In late October, the New York Court of Appeals issued an important decision that clarified New York's law of agency and the in pari delicto doctrine. [See Kirschner v. KPMG LLP, Nos. 151, 152, 2010 N.Y. LEXIS 2959 (Oct. 21, 2010).] In these times, when companies are under growing scrutiny and when accusations of corporate malfeasance are abundant, the decision should be of particular interest to in-house counsel.
In-house counsel may be familiar with the traditional agency-law principle that provides, in the words of the Kirschner Court, that "the acts of agents, and the knowledge they acquire while acting within the scope of their authority are presumptively imputed to their principals." Counsel may have also encountered the in pari delicto doctrine, which provides that "courts will not intercede to resolve a dispute between two wrongdoers." Agency law and the in pari delicto doctrine frequently intersect in circumstances where a business has been harmed by its own agents' misconduct, and the business then sues a third party that allegedly participated, or was complicit, in that misconduct. Here's a classic scenario: A company's managers engage in fraud to conceal the company's financial troubles, the fraud is subsequently revealed, the company suffers as a result, and the company then sues the accounting firm that failed to detect and/or report the accounting fraud. If the managers' acts are imputed to the company, the in pari delicto doctrine bars the suit; the company cannot recover from the accounting firm, even if that firm's actions exacerbated the company's losses.