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Liability for Negligence

Grumped Company asks Pierce Whippersnapper LLP (PW), a CPA firm, to audit its financial statements. Grumped tells PW that it plans to use the statements to obtain a loan from First Bank. PW prepares the statements. Grumped uses the statements to obtain a loan from Second Bank. The statements falsely state Grumped's financial position due to PW's negligent preparation of them. When Grumped defaults on the loan, Second Bank sues PW under the common law rule of negligence. Does PW have liability for negligence to Second Bank under the Ultramares decision? Does PW have liability for negligence to Second Bank under the Restatement (Second) of Torts? How does UCC Article 3 play into this situation?

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Step 1
PW does not have liability for negligence under the decision of Ultramares Corporation v. Touche. In this case the claim of negligence failed, because it was held that the auditors owed the plaintiff no duty of care,, since there was no proximate relationship. In this case there is no duty of care between the Second Bank and PW. The judge in the case said no "to a liability ...

Solution Summary

This solution explains the decision of Ultramares Corporation v. Touche . The sources used are also included in the solution.

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