Legal Malpractice

Legal Malpractice and "In pari delicto"

By (Andrew Lavoott Bluestone)

The Court of Appeals yesterday decided a case which limits potential liability, or more correctly put, continues a limit of potential liability of a corporation's outside professional advisors, including attorneys.  In Kirschner v Kpmg Llp ;  2010 NY Slip Op 07415 ;  Decided on October 21, 2010
Court of Appeals ;  Read, J. we see a discussion of this accountant's malpractice question:

""Would the doctrine of in pari delicto bar a derivative claim under New York law where a corporation sues its outside auditor for professional malpractice or negligence based on the auditor's failure to detect fraud committed by the corporation; and, the outside auditor did not knowingly participate in the corporation's fraud, but instead, failed to satisfy professional standards in its audits of the corporation's financial statements?" (In re Am. Intl. Group, Inc., 998 A2d 280 [Del 2010]).

"The doctrine of in pari delicto [FN4] mandates that the courts will not intercede to resolve a dispute between two wrongdoers. This principle has been wrought in the inmost texture of our common law for at least two centuries (see e.g. Woodworth v Janes, 2 Johns Cas 417, 423 [NY 1801] [parties in equal fault have no rights in equity]; Sebring v Rathbun, 1 Johns Cas 331, 332 [NY 1800] [where both parties are equally culpable, courts will not "interpose in favor of either"]). The doctrine survives because it serves important public policy purposes. First, denying judicial relief to an admitted wrongdoer deters illegality. Second, in pari delicto avoids entangling courts in disputes between wrongdoers. As Judge Desmond so eloquently put it more than 60 years ago, "[N]o court should be required to serve as paymaster of the wages of crime, or referee between thieves. Therefore, the law will not extend its aid to either of the parties or listen to their complaints against each other, but will leave them where their own acts have placed them" (Stone v Freeman, 298 NY 268, 271 [1948] [internal quotation marks omitted]). "

"Traditional agency principles play an important role in an in pari delicto analysis. Of particular importance is a fundamental principle that has informed the law of agency and corporations for centuries; namely, the acts of agents, and the knowledge they acquire while acting within the scope of their authority are presumptively imputed to their principals (see Henry v Allen, 151 NY 1, 9 [1896] [imputation is "general rule"]; see also Craigie v Hadley, 99 NY 131 [1885]; accord Center, 66 NY2d at 784). Corporations are not natural persons. "[O]f [*10]necessity, [they] must act solely through the instrumentality of their officers or other duly authorized agents" (Lee v Pittsburgh Coal & Min. Co., 56 How Prac 373 [Super Ct 1877], affd 75 NY 601 [1878]). A corporation must, therefore, be responsible for the acts of its authorized agents even if particular acts were unauthorized (see Ruggles v American Cent. Ins. Co. of St. Louis, 114 NY 415, 421 [1889]). "The risk of loss from the unauthorized acts of a dishonest agent falls on the principal that selected the agent" (see Andre Romanelli, Inc. v Citibank, N.A., 60 AD3d 428, 429 [1st Dept 2009]). After all, the principal is generally better suited than a third party to control the agent's conduct, which at least in part explains why the common law has traditionally placed the risk on the principal. "

"We 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. The derivative plaintiffs caution against dealing accounting firms a "get-out-of-jail-free" card. But as any former partner at Arthur Andersen LLP — once one of the "Big Five" accounting firms — could attest, an outside professional (and especially an auditor) whose corporate client experiences a rapid or disastrous decline in fortune precipitated by insider fraud does not skate away unscathed. In short, outside professionals — underwriters, law firms and especially accounting firms — already are at risk for large settlements and judgments in the litigation that inevitably follows the collapse of an Enron, or a Worldcom or a Refco or an AIG-type scandal. Indeed, in the Refco securities fraud litigation, the IPO's underwriters, including the three underwriter-defendants in this action, have agreed to settlements totaling $53 million (www.refcosecuritieslitigation.com). In the AIG securities fraud litigation, PwC settled with shareholder-plaintiffs last year for $97.5 million (www.refcosecuritieslitigationpwc.com). It is not evident that expanding the adverse interest exception or loosening imputation principles under New York law would result in any greater disincentive for professional malfeasance or negligence than already exists [FN6]. Yet the approach advocated by the Litigation Trustee and the derivative plaintiffs would allow the creditors and shareholders of the company that employs miscreant agents to enjoy the benefit of their misconduct without suffering the harm. [*20]"
 

Full post as published by New York Attorney Malpractice Blog on October 22, 2010 (boomark / email).