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November 12, 2010

New York Court of Appeals Holds No Third-Party Liability Exists For Corporate Misdeeds

In a decision applicable to two matters, Kirschner v. KPMG LLP and Teachers' Retirement System of Louisiana v. Pricewaterhouse Coopers LLP, the New York State Court of Appeals examined whether third-party claims by corporate representatives brought against professional accountants whose negligence or collusion aided in improper or fraudulent corporate conduct that resulted in harm to employees, shareholders and/or creditors were actionable. The decision essentially focuses on whether the Court would reinterpret New York common law to allow corporations to shift the responsibility for their own agents' misconduct to other involved parties. In a four to three decision, New York's Highest Court determined the doctrines of in pari delicto and imputation, which are "embedded in New York law" and "remain sound," barred such claims.

Imputation is a legal doctrine that assigns liability for malfeasance to a corporation and its direct agents under the principle that corporate officials are aware of and responsible for the actions of their third party agents, except in the narrow circumstance of the "adverse interest" exception where a third party is found to have been acting solely for his or her own interest. However, that exception is not triggered simply because a third party agent has a conflict of interest or because he or she was not acting primarily for the principal.

Correspondingly, the doctrine of in pari delicto mandates that courts cannot intercede to resolve a dispute between two wrongdoers where the blame between wrongdoing defendants is found to be equal.

In applying both these doctrines to the facts of Kirschner and Teachers Retirement, the Court of Appeals held that the malfeasance of the corporate officers in those actions barred the shareholder representative and bankruptcy trustee's third-party claims against the accountants that colluded in or failed to uncover improper corporate conduct and that the "adverse interest" exception did not apply.

The plaintiffs argued that remedies available to creditors or shareholders of a corporation whose management engaged in fraud allegedly either assisted or not detected by the corporation's outside professional accountants should be broadened "in the interests of fairness." However, the majority held that such third-party claims are simply not actionable under New York law reasoning: "[w]e are also not convinced that altering our precedent to expand remedies for these or similarly situated plaintiffs would produce a meaningful additional deterrent to professional misconduct or malpractice."

In addition, the Court noted that outside professionals are already at risk of large judgments if companies they have serviced fail.

The dissent argued that the majority's ruling ignored "complex assumptions and public policy that compel different conclusions . . . [and that] . . . the weight of the equities favors allowing suits such as these to go forward to deter active wrongdoing by negligence by auditors and similar professionals."

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Practice Area.


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