Business Associations, Pages 113–118

Kirschner v. KPMG LLP

Court of Appeals of New York, 2010

Facts:

A large corporation suffered huge losses due to fraud by company executives that was not detected by company auditors. The auditors were then sued for the losses.

Issue:

Should the corrupt executives' knowledge of the fraud be imputed to the company?

Defendant's Argument:

In pari delicto mandates that the courts will not resolve a dispute between two wrongdoers. As the company has its corrupt agents' knowledge imputed to it, it was also culpable. Thus plaintiffs cannot bring a suit standing in the shoes of the company.

Reasoning:

Knowledge must be imputed to corporations as they cannot do anything on their own, and they are generally better suited than others to control their agents' actions. Imputation is presumed even where the agents acts less than admirably or commits fraud, which the corporation must be liable for. This fosters an incentive for the corporations to select honest agents and delegate duties with care.

However, this does not apply if an agent acts adversely, meaning he "totally abandoned his principal's interests and [acted] entirely for his own or another's purposes." Knowledge of fraud is therefore not imputed when committed against a corporation, only when on its behalf. Here, the corporations received some benefit, at least initially, so the corrupt agents did not act entirely self-interestedly.

The suggested revision to add an exception if companies face a long term harm would go against the decision recently made on this issue in Pennsylvania. In addition, fraud is almost always bad for companies, so the exception would block almost all imputation.

Plaintiffs suggest that they should prevail to discourage negligence among auditors like defendants. However, why should the stakeholders of corporate fraudsters be prioritized over the stakeholders of outside professionals that may have been negligent? In addition, it is dubious that holding defendants liable would significantly deter auditors' misconduct. Defendants' will still be liable to other litigation that will follow the collapse of a corporation this size.

Holding:

Yes, the knowledge should be imputed as the adverse interest exception is not satisfied by showing that the insiders intended to benefit themselves by their misconduct.

Dissenting Opinion:

Ciparick: The majority effectively precludes litigations by derivative corporate plaintiffs or litigation trustees to recover against negligent or complicit outside actors, even if the outside actors actively colluded with the corrupt agents. Auditors are one of the primary sources for investors, so their diligence should be maximized for the public's sake. It is not clear how this is supposed to incentivize corporations to more effectively monitor their agents. It just seems to invite auditors to neglect their duties.

Like my site?
Slightly less broke than the average law student?
Want to give me money for some reason?

I accept donations!

(Don't feel bad if you don't) (Not tax-deductible)