Kirschner v. Llp

Decision Date21 October 2010
Citation15 N.Y.3d 446,938 N.E.2d 941,912 N.Y.S.2d 508
PartiesMarc 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.
CourtNew York Court of Appeals Court of Appeals

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.

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 U.S. 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, PC, 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.

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, 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 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 National Association of Bankruptcy Trustees, amicus curiae in the first above-entitled action.

Grant & Eisenhofer PA, 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.

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.

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.



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 farback 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

[938 N.E.2d 946, 912 N.Y.S.2d 513]

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 theIPO; 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 F.2d 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

[938 N.E.2d 947, 912 N.Y.S.2d 514]

"[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 U.S. Dist LEXIS 32581, *19-20 [2009] ).

Citing Second Circuit cases handed down after our decision in Center v. Hampton Affiliates, 66 N.Y.2d 782, 497 N.Y.S.2d 898, 488 N.E.2d 828 (1985), the District Court noted that, in order for the adverse interest exception toapply, "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 U.S. 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 U.S. Dist LEXIS 32581, *21, quoting In re Wedtech...

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