Shareholders Can Assert Derivative Fraud Claims Against Corporate Officers And Directors Notwithstanding In Pari Delicto Context

• Published date: 28 February 2022
• Law Firm: Meyer Suozzi English & Klein
• Author: Mr Kevin Schlosser

I have written about and explained the so-called in pari delicto defense in fraud actions. See In Pari Delicto Prevents Equal Wrongdoer from Seeking Damages Relating to Its Own Fraudulent Conduct. Basically, in the corporate context, if corporate officers and/or directors are involved in a fraud on behalf of the corporation, the shareholders are barred from asserting derivative claims on behalf of that very same corporation because the wrongdoing of the agents is imputed to the corporation and the corporation is not permitted to benefit from its own wrongdoing.

In Pari Delicto

As explained by a leading Court of Appeals decision: "[W]here conduct falls within the scope of the agents' authority, everything they know or do is imputed to their principals. . all corporate acts-including fraudulent ones-are subject to the presumption of imputation [and], as with in pari delicto, there are strong considerations of public policy underlying this precedent: imputation fosters an incentive for a principal to select honest agents and delegate duties with care." Kirschner v KPMG LLP, 15 N.Y.3d 446 (2010).

There is a well-recognized exception to this defense of in pari delicto-the adverse interest exception-where the fraudulent corporate agents act solely in their own interests and not in the interests of the corporation, then the corporation is permitted to sue them, or in the case of a shareholder, assert a derivative claim against them on behalf of the corporation for harm the fraud caused the corporation.

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