On Tuesday, September 14, 2010, the New York Court of Appeals heard argument in two important cases, Kirschner v. KPMG LLP and Teachers' Retirement System of Louisiana v. PricewaterhouseCoopers LLP, to address questions regarding whether the doctrine of in pari delicto and the related­ Wagoner rule bar claims by a wrongdoer against its outside audit firm for negligence in failing to catch the wrongdoer's own malfeasance.

In Kirschner, the district court dismissed claims asserted by the Refco Litigation Trustee under the Wagoner rule, pursuant to which a corporation lacks standing to bring claims against third parties when the wrongdoing of management is imputed to the corporation. The U.S. Court of Appeals for the Second Circuit certified eight questions to the New York Court of Appeals to determine the scope of the Wagoner rule, including the contours of the adverse interest exception to the rule of imputation—i.e., when conduct is not imputed where the agent has totally abandoned the corporation's interest. For more information on prior proceedings in the Refco case, please see our previous newsletter.

In Teachers' Retirement System of Louisiana, plaintiffs asserted derivative claims against PricewaterhouseCoopers LLP, alleging that it was negligent in its audit and failed to detect a massive fraud perpetrated by officers of American International Global (AIG). The Delaware Court of Chancery dismissed the claims because any wrongdoing by AIG's officers was imputed to the corporation, and thus any derivative claims against the auditors were barred by the doctrine of in pari delicto. The Delaware Supreme Court certified the question to the New York Court of Appeals, asking whether the doctrine bars a claim against an outside auditor that did not knowingly participate in the corporation's fraud. For more information on prior proceedings in the AIG case, please see our previous newsletter.

Argument before the New York Court of Appeals focused principally on the policy questions of whether an auditor ought to be held accountable to "innocent" stakeholders, or whether a wrongdoer ought to be able to recover against its outside audit firm for failure to catch its own wrongdoing. Copies of the appellate briefs filed in the New York Court of Appeals are available here under 'Kirschner Briefs' and 'Teachers' Briefs.'

The New York Court of Appeals is expected to render its decision in the fall of 2010.