deal with Pelz-Greenstein Company, upon the basis of the certified balance sheet prepared by the defendants. To such persons they owed only the duty to refrain from making any fraudulent misrepresentations. (Ultramares Corp. v. Touche,255 N.Y. 170.) The courts below have held, without dissent, that the evidence is insufficient to permit an inference of fraud as defined in that case.
The only representations made by the defendants are contained in the balance sheet which they prepared after examining the books of account of the Pelz-Greenstein Company and the certificate appended thereto. The certificate states: "We hereby certify that we examined the books of account and record pertaining to the assets and liabilities of Pelz-Greenstein Co., Inc., New York City, as of the close of business December 31 1928, and, based on the records examined, information submitted to us, and subject to the foregoing notes [not material here], it is our opinion that the above condensed statement shows the financial condition of the company at the date stated and that the related income and surplus account is correct."
To prepare a balance sheet, accountants must, of course, examine the books and accounts submitted to them, and from such examination and any other information which may be furnished to them, they must prepare a balance sheet which, in theiropinion, reflects the true financial position of the business. The certificate of the defendants constitutes an express representation of fact that they have "examined the books of account and record pertaining to the assets and liabilities of Pelz-Greenstein Co., Inc." The balance sheet itself represents and was understood to represent only the "opinion" of the defendants based "on the records examined" and on information presented to the defendants. *Page 125
It is undisputed that the defendants did examine the books and accounts of Pelz-Greenstein Company and that the balance sheet is based upon entries in those books and accounts. It is also undisputed that the balance sheet did not show the true financial position of the business. According to the balance sheet, the corporation had assets of about $8,000,000 and debts of less than $5,000,000; its capital of over $3,000,000 was unimpaired and it had a surplus of about $83,000. In fact the corporation was insolvent; its liabilities exceeded the fair value of its assets. The defendants did not, however, warrant, or certify, the accuracy of the balance sheet; they represented only that the balance sheet was in "their opinion" correct. May they be held responsible for loss caused to the bank by reliance on this expression of opinion? That is the problem presented upon this appeal.
The defendants are not liable for error of judgment; they are not liable even for lack of care in arriving at their opinion. They are liable only if the opinion expressed was not only erroneous, but was fraudulently expressed. Actual bad faith and intent to deceive is not always, it is true, an essential element in a cause of action for deceit. Such a cause of action may be established against the defendants without proof that they expressed an opinion which they knew was incorrect; at least, however, there must be evidence of a ruthless disregard of whether the opinion was correct or not — the expression of an opinion where "the grounds supporting it are so flimsy as to lead to the conclusion that there was no genuine belief back of it." (Ultramares Corp. v. Touche, supra, p. 186.)
In that case we said that "negligence or blindness, even when not equivalent to fraud, is none the less evidence to sustain an inference of fraud. At least this is so if the negligence is gross" (p. 190). That rule was not new; it had been applied in earlier cases cited in the *Page 126 opinion. Again and again, however, in that opinion, as in the cases cited, the court pointed out that even gross negligence is not equivalent to fraud. It may, in proper case, furnish sufficient evidence to justify an inference of fraud, but that is true only when the proof of gross negligence shows that the grounds supporting the opinion are in fact "so flimsy as to leadto the conclusion that there was no genuine belief back of it.Further than that this court has never gone." (Italics are mine.) (Ultramares Corp. v. Touche, supra, p. 186.)
Judge FINCH has, in his opinion, referred to the evidence upon which he bases his conclusion that it establishes fraud. I shall try to avoid repetition of that evidence. The most important of the alleged errors in the balance sheet is the failure to provide sufficient reserves for the collection of "commission accounts receivable." The amount of reserves which should be set aside to take care of loss that may be suffered by reason of inability to collect such accounts is a matter of judgment. The defendants knew of circumstances which it is said pointed clearly to the conclusion that a reserve of $21,000 is insufficient to take care of these accounts of over $2,043,337.81. Perhaps the defendants here showed a lack of caution. Their letter sent thirty days after the certified balance sheet was sent, shows that they knew that the reserve might prove insufficient. None the less, the amount of probable loss even with these circumstances known remained uncertain; the estimate of one per cent loss was doubtless over-optimistic, yet the estimate was based on facts which were not "so flimsy as to lead to the conclusion that there was no honest belief back of it" (p. 186).
The next error which, it is argued, shows negligence so gross as to indicate a lack of honest belief based on substantial grounds is that no allowance was made for "commission account advances." Many of these accounts were old. Again there are circumstances which *Page 127 perhaps should have acted as a warning signal to a cautious accountant. The defendants saw the signal — that is shown by the supplementary letter — but decided, nevertheless, to make no allowance. Again it would, doubtless, have been better if the defendants had given to those who might rely upon the balance sheet, the warning signal they had seen. They did, however, give notice on the balance sheet that accounts were "inactive and in liquidation" and they removed them from the current assets of the business and placed them "below the line." The owners of the business, men who at that time had a fine reputation, assured the defendants that they had sufficient security to liquidate these dead accounts. I can find here no justification for any argument that a balance sheet which shows that no allowance or reserve has been made for inactive accounts in liquidation may be held to be a fraudulent representation that no allowance or reserve is necessary.
I agree that the jury might find gross negligence in failure to provide a reserve of $46,000 against a group of bankrupt accounts aggregating $72,000. Even gross negligence in regard to an item of $46,000 in a balance sheet showing assets of almost $8,000,000 can hardly be regarded as substantial evidence of fraudulent misrepresentation. I do not take up in detail the other items where it is said the jury might find gross negligence. Each one involves the exercise of judgment; in none does it appear that there was no ground for honest exercise of judgment.
Certainly there is here no deliberate intention to deceive, no statement of fact made without actual knowledge, no statement of an opinion which the defendants did not honestly hold; nor, with the possible exception of the one item of $46,000, is there any evidence of an expression of opinion made by a person careless as to whether it was based on sufficient knowledge. The case is entirely different from that presented by Ultramares *Page 128 Corp. v. Touche (supra). There the defendants certified that the balance sheet corresponded with accounts which the jury might find had not been examined by the defendants, or had been disregarded by them; and the court pointed out "that in certifying to the correspondence between balance sheet and accounts" (p. 192), the defendants made a statement as true to their own knowledge, when they had, as a jury might find, no knowledge on the subject.
Here the defendants examined adequately the books and data which they certified they had examined, and they are not charged with either bad faith or even negligence in making their examination. The balance sheet corresponds with the books and if the defendants were negligent, their negligence, whether gross or slight, consisted only in failure to give to the information, which they obtained through such examination, the effect which expert witnesses testify should, in their opinion, be given to it. The defendants realized that this information might reasonably affect their judgment. The explanatory letter which they sent later shows that. The jury might find that the defendants' judgment was bad, but the court pointed out in theUltramares case that liability cannot be predicated upon error however great in the exercise of judgment. The error of judgment does not indicate a willful expression of a false opinion, or an expression of opinion based on grounds so flimsy that the jury might conclude that the opinion was not based on genuine belief. To permit recovery in a case where the evidence does not sustain such a conclusion is to wipe out the distinction which this court has always drawn and which it reiterated in the Ultramares case.
The judgment should be affirmed.
O'BRIEN, LOUGHRAN and RIPPEY, JJ., concur with FINCH, J.; LEHMAN, J., dissents in opinion in which CRANE, Ch. J., concurs; HUBBS, J., taking no part.
Judgments reversed, etc. (See 278 N.Y. 704.) *Page 129