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Kirschner v. KPMG LLP - 2010 NY Slip Op 7415, 15 N.Y.3d 446, 912 N.Y.S.2d 512, 938 N.E.2d 941

Rule:

Because the adverse interest exception to imputation requires adversity, it cannot apply unless the scheme that benefitted the insider operated at the corporation's expense. The crucial distinction is between conduct that defrauds the corporation and conduct that defrauds others for the corporation's benefit. Fraud on behalf of a corporation is not the same thing as fraud against it, and when insiders defraud third parties for the corporation, the adverse interest exception is not pertinent. Thus, for the adverse interest exception to apply, the agent must have totally abandoned his principal's interests and be acting entirely for his own or another's purposes, not the corporation's. So long as the corporate wrongdoer's fraudulent conduct enables the business to survive-to attract investors and customers and raise funds for corporate purposes-this test is not met. 

Facts:

In two cases, appellant trustee and appellant retirement funds sued appellee outside professionals, asserting, inter alia, fraud and malpractice arising from misconduct which led to the financial collapse of two corporations. Both cases were dismissed by the trial courts. The trustee and the retirement funds appealed. The United States Court of Appeals for the Second Circuit and the Supreme Court of Delaware submitted certified questions. The trustee and the retirement funds argued that the remedies available to creditors or shareholders of a corporation whose management engaged in fraud that was allegedly either assisted or not detected at all or soon enough by the corporation's outside professional advisers should have been broadened.

Issue:

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

Answer:

Yes

Conclusion:

The appellate court held that the principles of in pari delicto and imputation, with its narrow adverse interest exception, remained sound. To come within the adverse interest exception, the agent must have totally abandoned his principal's interests and must have been acting entirely for his own or another's purposes. It was not invoked merely because he had a conflict of interest or because he was not acting primarily for his principal. The fundamental agency principle that the acts of agents and the knowledge they acquire while acting within the scope of their authority are presumptively imputed to their principals plays an important role in an in pari delicto analysis. The acts of corporate agents--including fraudulent ones--are presumptively imputed to their principals. Imputation fosters an incentive for a principal to select honest agents and delegate duties with care.

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