New York

The New York Court of Appeals will hear arguments next Tuesday (September 14, 2010) in Kirschner v. KPMG LLP on whether, under New York law, the acts of the corporate insiders can be imputed to the corporation, in which event, pursuant to the Wagoner rule, the trustee for a debtor corporation lacks standing to recover against third parties for damage to the creditors.  Those third parties can be accountants, law firms, investment banks, and other various professional firms.

The United States Circuit of Appeals for the Second Circuit certified an unusual amount of certified questions, eight in total.  As framed by the Second Circuit, the questions are:

(1) the over-arching question whether the allegations of the complaint in this case satisfy the "adverse interest" exception to the Wagoner rule of imputing insiders' misconduct to their corporation, and the following subsidiary questions subsumed within that ultimate question: (2) whether the adverse interest exception is satisfied by showing that the insiders intended to benefit themselves by their misconduct; (3) whether the exception is available only where the insiders' misconduct has harmed the corporation; (4) if harm is required, whether the analysis of such harm may include any detriment to a corporation resulting from the eventual unmasking of the misconduct; (5) if harm is required, whether such harm may be determined by considering a corporation and its related corporations as a single enterprise; (6) if harm is required and is to be determined with respect to separate though related corporations, whether the allegations of the complaint adequately allege such harm; (7) whether the exception is precluded where the misconduct conferred some benefit upon the corporation; and (8) if the adverse interest exception were otherwise available, would it be precluded by the "sole actor" rule? If the Court of Appeals is disinclined to answer or at least discuss all of these questions, we hope it will focus its attention on questions (2) and (3).

The certified questions focus on the Wagoner rule and the "adverse interest exception" to the rule.  The rule holds that bankruptcy trustees and other corporate representative have no standing to sue third-party professional advisers to a company for actions they may have taken in connection with the management-led misconduct.  The exception is an extremely narrow one and applies only when the agent has totally abandoned the principal's interests.

NYCL will report on the decision in October or when the decision is handed down.