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Full Opinion
MARC S. KIRSCHNER, as Trustee of the REFCO LITIGATION TRUST, Appellant,
v.
KPMG LLP et al., Respondents, et al., Defendants.
TEACHERS' RETIREMENT SYSTEM OF LOUISIANA et al., Derivatively on Behalf of Nominal Defendant AMERICAN INTERNATIONAL GROUP, INC., Appellants,
v.
PRICEWATERHOUSECOOPERS LLP, Respondent.
Court of Appeals of New York.
*449 Quinn Emanuel Urquhart & Sullivan, LLP, New York City (Kathleen M. Sullivan, Richard I. Werder, Jr., Sascha N. Rand, Sanford I. Weisburst, K. McKenzie Anderson, Sarah Rubin and Simona Gory of counsel), for appellant in the first above-entitled action.
*450 Wilmer Cutler Pickering Hale and Dorr LLP, New York City (Philip D. Anker, Anne K. Small and Jeremy S. Winer of counsel), Winston & Strawn LLP, Chicago, Illinois (Linda T. Coberly and Bruce R. Braun of counsel), Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C. (Paul R.Q. Wolfson and Daniel P. Kearney, Jr., of counsel), Clifford Chance US LLP, New York City (Anthony Candido of counsel), Davis Polk & Wardwell LLP (Robert F. Wise, Jr., and Paul Spagnoletti of counsel), King & Spalding LLP (James J. Capra, Jr., and James P. Cusick of counsel), King & Spalding LLP, Washington, D.C. (Kenneth Y. Turnbull of counsel), Marino, Tortorella & Boyle, P.C., Chatham, New Jersey (Kevin H. Marino and John D. Tortorella of counsel), Williams & Connolly LLP, Washington, D.C. (John K. Villa, George A. Borden and Craig D. Singer of counsel), and Howrey LLP, New York City (Kevin A. Burke, Gary F. Bendinger and Sarah D. Abeles of counsel), for respondents in the first above-entitled action.
*451 Cohen & Gresser LLP, New York City (Lawrence T. Gresser, Nathaniel P.T. Read and Lawrence J. Lee of counsel), for William Wilson Bratton and others, amici curiae in the first above-entitled action.
Paduano & Weintraub LLP, New York City (Leonard Weintraub and Kathryn L. Bedke of counsel), for Anthony Paduano, *452 amicus curiae in the first above-entitled action.
Goldberg Segalla LLP, Albany (Matthew S. Lerner of counsel), for DRI—The Voice of the Defense Bar, amicus curiae in the first above-entitled action.
Strook & Strook & Lavan LLP, New York City (James L. Bernard, Elizabeth H. Cronise, David M. Cheifetz and Hannah Yu *453 of counsel), for M. Todd Henderson, amicus curiae in the first above-entitled action.
Skadden Arps Slate Meagher & Flom LLP, New York City (Scott D. Musoff and Christos Ravanides of counsel), Ira D. Hammerman, Washington, D.C., and Kevin Carroll for Securities Industry and Financial Markets Association, amicus curiae in the first above-entitled action.
Pachulski Stang Ziehl & Jones LLP, New York City (Dean A. Ziehl, Harry D. Hochman and Maria A. Bove of counsel), for *454 National Association of Bankruptcy Trustees, amicus curiae in the first above-entitled action.
Grant & Eisenhofer P.A., New York City (Stuart M. Grant of counsel), Megan D. McIntyre, Wilmington, Delaware, John C. Kairis, Christine M. Mackintosh and Wolf Haldenstein Adler Freeman & Herz LLP, New York City (Daniel W. Krasner, Eric B. Levine, Peter C. Harrar, Alan A.B. McDowell and Kate M. McGuire of counsel), for appellants in the second above-entitled action.
*455 King & Spalding LLP (Paul D. Clement, of the District of Columbia bar, admitted pro hac vice, of counsel), Cravath, Swaine & Moore LLP, New York City (Thomas G. Rafferty, Antony L. Ryan and Samira Shah of counsel), and Connolly Bove Lodge & Hutz LLP, Wilmington, Delaware (Henry E. Gallagher, Jr., of counsel), for respondent in the second above-entitled action.
*456 Willkie Farr & Gallagher LLP, New York City (Kelly M. Hnatt and Derek M. Schoenmann of counsel), Richard I. Miller, General Counsel, American Institute of Certified Public Accountants, and Bradley M. Pryba for American Institute of Certified Public Accountants and another, amici curiae in the first and second above-entitled actions.
Gibson, Dunn & Crutcher LLP, Washington, D.C. (Douglas R. Cox, Michael J. Scanlon, Jason J. Mendro and Dace A. Caldwell of counsel), for Center for Audit Quality, amicus curiae in the first and second above-entitled actions.
Judges GRAFFEO, SMITH and JONES concur with Judge READ; Judge CIPARICK dissents in a separate opinion in which Chief Judge LIPPMAN and Judge PIGOTT concur.
*457 OPINION OF THE COURT
READ, J.
In these two appeals, plaintiffs ask us, in effect, to reinterpret New York law so as to broaden the remedies available to creditors or shareholders of a corporation whose management engaged in financial fraud that was allegedly either assisted or not detected at all or soon enough by the corporation's outside professional advisers, such as auditors, investment bankers, financial advisers and lawyers. For the reasons that follow, we decline to alter our precedent relating to in pari delicto, and imputation and the adverse interest exception, as we would have to do to bring about the expansion of third-party liability sought by plaintiffs here.
I.
Kirschner
This lawsuit was triggered by the collapse of Refco, once a leading provider of brokerage and clearing services in the derivatives, currency and futures markets. After a leveraged buyout in August 2004, Refco became a public company in August 2005 by way of an initial public offering.[1] In October 2005, Refco disclosed that its president and chief executive officer had orchestrated a succession of loans, apparently beginning as far *458 back as 1998, which hid hundreds of millions of dollars of the company's uncollectible debt from the public and regulators. These maneuvers created a falsely positive picture of Refco's financial condition.[2] In short order, this revelation caused Refco's stock to plummet and RCM, Refco's brokerage arm, to experience a "run" on customer accounts, forcing Refco to file for bankruptcy protection.
In December 2006, the United States Bankruptcy Court for the Southern District of New York confirmed Refco's chapter 11 bankruptcy plan, which became effective soon thereafter. Under the plan, secured lenders, who were owed $717 million, were paid in full; Refco's bondholders and the securities customers and unsecured creditors of RCM were due to receive 83.4 cents, 85.6 cents and 37.6 cents on the dollar, respectively; and Refco's general creditors with unsecured claims could expect from 23 cents to 37.6 cents on the dollar (see One Chapter of Refco Saga Closed, 47 Bankr Ct Decisions Wkly News & Comment [No. 13], Jan. 16, 2007, at 2; Refco Exits Bankruptcy Protection, New York Times, Dec. 27, 2006, section C, at 3).
The plan also established a Litigation Trust, which authorized plaintiff Marc S. Kirschner, as Litigation Trustee, to pursue claims and causes of action possessed by Refco prior to its bankruptcy filing. The Litigation Trust's beneficiaries are the holders of allowed general unsecured claims against Refco. Any recoveries are to be allocated, after repayment of up to $25 million drawn from certain Refco assets to administer the Trust, on the basis of the beneficiaries' allowed claims under the confirmed plan.
In August 2007, the Litigation Trustee filed a complaint in Illinois state court asserting fraud, breach of fiduciary duty and malpractice against Refco's president and CEO and other owners and senior managers (collectively, the Refco insiders); investment banks that served as underwriters for the LBO and/or the *459 IPO; Refco's law firm; accounting firms that had provided services to Refco; and several customers that participated in the allegedly deceptive loans. According to the Trustee, these defendants all aided and abetted the Refco insiders in carrying out the fraud, or were negligent in neglecting to discover it. A year later, the Litigation Trustee filed a complaint in Massachusetts state court, asserting similar claims against the accounting firm KPMG LLP. Both lawsuits were removed to federal court and transferred to the Southern District of New York for coordinated or consolidated proceedings.
Defendants subsequently moved to dismiss the Litigation Trustee's claims pursuant to rule 12 (b) (1) and (6) of the Federal Rules of Civil Procedure, and the District Court granted the motions on April 14, 2009. Because the Trustee acknowledged that the Refco insiders masterminded Refco's fraud, the judge identified as the threshold issue whether the claims were subject to dismissal by virtue of the Second Circuit's Wagoner rule (see Shearson Lehman Hutton, Inc. v Wagoner, 944 F2d 114, 118 [2d Cir 1991] [bankruptcy trustee does not possess standing to seek recovery from third parties alleged to have joined with the debtor corporation in defrauding creditors]).[3] Further, since "[a]ll parties agree[d] that if the Wagoner rule applie[d], the Litigation Trustee lack[ed] standing to assert any of Refco's claims against the defendants," the judge observed that "the parties' dispute focus[ed] solely on whether the narrow exception to the Wagoner rule—the `adverse-interest' exception—applie[d]" (Kirschner v Grant Thornton LLP, 2009 WL 1286326, *5, 2009 US Dist LEXIS 32581, *19-20 [2009]).
Citing Second Circuit cases handed down after our decision in Center v Hampton Affiliates (66 NY2d 782 [1985]), the District Court noted that, in order for the adverse interest exception to *460 apply, "the [corporate officer] must have totally abandoned [the corporation's] interests and be acting entirely for his own or another's purposes ... because where an officer acts entirely in his own interests and adversely to the interests of the corporation, that misconduct cannot be imputed to the corporation" (2009 WL 1286326, *5, 2009 US Dist LEXIS 32581, *20 [citations and internal quotation marks omitted]). Further, "[i]n determining whether an agent's actions were indeed adverse to the corporation, courts have identified `[t]he relevant issue [as being the] short term benefit or detriment to the corporation, not any detriment to the corporation resulting from the unmasking of the fraud'" (2009 WL 1286326, *6, 2009 US Dist LEXIS 32581, *21, quoting In re Wedtech Corp., 81 BR 240, 242 [SD NY 1987]).
The District Court concluded that "[t]his line of precedent foreclose[d] the Trustee's claims" because the complaint was "saturated by allegations that Refco received substantial benefits from the [Refco] insiders' alleged wrongdoing" (2009 WL 1286326, *6, 2009 US Dist LEXIS 32581, *22). Thus, under the Trustee's own allegations the Refco insiders stole for Refco, not from it—i.e., "the burden of the [Refco] insiders' fraud was not borne by Refco or its then-current shareholders who were themselves the [Refco] insiders—but rather by outside parties, including Refco's customers, creditors, and third parties who acquired shares through the IPO" (2009 WL 1286326, *6, 2009 US Dist LEXIS 32581, *24).
In reaching his decision, the judge rejected as "without merit" the Litigation Trustee's "industrious" interpretation of the Second Circuit's decision in In re CBI Holding Co., Inc. (529 F3d 432 [2d Cir 2008]), a case where the court held that a bankruptcy court's finding that the adverse interest exception applied was not clearly erroneous. The judge declined to read a solely "intent-based" standard into CBI because
"deferring to a finder-of-fact's choice as to which evidence to credit after a trial, or acknowledging that facts related to intent could contribute to the explication of how a fraud worked and to whose benefit it accrued, does not make the participants' intent the `touchstone' of the analysis such that it precludes dismissal on the pleadings" (2009 WL 1286326, *7, 2009 US Dist LEXIS 32581, *26).
"To hold otherwise," he reasoned, "would be to explode the *461 adverse-interest exception, transforming it from a `narrow' exception ... into a new, and nearly impermeable rule barring imputation" (2009 WL 1286326, *7 n 14, 2009 US Dist LEXIS 32581, *27 n 14). The standard could not depend exclusively on the Refco insiders' subjective motivation, the judge explained, because "[w]henever insiders conduct a corporate fraud they are doing so, at least in part, to promote their own advantage" (2009 WL 1286326, *7 n 14, 2009 US Dist LEXIS 32581, *28 n 14).
Having declined the Litigation Trustee's invitation to read CBI to inquire solely into insiders' claimed motivations, without regard to the nature and effect of their misconduct, the District Court revisited the fraud's impact on Refco. He again emphasized that the Trustee's allegations did not establish injury to Refco, because the Refco insiders did not embezzle or steal assets from Refco, but instead sold their holdings in Refco to third parties at fraudulently inflated prices—i.e., the Refco insiders' benefit came at the expense of the new purchasers of Refco securities, not Refco itself. Critically, "the Trustee must allege, not that the [Refco] insiders intended to, or to some extent did, benefit from their scheme, but that the corporation was harmed by the scheme, rather than being one of its beneficiaries" (2009 WL 1286326, *7, 2009 US Dist LEXIS 32581, *27).
Plaintiff appealed to the Second Circuit Court of Appeals. After presenting a comprehensive account of the Litigation Trustee's factual allegations and the District Court's decision, the court remarked that the parties seemingly did not dispute several propositions in the lower court's decision, which "appear[ed] to correctly reflect New York law concerning the adverse interest exception" (Kirschner v KPMG LLP, 590 F3d 186, 191 [2d Cir 2009]); specifically, that the adverse interest exception was "a narrow one and that the guilty manager must have totally abandoned his corporation's interests for [the exception] to apply"; and that "whether the agent's actions were adverse to the corporation turns on the short term benefit or detriment to the corporation, not any detriment to the corporation resulting from the unmasking of the fraud" (id. [internal quotation marks omitted] [quoting the District Court's opinion]). Nonetheless, the court observed, "[a]s [the District Court judge] applied these propositions to the Trustee's allegations,... he interpreted New York law in ways that [brought] the parties into sharp dispute concerning certain aspects of the adverse interest exception"; namely, "the state of mind of the [Refco] insiders and the harm to their corporation" (id.).
*462 The Second Circuit noted that "New York cases seem[ed] to support" the District Court's conclusion that an insider's subjective intent was not the "touchstone" of adverse interest analysis; however, the court added, "other New York cases may be read to make intent more significant" (id. at 191-192 n 3). In light of the parties' "differing uses of New York cases, coupled with the somewhat divergent language used by the District Court in the pending case and by [the Second Circuit] in CBI, both endeavoring to interpret New York law," the court sought our guidance as to the scope of New York's adverse interest exception (id. at 194). Accordingly, on December 23, 2009 the Second Circuit certified eight questions, inviting us to "focus [our] attention on questions (2) and (3)" (id. at 195), which are "whether the adverse interest exception is satisfied by showing that the insiders intended to benefit themselves by their misconduct"; and "whether the exception is available only where the insiders' misconduct has harmed the corporation," respectively (id. at 194-195).
Teachers' Retirement System of Louisiana and City of New Orleans Employees' Retirement System
This lawsuit is a derivative action brought on behalf of American International Group, Inc. (AIG) by the Teachers' Retirement System of Louisiana and the City of New Orleans Employees' Retirement System (derivative plaintiffs). According to the complaint, senior officers of AIG set up a fraudulent scheme to misstate AIG's financial performance in order to deceive investors into believing that the company was more prosperous and secure than it really was. The complaint further accuses these officers of causing the corporation to avoid taxes by falsely claiming that workers' compensation policies were other types of insurance, and of engaging in "covered calls" to recognize investment gains without paying capital gains taxes. It is also claimed that AIG conspired with other companies to rig markets to subvert supposedly competitive auctions, and that the senior officers exploited their familiarity with improper financial machinations by selling the company's "expertise" in balance sheet manipulation. Specifically, AIG is alleged to have sold to other companies insurance policies that did not involve the actual transfer of insurable risk, with the improper purpose of helping those companies report better financial results; and to have created special purpose entities for other companies without observing the required accounting rules for the similarly improper purpose of helping those companies hide *463 impaired assets. These financial tricks eventually came to light, resulting in serious harm to AIG. Stockholder equity was reduced by $3.5 billion, and AIG was saddled with litigation and regulatory proceedings requiring it to pay over $1.6 billion in fines and other costs.
Derivative plaintiffs do not allege that defendant PricewaterhouseCoopers LLP (PwC) conspired with AIG or its agents to commit accounting fraud. Rather, they contend that, as AIG's independent auditor, PwC did not perform its auditing responsibilities in accordance with professional standards of conduct, and so failed to detect or report the fraud perpetrated by AIG's senior officers. Had it done so, derivative plaintiffs argue, the fraudulent accounting schemes at AIG would have been timely discovered and rectified.
PwC moved to dismiss the action. On February 10, 2009, the Delaware Court of Chancery granted the motion, concluding that New York law applied to the claims and that, under New York law, the claims were barred (In re American Intl. Group, Inc., 965 A2d 763 [Del Ch 2009]). Consistent with the way in which the District Court handled the same issues two months later in Kirschner, the vice-chancellor decided that, under New York's law of agency, the wrongdoing of AIG's senior officers was imputed to AIG and that, based on the allegations in the complaint, AIG's senior officers did not totally abandon AIG's interests such that the adverse interest exception to imputation would apply. Once the wrongdoing was imputed to AIG, the Court of Chancery decided that AIG's claims against PwC were barred by New York's in pari delicto doctrine and the Wagoner rule governing standing.
Derivative plaintiffs appealed. Determining that the appeal's resolution depended on significant and unsettled questions of New York law, on March 3, 2010, the Delaware Supreme Court issued a decision certifying the following question to us:
"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?" (Teachers' Retirement *464 Sys. of La. v PricewaterhouseCoopers LLP, 998 A2d 280, 282-283 [Del 2010].)
II.
In Pari Delicto
The doctrine of in pari delicto[4] 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 1800] [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 favour 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]).
The justice of the in pari delicto rule is most obvious where a willful wrongdoer is suing someone who is alleged to be merely negligent. A criminal who is injured committing a crime cannot sue the police officer or security guard who failed to stop him; the arsonist who is singed cannot sue the fire department. But, as the cases we have cited show, the principle also applies where both parties acted willfully. Indeed, the principle that a wrongdoer should not profit from his own misconduct is so strong in New York that we have said the defense applies even in difficult cases and should not be "weakened by exceptions" (McConnell v Commonwealth Pictures Corp., 7 NY2d 465, 470 [1960] ["We are not working here with narrow questions of technical law. We are applying fundamental concepts of morality and fair dealing not to be weakened by exceptions" (emphasis added)]; see also Saratoga County Bank v King, 44 NY 87, 94 [1870] [characterizing the doctrine as "inflexible"]).
*465 Imputation
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 Cragie v Hadley, 99 NY 131 [1885]; accord Center, 66 NY2d at 784). Corporations are not natural persons. "[O]f 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, 375 [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.
Agency law presumes imputation even where the agent acts less than admirably, exhibits poor business judgment, or commits fraud (see e.g. Price v Keyes, 62 NY 378, 384-385 [1875] [critical issue is whether agent was acting in furtherance of his duties, regardless of his "selfish motive"]). As we explained long ago, a corporation "is represented by its officers and agents, and their fraud in the course of the corporate dealings[ ] is in law the fraud of the corporation" (Cragie, 99 NY at 134; accord Reynolds v Snow, 10 AD2d 101, 109 [1st Dept 1960], affd 8 NY2d 899 [1960]). Like a natural person, a corporation must bear the consequences when it commits fraud (see e.g. Wight v BankAmerica Corp., 219 F3d 79, 86-87 [2d Cir 2000] [under "fundamental principle(s) of agency," managers' misconduct within the scope of their employment is imputed and "bars a trustee from suing to recover for a wrong that he himself essentially took part in"]).
When corporate officers carry out the everyday activities central to any company's operation and well-being—such as issuing financial statements, accessing capital markets, handling customer accounts, moving assets between corporate entities, *466 and entering into contracts—their conduct falls within the scope of their corporate authority (see e.g. Baena, 453 F3d at 7 ["The approval and oversight of (financial) statements is an ordinary function of management that is done on the company's behalf, which is typically enough to attribute management's actions to the company itself"]). And where conduct falls within the scope of the agents' authority, everything they know or do is imputed to their principals.
Next, the presumption that agents communicate information to their principals does not depend on a case-by-case assessment of whether this is likely to happen. Instead, it is a legal presumption that governs in every case, except where the corporation is actually the agent's intended victim (see Center, 66 NY2d at 784 ["when an agent is engaged in a scheme to defraud his principal... he cannot be presumed to have disclosed that which would expose and defeat his fraudulent purpose"]). Where the agent is defrauding someone else on the corporation's behalf, the presumption of full communication remains in full force and effect (see 3 Thompson and Thompson, Commentaries on the Law of Corporations § 1778, at 347 [3d ed 1927] ["However applicable the dictum that an agent about to commit a fraud will not announce his intention may be in the case of fraud by an agent upon his own principal, it has no application when the agent, acting in behalf of his principal, or ostensibly so, commits a fraud upon a third person"]).
In sum, we have held for over a century that all corporate acts—including fraudulent ones—are subject to the presumption of imputation (Cragie, 99 NY at 134). And, as with in pari delicto, there are strong considerations of public policy underlying this precedent: imputation fosters an incentive for a principal to select honest agents and delegate duties with care.
Adverse Interest Exception to Imputation
We articulated the adverse interest exception in Center as follows: "To come within the exception, the agent must have totally abandoned his principal's interests and be acting entirely for his own or another's purposes. It cannot be invoked merely because he has a conflict of interest or because he is not acting primarily for his principal" (Center, 66 NY2d at 784-785 [emphasis added]). This rule avoids ambiguity where there is a benefit to both the insider and the corporation, and reserves this most narrow of exceptions for those cases—outright theft or looting or embezzlement—where the insider's misconduct *467 benefits only himself or a third party; i.e., where the fraud is committed against a corporation rather than on its behalf.
The rationale for the adverse interest exception illustrates its narrow scope. As already discussed, the presumption that an agent will communicate all material information to the principal operates except in the narrow circumstance where the corporation is actually the victim of a scheme undertaken by the agent to benefit himself or a third party personally, which is therefore entirely opposed (i.e., "adverse") to the corporation's own interests (see Center, 66 NY2d at 784). Where the agent is perpetrating a fraud that will benefit his principal, this rationale does not make sense.
A fraud that by its nature will benefit the corporation is not "adverse" to the corporation's interests, even if it was actually motivated by the agent's desire for personal gain (Price, 62 NY at 384). Thus, "[s]hould the `agent act[ ] both for himself and for the principal,' ... application of the exception would be precluded" (Capital Wireless Corp. v Deloitte & Touche, 216 AD2d 663, 666 [3d Dept 1995], quoting In re Crazy Eddie Sec. Litig., 802 F Supp 804, 817 [ED NY 1992]; see also Center, 66 NY2d at 785 [the adverse interest exception "cannot be invoked merely because ... (the agent) is not acting primarily for his principal"]).
New York law thus articulates the adverse interest exception in a way that is consistent with fundamental principles of agency. To allow a corporation to avoid the consequences of corporate acts simply because an employee performed them with his personal profit in mind would enable the corporation to disclaim, at its convenience, virtually every act its officers undertake. "[C]orporate officers, even in the most upright enterprises, can always be said, in some meaningful sense, to act for their own interests" (Grede v McGladrey & Pullen LLP, 421 BR 879, 886 [ND Ill 2009]). A corporate insider's personal interests—as an officer, employee, or shareholder of the company—are often deliberately aligned with the corporation's interests by way of, for example, stock options or bonuses, the value of which depends upon the corporation's financial performance.
Again, because the exception 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 *468 others for the corporation's benefit. "Fraud on behalf of a corporation is not the same thing as fraud against it" (Cenco Inc. v Seidman & Seidman, 686 F2d 449, 456 [7th Cir 1982]), and when insiders defraud third parties for the corporation, the adverse interest exception is not pertinent. Thus, as we emphasized in Center, 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 (Center, 66 NY2d at 784-785 [emphasis added]). 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 (Baena, 453 F3d at 7 ["A fraud by top management to overstate earnings, and so facilitate stock sales or acquisitions, is not in the long-term interest of the company; but, like price-fixing, it profits the company in the first instance"]).
The Litigation Trustee suggests that, to the extent that the adverse interest exception requires harm, "bankruptcy is harm enough" and that, whenever the corporation is bankrupt, "it is fair to assume at the pleading stage" that the adverse interest exception applies. But the mere fact that a corporation is forced to file for bankruptcy does not determine whether its agents' conduct was, at the time it was committed, adverse to the company (see e.g. Barnes v Hirsch, 215 App Div 10, 11 [1st Dept 1925] [trustee's claim dismissed where it sought to recover for agents' fraud "practiced on these customers" of debtor rather than debtor itself], affd 242 NY 555 [1926]). Even where the insiders' fraud can be said to have caused the company's ultimate bankruptcy, it does not follow that the insiders "totally abandoned" the company. As we have held when considering whether an agent's acts were a fraud on the principal prompted by "selfish" motives, it "is immaterial that it has turned out that it would have been better" for the agent to have acted differently (Price, 62 NY at 385; see also Restatement [Third] of Agency § 5.04, Comment c ["the fact that an action taken by an agent has unfavorable results for the principal does not establish that the agent acted adversely"]).
Critically, the presumption of imputation reflects the recognition that principals, rather than third parties, are best suited to police their chosen agents and to make sure they do not take actions that ultimately do more harm than good (see Cenco, 686 F2d at 455 ["if the owners of the corrupt enterprise are allowed *469 to shift the costs of its wrongdoing entirely to the auditor, their incentives to hire honest managers and monitor their behavior will be reduced"]; see also Restatement [Third] of Agency § 5.03, Comment b ["Imputation creates incentives for a principal to choose agents carefully and to use care in delegating functions to them"]).
Consistent with these principles, any harm from the discovery of the fraud—rather than from the fraud itself—does not bear on whether the adverse interest exception applies. The disclosure of corporate fraud nearly always injures the corporation. If that harm could be taken into account, a corporation would be able to invoke the adverse interest exception and disclaim virtually every corporate fraud—even a fraud undertaken for the corporation's benefit—as soon as it was discovered and no longer helping the company.
Finally, to focus on harm from the exposure of the fraud would be a step away from the requirement of adversity. Generally, a fraud will suit the interests of both a company and its insiders for as long as it remains a secret (sometimes a considerable number of years, as was the case with Refco), and leads to negative consequences for both when disclosed.
III.
The Litigation Trustee and the derivative plaintiffs encourage us to broaden the adverse interest exception or revise New York precedents relating to in pari delicto or imputation for reasons of public policy—specifically, as they put it, to recompense the innocent and make outside professionals (especially accountants) responsible for their negligence and misconduct in cases of corporate fraud. Although they do not stress the point, their proposals to revise imputation rules are limited to in pari delicto cases. No one disputes that traditional imputation principles, including a narrowly confined adverse interest exception, should remain unchanged—indeed, are essential—in other contexts. For example, in a suit against Refco or AIG by an innocent victim of the frauds, no one would suggest that the wrongful acts of the corporate insiders could not be attributed to their principals. Instead, the Litigation Trustee and the derivative plaintiffs advance various ways for us to reformulate New York law where in pari delicto is in issue. All their proposals push the adverse interest exception up to, if not beyond, the point of extinction. We next explore these proposals and consider whether our precedent remains anchored in sound public policy and workable.
*470 Subjective Intent and Illusory Benefits
First, the Litigation Trustee advocates that we "adopt the rule of CBI, under which the insiders' intent is the touchstone and a short term, illusory benefit to the company does not defeat the adverse interest exception." The derivative plaintiffs similarly argue that analysis of the adverse interest exception should focus on the agent's overall intent.
As an initial matter, it is not entirely clear that CBI stands for any such far-reaching "rule." CBI held that plaintiff Bankruptcy Services, Inc. (BSI), CBI's successor under its bankruptcy plan, possessed standing by virtue of the adverse interest exception to assert claims against its outside accountants arising from their performance of pre-bankruptcy audits of CBI. This was so because "[t]he bankruptcy court's finding that CBI's management `was acting for its own interest and not that of CBI' [was] not clearly erroneous and constitute[d] the `total abandonment' of [the] corporation's interests necessary to satisfy the adverse interest exception" (CBI, 529 F3d 432, 438 [2008]). In particular, the bankruptcy court found as a matter of fact that "the fraud was perpetrated for the purpose of obtaining a bigger bonus for [CBI's president and CEO and principal shareholder], and to preserve [his] personal control over the company" (id. at 449). Further, the bankruptcy court found as a matter of fact that CBI would have sold for almost $28 million as late as October 1993, about 10 months before it declared bankruptcy (id. at 453). The ongoing plundering practiced by its president, and not flagged by the accountants as early as the bankruptcy court determined it should have been, deprived the company of this opportunity to sell equity for value.
Giving a broad reading to the Second Circuit's opinion in CBI, the Litigation Trustee asks us to make availability of the adverse interest exception depend upon whether "corrupt insiders intend to benefit themselves at the company's expense" to be "alleged and proved by showing that the corrupt insiders intended to benefit themselves personally and actually received personal benefits and/or that the company received only short term benefits but suffered long term harm" (emphasis added). To recast the adverse interest exception in this fashion, as the District Court pointed out, would "explode" the exception, turning it into a "nearly impermeable rule barring imputation" in every case (Kirschner v Grant Thornton LLP, 2009 WL 1286326, *7 n 14, 2009 US Dist LEXIS 32581, *27-28 n 14 [2009]). This is so because fraudsters are presumably not, as a general rule, *471 motivated by charitable impulses, and a company victimized by fraud is always likely to suffer long-term harm once the fraud becomes known. The Trustee's proposed rule would limit imputation to fraudsters so inept they gain no personal benefit and unexposed frauds, which is another way of saying the adverse interest exception would become a dead letter because it would encompass every corporate fraud prompting litigation.
The NCP and AHERF Rules
Alternatively, the Litigation Trustee urges us to take the approach to in pari delicto and imputation adopted by the New Jersey Supreme Court in 2006 (NCP Litig. Trust v KPMG LLP, 187 NJ 353,