The New York Court of Appeals has reaffirmed that the doctrine of in pari delicto bars lawsuits against a corporation's outside advisors in connection with a corporation's fraudulent activities. New York's highest court, answering certified questions from the United States Court of Appeals for the Second Circuit and the Supreme Court of Delaware, declined to adopt the approach taken by the highest courts in New Jersey and Pennsylvania, which have permitted recovery against outside advisors in light of recent financial fraud scandals.
The doctrine of in pari delicto is often asserted as an affirmative defense by outside advisors against claims that they acted negligently or colluded with management in fraudulent activities. Pursuant to this doctrine, a court will not intervene in disputes between two wrongdoers (e.g. in an action between a corporation, whose officers are accused of fraud, and that corporation's outside auditors, who allegedly assisted in the fraud). The court acknowledged the general presumption of agency law that the acts of agents, while acting in the scope of their authority, are imputed to their principals. Thus, bad acts by corporate agents are imputed to the corporation itself. Although New York recognizes a limited exception to this general presumption in the event that an agent acts adversely to its principal, the court explained that the exception is very narrow and will only be applied in the event that an agent has acted with "total abandonment" of the corporation's interests and has engaged in misconduct benefitting only the agent and not the corporation. In highlighting New York's limited exception to the imputation presumption, it refused to adopt the carve-outs used in New Jersey and Pennsylvania, which permit claims against negligent or colluding outside advisors based on equitable principals.
As a result, New York law will continue, other than in narrow circumstances, to bar claims against outside advisors, such as auditors and lawyers, for failing to detect, or for assisting management with, fraudulent activities.
2010 N.Y. Slip Op. 7415 (N.Y. Oct. 21, 2010)