Allard v. Arthur Andersen & Co.(USA)
924 F. Supp. 488, 1996 WL 153937, 1996 U.S. Dist. LEXIS 4131 (1996)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
An agent's fraudulent conduct will not be imputed to the corporate principal, thereby barring a claim against a third party, if the agent has totally abandoned the principal's interests and acted entirely for his own or another's purposes. However, if the agent acts even partially for the principal's benefit, the adverse interest exception does not apply and the conduct is imputed.
Facts:
- DeLorean Motor Company (DMC), headed by John DeLorean, was an automobile manufacturer.
- To fund research and development, DMC acted as the general partner in creating the DeLorean Research Limited Partnership (DRLP).
- DRLP raised approximately $18 million from individual limited partner investors.
- The funds were transferred to a Panamanian entity, GPD Services Inc., purportedly for research and development work.
- John DeLorean allegedly misappropriated a large portion of the GPD funds for his personal use and to bribe officials at Lotus, a company he intended to purchase for his own account.
- Arthur Andersen & Co. (AA) was engaged as DMC's independent auditor.
- AA issued audit reports for DMC's fiscal years up to November 30, 1980.
- DMC's bankruptcy trustee alleged that AA's audits were faulty and negligently or fraudulently failed to disclose DeLorean's misappropriation scheme.
Procedural Posture:
- David W. Allard, Jr., the bankruptcy trustee for DeLorean Motor Company (DMC), filed suit against Arthur Andersen & Co. (AA) in the U.S. District Court for the Southern District of New York in October 1984.
- The Trustee filed a Second Amended Complaint in September 1988, which asserted 12 claims including malpractice, negligence, securities fraud, and RICO violations.
- Defendant Arthur Andersen & Co. moved for summary judgment on all 12 claims asserted by the Trustee.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a corporate officer's fraudulent conduct get imputed to the corporation, thereby barring the corporation's claims against its auditor for failing to detect the fraud, when the officer allegedly acted entirely for his own benefit?
Opinions:
Majority - Mukasey, District Judge.
No, a corporate officer's fraud is not necessarily imputed to the corporation. While the knowledge and conduct of corporate officials are generally imputed to the corporation, the 'adverse interest' exception prevents imputation when an agent has 'totally abandoned his principal’s interests and [acts] entirely for his own or another’s purposes.' The court found that this exception does not apply if the agent acts both for himself and for the principal, even if his primary interest is self-serving. In this case, the Trustee alleged that DeLorean misappropriated the funds entirely for his own benefit—half for personal enrichment and half to facilitate a future purchase of another company for his own account. Because the Trustee may be able to prove at trial that DeLorean completely abandoned DMC's interests and that no portion of the funds benefited DMC, a genuine issue of material fact exists, precluding summary judgment on the basis of imputation for the state law claims of fraud, negligence, and malpractice.
Analysis:
This decision is significant for its clear application of the 'adverse interest' exception to the rule of imputation, which is a common defense raised by third-party professionals like auditors when sued by a corporation for failing to detect insider fraud. The ruling establishes that a corporation (or its successor, like a bankruptcy trustee) is not automatically barred from suing its auditors, provided it can demonstrate that the fraudulent insiders were acting completely contrary to the corporation's interests. The case also validates 'deepening insolvency' as a cognizable theory of damages, recognizing that prolonging the life of an insolvent company through fraud can cause harm by increasing its debt and wasting its remaining assets. This precedent strengthens the ability of bankruptcy trustees to recover assets for creditors from professional firms that failed in their gatekeeping roles.
