explaining that the imputation doctrine exists to protect innocent third parties from being sued by corporations whose agents have engaged in malfeasant behavior against those third parties, but, ”[w]hen the agent is in collusion with a third person to defraud the principal, the latter will not be responsible for the knowledge of the agent in relation to such fraud” (quoting Hickman v. Green, 123 Mo. 165, 27 S.W. 440, 443 (1894))
How later courts described this case
- explaining that the imputation doctrine exists to protect innocent third parties from being sued by corporations whose agents have engaged in malfeasant behavior against those third parties, but, ”[w]hen the agent is in collusion with a third person to defraud the principal, the latter will not be responsible for the knowledge of the agent in relation to such fraud” (quoting Hickman v. Green, 123 Mo. 165, 27 S.W. 440, 443 (1894))
- explaining that the imputation doctrine exists to protect third parties from being sued by corporations whose agents have engaged in malfeasant behavior against those third parties, but, "[w]hen the agent is in collusion with a third person to defraud the principal, the latter will not be responsible for the knowl edge of the agent in relation to such fraud” (quoting Hickman v. Green, 123 Mo. 165, 27 S.W. 440, 443 (1894))
- holding that imputation of a corporate officer’s fraud to the corporation does not bar a claim against a negligent third-party, and determining that a bankruptcy representative who acts for innocent shareholders is entitled to pursue a claim against a negligent auditor, with the auditor then afforded the opportunity to raise a defense of comparative fault
- explaining that “the rationale for imputa tion in a simple principal-agent relationship begins to break down in the context of a corporate audit where the allocation of risk and liability among principals, agents, and third parties becomes more complicated.”
Written by the judges who cited it.
The opinion
Justice LaVECCHIA,
dissenting.
Although I agree with most of Justice Rivera-Soto’s dissenting opinion, I write separately in dissent because I differ from my colleague in that I believe that it may be appropriate to deny an imputation defense to a litigant based on a theory of negligence in certain circumstances. In other words, I would not foreclose consideration of extending a carve-out from the imputation defense based on certain instances of recklessness or gross alleged professional negligence. That said, I agree that this matter properly was dismissed at the pleading stage.
The majority is altering our ease law to include negligence as among the torts that will justify a carve-out from the application of the strict rule of the imputation defense. That approach may be appropriate for some negligent behavior, depending on the extent *386 of the dereliction. In re Integrity Ins. Co., 240 N.J.Super. 480 , 573 A.2d 928 (App.Div.1990), already has indicated our courts’ willingness to move from a pure, or “absolutist” rule in respect of the imputation defense that “if it is your fraud, you cannot recover.” 1 We allow a carve-out from that position for suits against third parties who were active participants in the fraud. Recklessness or gross negligence may be sufficiently close to knowledgeable or intentional participation in the wrongdoing and, therefore, I would be willing to consider the possibility that that conduct may be appropriate for expansion of the carve-out. However, to the extent that the majority suggests that simple negligence will do, it goes too far in the signal that the Court sends and, therefore, I cannot join in the Court’s holding.
In respect of the procedural posture in which the question is presented, I must add that it would have been my preference not to decide whether to extend the current carve-out from the imputation defense until a properly pled complaint and developed record brought a cause of action based on recklessness or gross negligence before the Court. However, because the majority has elected to recognize a new rule of law that would deny imputation of wrongdoing in favor of any accountant who may have negligently audited the books of the wrongdoer, I cannot wait to make my decision. I can only state my present view that I do not endorse the wholesale adoption of simple negligence as the basis for permitting a carve-out from application of the imputation defense.
Moreover, given the different standard of negligence that I would require in order to consider expansion of the carve-out, I also cannot agree with the determination to remand this matter for discovery. Normally, we are loath to dismiss at the pleading stage because we do not want to deny a litigant an opportunity to flesh out a complaint through discovery. See R. 4:5-7 (stating *387 that pleadings are to be liberally construed). Here, however, I do not have that concern because discovery on these same allegations has taken place before.
As noted by the majority, a similar action was filed in federal court against KPMG by a group of shareholders. 2 Their complaint alleged that KPMG acted “with scienter” and “knowledge of the falsity and misleading nature of the statements contained in its unqualified audit reports, and in reckless disregard of the true nature of its audits.” Further, that complaint’s assertions were based, as is the instant complaint, purely on circumstantial evidence that was found to be insufficient to state a cause of action for intentional, knowing, or reckless behavior by the defendant auditors. In granting KPMG’s motion to dismiss, Judge Debevoise noted that “[i]t is sufficient ... for a plaintiff to plead scienter by alleging facts ‘establishing a motive and an opportunity to commit fraud, or by setting forth facts that constitute [strong] circumstantial evidence of either reckless or conscious behavior.’ If those requirements are not met, the complaint shall be dismissed.” Wis. Inv. Bd. v. KPMG, No. 01-751 (D.N.J. Jun. 18, 2001) (citations omitted). Applying that standard, the court found that plaintiffs had made “only vague references to ‘accounting irregularities’ ” with respect to the 1995 audit. Moreover, there was “no allegation that KPMG acted with intent to defraud, either in the form of motive and opportunity or reckless disregard or conscious behavior.”
Specifically, in respect of the G. Barry transaction, the court found that “there was no allegation that KPMG knew that the transaction was fictitious.” There was “no allegation of facts constituting strong circumstantial evidence of conscious misbehavior or recklessness by KMPG. [Plaintiffs’] allegations that KPMG violated GAAP and GAAS without more, are insufficient to state a *388 ... claim.” The court concluded that much greater specificity in the complaint was required under the federal rules of civil procedure given that plaintiffs had full discovery available to them from a prior action involving PCN. Indeed, plaintiffs “admit[ted] to having access to documents produced in the prior PCN litigation and information provided by Mortell and Wraback—PCN’s officers serving as the contacts to KPMG for the audits.” Thus, these same allegations of knowing, conscious, or reckless participation in the wrongdoing have been weighed, measured, and found lacking in two prior litigations.
In the wake of those circumstances, the instant complaint had to have pled something more than worn allegations from prior proceedings to overcome a defendant’s motion to dismiss based on an imputation defense. To me, the failure in pleading is dispositive in these unique circumstances involving multiple prior litigations on the same alleged facts. In the context of a novel theory that a shareholder’s negligence action against a third-party auditor should be carved out from the application of the imputation defense, more was required for this action to avoid dismissal. In the end, Judge Debevoise’s analysis and conclusion is instructive. Just as the federal action was dismissed because neither recklessness nor other evidence of conscious participation in the wrongdoing was shown, those same standards remain unsatisfied by the pleadings in this matter. In other words, absent any credible claim of recklessness, gross negligence or other similar culpable conduct by the auditor that contributed to the wrongdoing, defendants were entitled to a dismissal. Thus, there was no basis presented on which I would consider expanding the carve-out from the imputation defense. The defendant, therefore, was entitled to the defense and the defense is all-or-nothing.
Accordingly, I respectfully dissent.
See Cenco, Inc. v. Seidman & Seidman, 686 F.2d 449, 454 (7th Cir.1982) (recognizing that there is "[an] extreme position" that "employee’s fraud is always attributed to the corporation____").
Although those claims involved violations of federal securities law, the claims in the Trust’s complaint in this matter recited the identically pled facts as are found in the federal complaint.