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Keywords

lawsuitplaintiffdamageslitigationequitymalpracticewillcorporation
lawsuitplaintiffdamageslitigationequitymalpracticewillcorporation

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Kirschner v. KPMG LLP, 15 N.Y.3d 446, 938 N.E.2d 941, 912 N.Y.S.2d 508, 2010 N.Y. Slip Op. 07415

Facts

The lawsuit arose from a fraudulent scheme orchestrated by senior officers of AIG to misstate the company's financial performance, deceive investors, and avoid taxes. This misconduct led to a significant reduction in stockholder equity and substantial litigation costs for AIG. The derivative plaintiffs contended that PwC, as AIG's independent auditor, failed to perform its auditing duties according to professional standards, which allowed the fraud to continue undetected. The Delaware Court of Chancery dismissed the claims, ruling that the wrongdoing of AIG's officers was imputed to the corporation, thus barring the claims under New York law.

The lawsuit arose from a fraudulent scheme orchestrated by senior officers of AIG to misstate the company's financial performance, deceive investors, and avoid taxes. This misconduct led to a significant reduction in stockholder equity and substantial litigation costs for AIG. The derivative plaintiffs contended that PwC, as AIG's independent auditor, failed to perform its auditing duties according to professional standards, which allowed the fraud to continue undetected. The Delaware Court of Chancery dismissed the claims, ruling that the wrongdoing of AIG's officers was imputed to the corporation, thus barring the claims under New York law.

Issue

Whether the doctrine of in pari delicto bars a derivative claim under New York law where a corporation sues its outside auditor for professional malpractice based on the auditor's failure to detect fraud committed by the corporation's senior officers.

Whether the doctrine of in pari delicto bars a derivative claim under New York law where a corporation sues its outside auditor for professional malpractice based on the auditor's failure to detect fraud committed by the corporation's senior officers.

Rule

The doctrine of in pari delicto mandates that courts will not intercede to resolve disputes between two wrongdoers, and the wrongdoing of corporate agents is generally imputed to the corporation.

The doctrine of in pari delicto mandates that courts will not intercede to resolve disputes between two wrongdoers, and the wrongdoing of corporate agents is generally imputed to the corporation.

Analysis

The Delaware Supreme Court analyzed the application of the in pari delicto doctrine in the context of the claims against PwC. It concluded that since the senior officers' misconduct was imputed to AIG, the corporation could not pursue claims against its auditor for failing to detect that misconduct. The court emphasized that the principle of imputation serves to hold corporations accountable for the actions of their agents, and allowing AIG to recover would undermine this principle.

The Delaware Supreme Court analyzed the application of the in pari delicto doctrine in the context of the claims against PwC. It concluded that since the senior officers' misconduct was imputed to AIG, the corporation could not pursue claims against its auditor for failing to detect that misconduct. The court emphasized that the principle of imputation serves to hold corporations accountable for the actions of their agents, and allowing AIG to recover would undermine this principle.

Conclusion

The Delaware Supreme Court affirmed the dismissal of the derivative claims against PwC, holding that the in pari delicto doctrine barred the action because AIG's senior officers were complicit in the fraud.

The Delaware Supreme Court affirmed the dismissal of the derivative claims against PwC, holding that the in pari delicto doctrine barred the action because AIG's senior officers were complicit in the fraud.

Who won?

PricewaterhouseCoopers LLP prevailed in the case because the court found that the claims against them were barred by the in pari delicto doctrine, which prevents a corporation from suing for damages resulting from its own wrongdoing.

PricewaterhouseCoopers LLP prevailed in the case because the court found that the claims against them were barred by the in pari delicto doctrine, which prevents a corporation from suing for damages resulting from its own wrongdoing.

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