09-2020-cv (L)

Kirschner v. KPMG LLP

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

August Term 2009

Heard: September 18, 2009 Decided: December 23, 2009

Corrected: December 28, 2009

Docket Nos. 09-2020-cv (L), -2027-cv (CON)

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MARC S. KIRSCHNER, as Trustee of the Refco

Litigation Trust,

Plaintiff-Appellant,

 v.

KPMG LLP, GRANT THORNTON LLP, MAYER BROWN LLP,

INGRAM MICRO, INC., CIM VENTURES, INC., WILLIAM

T. PIGOTT, MAYER BROWN INTERNATIONAL LLP, 

PRICEWATERHOUSECOOPERS LLP, LIBERTY CORNER

CAPITAL STRATEGIES, LLC, BANC OF AMERICA

SECURITIES, LLC, CREDIT SUISSE SECURITIES (USA)

LLC, and DEUTSCHE BANK SECURITIES, INC.,

Defendants-Appellees.

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Before: NEWMAN, PARKER, and LIVINGSTON, Circuit Judges.

Appeal from the May 8, 2009, judgment of the United States

District Court for the Southern District of New York (Gerard E. Lynch,

District Judge), dismissing a suit brought by the trustee of a

litigation trust, resulting from a bankruptcy proceeding, in which the

trustee alleged misconduct by corporate insiders and advisers. The

District Court ruled that the trustee lacked standing because the

insiders’ misconduct was imputed to the corporation. On appeal, the
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trustee contends that the “adverse interest” exception precludes

imputation.

Questions of New York law certified to the New York Court of

Appeals.

Kathleen M. Sullivan, Quinn Emanuel Urquhart

Oliver & Hedges, LLP, New York, N.Y.

(Richard I. Werder, Jr., Sascha N. Rand,

Sanford I. Weisburst, K. McKenzie Anderson,

Quinn Emanuel Urquhart Oliver & Hedges,

LLP, New York, N.Y., on the brief), for

Plaintiff-Appellant.

 Linda T. Coberly, Winston & Strawn LLP,

Chicago, Ill., for Defendant-Appellee Grant

Thorton LLP.

Kevin A. Burke, Howrey, LLP, New York, N.Y.

(Gary F. Bendinger, Sarah D. Abeles, Howrey

LLP, New York, N.Y., on the brief), for

Defendant-Appellee KPMG LLP.

Philip D. Anker, Lori A. Martin, John V.H.

Pierce, Anne K. Small, Jeremy S. Winer,

Wilmer Cutler Pickering Hale and Dorr LLP,

New York, N.Y., on the brief, for

Defendants-Appellees Banc of America

Securities, Credit Suisse Securities and

Deutsche Bank Securities.

Anthony Candido, Clifford Chance LLP, New

York, N.Y., on the brief, for DefendantAppellee Mayer Brown International.

James J. Capra, Jr., Orrick, Herrington &

Sutcliffe LLP, New York, N.Y., Kenneth Y.

Turnbull, Orrick, Herrington & Sutcliffe

LLP, Washington, D.C., on the brief, for

Defendant-Appellee PricewaterhouseCoopers.

Robert F. Wise, Jr., Paul Spagnoletti, Davis

Polk & Wardell LLP, New York, N.Y., on the
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brief, for Defendants-Appellees Ingram

Micro, Inc. and CIM Ventures, Inc.

Kevin H. Marino, John D. Tortorella, Marino,

Tortorella & Boyle, P.C., Chatham, N.J., on

the brief, for Defendants-Appellees William

Pigott and Liberty Corner Capital

Strategies.

John K. Villa, George A. Borden, Craig D.

Singer, Williams & Connolly LLP,

Washington, D.C., on the brief, for

Defendant-Appellee Mayer Brown LLP.

JON O. NEWMAN, Circuit Judge.

This appeal concerns the standing of the trustee of a bankrupt

corporation’s litigation trust to sue third parties who allegedly

assisted corporate insiders in defrauding the corporation’s creditors.

The appeal primarily raises the issue of whether, under New York law,

the acts of the corporate insiders can be imputed to the corporation,

in which event, pursuant to the so-called Wagoner rule, the trustee

for a debtor corporation lacks standing to recover against third

parties for damage to the creditors, see Shearson Lehman Hutton, Inc.

v. Wagoner, 944 F.2d 114, 118 (2d Cir. 1991), or whether the “adverse

interest” exception precludes imputation. Plaintiff-Appellant Marc

Kirschner (“the Trustee”), in his capacity as the Trustee of the Refco

Litigation Trust, appeals from the May 8, 2009, judgment of the

District Court for the Southern District of New York (Gerard E. Lynch,

then District Judge), dismissing the Trustee’s suit for lack of
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standing under the Wagoner rule. See Kirschner v. Grant Thornton LLP,

07 Civ. 11604, 2009 WL 1286326 (S.D.N.Y. Apr. 14, 2009). The Trustee

brought the suit on behalf of Refco Group Ltd., LLC (“RGL”), its

indirect subsidiary, Refco Capital Markets, Ltd. (“RCM”), and Refco

Inc., the entity created by Refco’s initial public offering

(collectively “Refco”) against senior management of Refco, law firms,

and accounting firms that allegedly participated in defrauding Refco’s

creditors.

The Trustee principally argues that the District Court erred in

imputing the insiders’ wrongdoing to Refco because, the Trustee

contends, the Refco insiders, in perpetrating the fraud, totally

abandoned Refco’s interests, and therefore the adverse interest

exception to imputation applies. We conclude that the issues

concerning imputation and the adverse interest exception raise

questions of New York law as to which considerable uncertainty exists.

We therefore certify to the New York Court of Appeals questions the

answers to which will govern our ultimate disposition of this appeal.

Background

Making clear why we believe certification of state law questions

is needed requires a detailed account of the Trustee’s factual

allegations and a full understanding of the District Court’s opinion.

The background facts are taken from the Trustee’s complaint, the

allegations of which are assumed to be true for purposes of
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adjudicating the Defendants’ motion to dismiss. These facts are well

summarized in the District Court’s opinion:

I. The Refco Fraud

Prior to its collapse in the fall of 2005, Refco was

among the world's largest providers of brokerage and

clearing services in the international derivatives,

currency, and futures markets. (Compl. ¶ 56) Beginning in

the late 1990s, Refco's controlling officer-shareholders--

Phillip R. Bennett, Tone N. Grant, Robert C. Trosten, and

Santo C. Maggio (collectively, the “insiders”)--with the aid

of certain professionals and financial advisors,

orchestrated a complex fraudulent scheme to artificially

enhance Refco's performance and conceal Refco's true

financial condition, so that these insiders, through the

company's August 2004 leveraged buy-out (“LBO”) and its

August 2005 IPO, could cash out their interests in Refco on

lucrative terms. (Compl. ¶¶ 4-7, 32, 59-149) That scheme,

which has been thoroughly discussed in [the District]

Court’s prior opinions, involved both concealment of Refco's

uncollectible debt and the misappropriation of customer

assets.

The concealment of Refco's uncollectible debt involved

a two-part process. First, hundreds of millions of dollars

in uncollectible trading losses and other operating expenses

were transferred and converted into legitimate receivables

owed to Refco by RGHI, a related-party holding company, or

“alter-ego[,]” owned by Bennett and Grant. (Compl. ¶¶ 35,

39, 60, 65, 68) These transfers offloaded debt from Refco,

specifically RGL--the holding company through which Refco's

business was primarily conducted prior to the IPO and which

was controlled by RGHI--and artificially inflated RGL's

earnings capability. (Compl. ¶ 68) Refco's apparent

financial outlook was further improved by the fact that

Refco then charged RGHI as much as 35 percent interest on

the sham receivables, which between 2001 and 2004 amounted

to at least $250 million. (Compl. ¶ 71) Although that

accrued interest was recorded as income at Refco, it was

never, in fact, collected. (Id.) 

Next, the insiders disappeared the receivables parked

at RGHI through a series of so-called round-trip loans.
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This additional maneuver was necessary because the

disclosure of large “related-party” receivables--the sum of

which dwarfed Refco's net income--would have raised red

flags among investors and regulators. (Compl. ¶¶ 75-78)

These “loans,” which straddled the end of each fiscal year

starting in 1998 and, after the LBO, at the end of several

fiscal quarters as well, all worked in essentially the same

way. (Compl. ¶¶ 77-79) Several days before Refco closed its

books for each financial period, RCM--an unregulated,

indirect subsidiary wholly owned by RGL and thus by Bennett

and Grant (Compl. ¶¶ 32, 57)--would loan hundreds of

millions of dollars to a third-party customer who then,

through the customer's account at Refco, simultaneously

loaned the same amount to RGHI. (Compl. ¶ 78) The loan

agreements between the third party and RCM--which were done

on a book basis (the principal never changed hands)--were

meticulously structured so that they were essentially riskfree to the third-party customers: the customers' loans to

RGHI were guaranteed by Refco, and the customers profited

for their participation in the “loans” through interest

earned on their loans to RGHI, which by design exceeded the

interest they were charged by RCM. (Compl. ¶ 79-81) RGHI,

in turn, used the loans from the customers to pay down the

money it owed to Refco for its uncollectible receivables.

(Compl. ¶ 78) The net effect of these transactions was that

at the close of each reporting period, Refco's books would

show apparently legitimate loans to third-party customers,

and the RGHI receivables would be gone. (Id.) Then, just

days after the financial period closed, the transactions

were unwound--the “loans” were repaid, and the uncollectible

receivables from RGHI were returned to Refco's books.

(Compl. ¶ 79) Through these transactions, Refco lent money

to itself, through third parties, to conceal its trading

losses, its true operating expenses, and the fictitious

nature of hundreds of millions of dollars in revenue.

(Compl. ¶ 83)

In addition to concealing Refco's debt, the insiders

routinely misappropriated customer assets held at RCM in

order to obtain cash infusions to prop up other Refco

entities. (Compl. ¶¶ 57, 94-95) This cash was distributed to

Refco affiliates through a series of intercompany transfers

that contained no safeguards and for which no appropriate

documents were kept. (Compl. ¶¶ 7, 94-105) Although the

receiving entities had no ability to repay these “loans,”
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Refco's overall financial health depended on the steady

influx of these illicit RCM assets (Compl. ¶¶ 95, 98), and,

accordingly, the insiders kept careful track of these

transactions and distributed among themselves daily “cash

flow” statements that calculated the amount of customer

assets available for diversion to other Refco entities.

(Compl. ¶¶ 99-100) The size of these uncollateralized

intercompany transfers--like the size of Refco's concealed

debt--was substantial; they involved hundreds of millions of

dollars and dwarfed Refco's total capital. (Compl. ¶¶ 101,

104, 329) At the time of the LBO, Refco affiliates owed RCM

approximately two billion dollars. (Compl. ¶ 102)

II. The LBO and IPO

The illusion of a thriving company enabled Refco

insiders to position Refco for, and ultimately to carry out,

what appeared to be a legitimate “buy-out” of the insiders'

interests for far more than those interests were worth. In

2004, after a number of unsuccessful attempts at the partial

or complete sale of their interests in Refco (Compl. ¶ 106),

Thomas H. Lee Partners (“THL”), a private equity firm,

purchased a 57 percent controlling interest in Refco for

$507 million as part of a leveraged buy-out transaction

(“LBO”) (Compl. ¶¶ 112-13). For its part, Refco sold $600

million in unregistered notes to the Investment Bank

Defendants and obtained $800 million in financing. (Compl.

¶¶ 113, 338) This $1.4 billion of bank and bond debt, which

Refco could not possibly repay (Compl. ¶ 132), became senior

to the debt owed to RCM, Refco's largest creditor. (Compl.

¶ 114) The LBO was lucrative, however, for the insiders:

Bennett and others received $106 million, with at least $25

million going to Bennett personally. (Compl. ¶ 113)

Less than a year after the LBO, with Refco still

concealing its grim financial condition, Refco insiders and

THL led Refco through an initial public offering of its

stock. The offering generated $258.5 million in proceeds

for Refco Inc. and approximately $289.5 million in proceeds

for the selling shareholders. (Compl. ¶ 341) Some of the

IPO proceeds were used to retire part of RGL's LBO debt–a

move that the Trustee characterizes as “waste” because RGL

was already insolvent (Compl. ¶ 136)--but, consistent with

maintaining Refco's good reputation and the ongoing

concealment of the Refco fraud, no proceeds were used to
The suit was originally filed in the Circuit Court of Cook 1

County, Illinois, then removed to the United States District Court for

the Northern District of Illinois, and then transferred to the

District Court for the Southern District of New York by the Panel on

Multidistrict Litigation.

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repay the amounts owed to RCM or to pay down the RGHI

receivables. (Compl. ¶¶ 45-47, 134-36) Instead, the

insiders used the proceeds to pay themselves, other equity

holders, and the Investment Bank Defendants. (Compl. ¶¶ 135,

342) Bennett himself sold approximately seven million shares

through his holding vehicles for a total price of $146

million, and THL and its affiliates sold approximately ten

million shares of Refco common stock, with a total sale

price of approximately $223 million. (Compl. ¶134) Weeks

after the IPO, in the wake of the public disclosure of the

RGHI receivables, Refco and its subsidiaries and affiliates

declared bankruptcy. (Compl. ¶ 32) 

III. The Refco Litigation Trust

On December 15, 2006, approximately fourteen months

after Refco filed for bankruptcy, the United States

Bankruptcy Court for the Southern District of New York

confirmed the Modified Joint Chapter 11 Plan of Refco Inc.

and Certain of its Direct and Indirect Subsidiaries (the

“Plan”). (Compl. ¶ 31) The Plan provided for the

establishment of a Litigation Trust and the appointment of

a Litigation Trustee to pursue any claims and causes of

action transferred from the bankruptcy estates of RGL, RCM

and Refco Inc. (Compl. ¶¶ 31-32)

Kirschner, 2009 WL 1286326, at *1-*4 (footnotes omitted) (punctuation

slightly altered).

The lawsuit. The Trustee, in the shoes of RGL, RCM, and Refco

Inc., then brought the pending lawsuit against certain Refco insiders,

professionals, and advisors for fraud, breach of fiduciary duty, and

malpractice. Among the defendants, the investment bank, various 1
The motions were filed by Credit Suisse Securities (USA) LLC 2

(f/k/a Credit Suisse First Boston LLC), Banc of America Securities

LLC, Deutsche Bank Securities Inc., Grant Thornton LLP, Mayer Brown

LLP, Mayer Brown International LLP, Ernst & Ernst LLP,

PricewaterhouseCoopers LLP, Liberty Corner Capital Strategies LLC,

Ingram Micro, Inc., CIM Ventures, Inc., and William T. Pigott.

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professional firms, and several third-party participants in the

“round-trip loans” filed motions to dismiss pursuant to Federal Rules

of Civil Procedure 12(b)(1) and 12(b)(6). The District Court 2

concluded that standing was lacking and granted the motions.

The District Court’s opinion. Judge Lynch began by stating that

“[u]nder New York law, a bankruptcy trustee lacks standing to seek

recovery on behalf of a debtor company against third-parties for

injuries incurred by the misconduct of the debtor’s controlling

managers.” Id. at *5 (footnote omitted). He also stated that this

principle applies to the standing of the Trustee of the Refco

Litigation Trust. See id. n. 12 (citing In re Mediators, Inc., 105

F.3d 822, 826 (2d Cir. 1997) (applying Wagoner to suit brought by a

creditors’ committee)). The lack of standing, he explained, results

from the imputation of the insiders’ conduct to the corporation under

agency principles. See id.

 Judge Lynch then stated several propositions for determining

whether the “adverse-interest” exception to the Wagoner rule applied.

First, he explained, the corporate officer must have “totally

abandoned” the corporation’s interests and “be acting entirely for his
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own or another’s purpose.” Id. (internal quotation marks deleted); see

Mediators, 105 F.3d at 827. He quoted from our recent decision in In

re CBI Holding Co. v. Ernst & Young, 529 F.3d 432, 448 (2d Cir. 2008),

which explained that “when an agent is engaged in a scheme to defraud

his principal, either for his own benefit or that of a third person,

. . . he cannot be presumed to have disclosed that which would expose

and defeat his fraudulent purpose.” Kirschner, 2009 WL 1286326, at *6;

see People v. Kirkup, 4 N.Y.2d 209, 213-214, 173 N.Y.S.2d 574 (1958);

Benedict v. Arnoux, 154 N.Y. 715, 729 (1898). Judge Lynch also

recognized, as we said in CBI, that “New York courts have cautioned

that [the adverse interest] exception is a narrow one and that the

guilty manager ‘must have totally abandoned’ his corporation’s

interests for [the exception] to apply.” Kirschner, 2009 WL 1286326,

at *6 (quoting CBI, 529 F.3d at 448); see Center v. Hampton

Affiliates, Inc., 66 N.Y.2d 782, 784-85, 497 N.Y.S.2d 898 (1985).

Next Judge Lynch noted that whether the agent’s actions were adverse

to the corporation turns on the “‘short term benefit or detriment to

the corporation, not any detriment to the corporation resulting from

the unmasking of the fraud.’” Kirschner, 2009 WL 1286326, at *6

(quoting In re Wedtech Corp., 81 B.R. 240, 242 (S.D.N.Y. 1987)).

All of these propositions appear to correctly reflect New York

law concerning the adverse interest exception, and we do not

understand the parties to dispute them. As Judge Lynch applied these
New York cases seem to support this statement. See Farr v. 3

Newman, 14 N.Y.2d 183, 190, 250 N.Y.S.2d 272 (1964) (“A conflict of

interest does not avoid the imputation of knowledge. . . . ‘The mere

fact that the agent's primary interests are not coincident with those

of the principal does not prevent the latter from being affected by

the knowledge of the agent if the agent is acting for principal's

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propositions to the Trustee’s allegations, however, he interpreted New

York law in ways that bring the parties into sharp dispute concerning

certain aspects of the adverse interest exception. The dispute

concerns both the state of mind of the insiders and the harm to their

corporation.

State of mind. Judge Lynch noted the Trustee’s argument “that the

adverse-interest exception . . . applies because the insiders intended

to benefit only themselves.” Id. at *7. In CBI we had said “that the

‘total abandonment’ standard,” which must be met for the adverse

interest exception to apply, “looks principally to the intent of the

managers engaged in misconduct.” CBI, 529 F.3d at 451. Judge Lynch

acknowledged this statement from CBI, see Kirschner, 2009 WL 1286326,

at *7, but discounted its significance by noting that CBI was

concerned with the district court’s rejection of the bankruptcy

court’s finding that the real reason for the insider’s fraud in CBI

was to maximize his bonus. See id. CBI ruled that the bankruptcy

court’s finding as to the insider’s intent was not clearly erroneous.

See CBI, 529 F.3d at 449. Judge Lynch further stated that “the

participants’ intent” is not the “‘touchstone’” of the analysis,3
interests.’”) (quoting Restatement (Second) of Agency § 382 (1994));

Center, 66 N.Y.2d at 785, 497 N.Y.S.2d 898 (“[The adverse interest

exception] cannot be invoked merely because he has a conflict of

interest or because he is not acting primarily for his principal.”);

Henry v. Allen, 151 N.Y. 1, 9 (1896); 546-552 West 146th Street LLC v.

Arfa, 54 A.D.3d 543, 863 N.Y.S.2d 412 (N.Y. App. Div. 2008) (holding

that the exception is not triggered by allegations that the insiders

received personal commissions that resulted in their employers’ paying

more to buy properties). However, other New York cases may be read to

make intent more significant. See Marine Midland Bank v. John E. Russo

Produce Co., 50 N.Y.2d 31, 427 N.Y.S.2d 961 (1980); Capital Wireless

Corp. v. Deloitte & Touche, 216 A.D.2d 663, 627 N.Y.S.2d 794 (N.Y.

App. Div. 1995).

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Kirschner, 2009 WL 1286326, at *7, and that CBI does not “hold that

the mere allegations of an insider’s intent to personally profit is

sufficient to defeat application of the Wagoner rule at the pleading

stage.” Id. As he explained, “[The Wagoner rule] addresses the

question of who has a claim for relief, which, in the context of

fraud, means who has been harmed and who has benefitted by the

fraudulent conduct alleged. This question concerns the nature and

consequences of the alleged fraud, not the extent to which the

perpetrators acted from self-interested motives.” Id. (footnote

omitted). 

Harm. Judge Lynch further stated that “the Trustee must allege,

not that the insiders intended to, or to some extent did, benefit from

their scheme, but that the corporation was harmed by the scheme,

rather than being one of its beneficiaries.” Id. (emphasis in

original). On the other hand, CBI had stated that “[e]vidence that
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CBI actually benefitted from CBI’s management’s fraud does not make

the bankruptcy court’s finding that CBI’s management did not intend to

benefit the company clearly erroneous.” CBI, 529 F.3d at 451 (emphasis

added). CBI placed some reliance on Capital Wireless Corp. v.

DeLoitte & Touche, 216 A.D. 2d 663, 627 N.Y.S.2d 794 (N.Y. App. Div.

1995), which had ruled that a triable issue existed because although

the “fraud generated much needed financing for plaintiff and

forestalled its bankruptcy,” the wrongdoer might still have totally

abandoned the company’s interest. See id. (citing Capital Wireless,

216 A.D.2d at 666, 627 N.Y.S.2d at 797).

In the pending case, Judge Lynch ruled that “[t]he complaint is

saturated by allegations that Refco received substantial benefits from

the insiders’ alleged wrongdoing.” Kirschner, 2009 WL 1286326, at *6.

He recounted the following:

The Trustee alleges both that had Refco’s trading losses

been disclosed, it would have “severely damaged Refco’s

business” and that the improper round-trip loans and

misappropriation of customer assets at RCM were designed to,

and did, in fact, buttress Refco’s organization. (Compl. ¶¶

32, 64, 492) The illicit cash flow from RCM, in particular,

was used for a “wide variety of general and specific funding

purposes by various Refco affiliates who would not have been

able to sustain their reported financial health and

operations without using funds stolen from RCM.” (Compl. ¶

98) These benefits are plainly evident in the Trustee’s

allegations that the insider’s conduct enabled the false

reporting of the company’s steady growth, which in turn,

attracted and retained capital from investors in the LBO

and the IPO. (Compl. ¶¶ 94-105) Indeed the gravamen of the

Trustee’s allegations is not that the insiders stole assets

from Refco, but rather that the insiders’ fraudulent scheme
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was to steal for Refco--to inflate the value of Refco’s

interests on behalf of Refco itself by maintaining the

illusion that Refco was “fast-growing, highly profitable,

and able to satisfy its substantial working capital needs

without having to borrow money.” (Compl. ¶ 94)

Id. (emphasis in original) (punctuation slightly altered). Judge

Lynch placed some reliance on Bullmore v. Ernst & Young Cayman

Islands, 20 Misc. 3d 667, 861 N.Y.S.2d 578 (N.Y. Sup. Ct. 2008), which

found no standing for liquidators where the insiders “inflated the

value of the Fund’s portfolio on behalf of the Fund itself.” Id.

(citing Bullmore, 20 Misc. 3d at 672, 861 N.Y.S.2d at 583).

Judge Lynch also reckoned with the Trustee’s arguments that the

insiders’ misconduct in fact harmed Refco. First, he considered the

argument

that RCM, RGL, and Refco Inc. were injured by an “imprudent”

LBO and IPO (Compl. ¶¶ 352, 463), in that RCM was injured

when the receivables owed to it by other Refco entities were

subordinated by the receivables owed to the Investment Bank

Defendants following the LBO (Compl. ¶ 336), RGL was damaged

when it incurred $1.4 billion in new LBO debt and was no

longer able to repay the funds diverted from RCM to RGL and

its affiliates (Compl. ¶¶ 452, 460, 476), and Refco, Inc.

was injured when it was “saddled with hundreds of millions

of dollars in liability to the purchasers of Refco stock,”

and used $231 million in proceeds from the IPO to retire

part of RGL’s LBO debt (Compl. ¶¶ 136-37).

Id. at *8. He rejected these allegations of “harm,” pointing out that

“[i]t is a basic principle of corporate finance that extending credit

to a distressed entity in itself does the entity no harm.” Id. 

Second, he reckoned with “[t]he Trustee’s attempt to parse the
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Refco fraud in pursuit of establishing a corporate injury to some

particular corporate unit within Refco.” Id. at *9. He rejected this

argument essentially because any harm to a Refco entity benefitted the

entire Refco fraud:

Both Refco’s round-robin fraud and its distribution of

LBO and IPO debt were dedicated to “maintain[ing] the

illusion of [the] financial and operational strength and

stability” of Refco. (Compl. ¶ 4) Both RCM and RGL

participated--for good and for ill--in the Refco fraud.

Although the assets at RCM were siphoned to other Refco

entities, the Trustee acknowledges that absent Refco’s--and

preeminently RGL’s--artificially-induced solvency, customers

would not have “continued [to make] deposits of cash and

securities . . . needed to facilitate and fund” the

corporation. (Compl. ¶¶ 60, 63) In turn, the fact that RGL

was “finance[d]” and “prop[ped] up” by assets

misappropriated from RCM (Compl. ¶¶ 7, 448), benefitted RGL.

The concealment of Refco’s losses “maintained the illusion

that Refco was a highly successful, financially secure

broker-dealer.” (Compl. ¶ 2) The fact that RGL could not

repay its “loans” to RCM upon incurring $1.4 billion in new

LBO debt (Compl. ¶¶ 452, 460, 476), . . . is a harm not to

RGL, but to RGL’s creditors, to whom the assets were owed.

Id. (punctuation slightly altered).

The parties’ contentions. The Trustee contends that the District

Court erred in several respects: (1) the adverse interest exception to

the Wagoner rule was available, at least at the pleading stage,

because the complaint adequately alleged the intent of the insiders to

benefit themselves, Br. for Appellant at 25-32; (2) whatever benefits

the insiders conferred on Refco should not have precluded the adverse

interest exception because these benefits were “of the ‘illusory’

short-term variety,” id. at 33 (quoting CBI, 529 F.3d at 453); (3) the
The “sole actor” exception to the adverse interest exception 4

applies “where the principal and agent are one and the same,” e.g.,

where the wrongdoer is the sole shareholder of the corporation. See

Mediators, 105 F.3d at 827. It is not clear that the District Court

applied the sole actor exception to the adverse interest exception (as

distinguished from simply ruling that the requirements for the adverse

exception were not met). The Trustee points to Judge Lynch’s

observation in a footnote that “the relevant shareholders prior to the

LBO were, themselves, the insiders conducting the fraud.” Br. for

Appellant at 37 (quoting Kirschner, 2009 WL 1286326, at *9 n.16).

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“sole actor” exception to the adverse interest exception was

inapplicable, id. at 36-38; (4) the adverse interest exception does 4

not require an allegation of harm to the corporation, id. at 40-42;

(5) if harm needs to be alleged, it may not be shown by treating a

corporation and its affiliated corporations as a single enterprise,

id. at 42-45; (6) if harm needs to be alleged, it was adequately

alleged with respect to each of the separate corporate entities--RCM,

RGL, and Refco Inc., id. at 45-54.

The Appellees respond that: (1) the adverse interest exception

does not depend on the insiders’ intent, Br. for Appellees at 3, 19,

24-31; (2) the adverse interest exception requires harm to the

corporation, id. at 20, 34-36; (3) the insiders’ acts conferred

benefits on the corporation, id. at 30-34; (4) in assessing the harm

caused by the insiders’ conduct, Refco and its subsidiaries should all

be considered part of a single enterprise, id. at 37; (5) even if the

subsidiaries are considered separately, the insiders’ conduct caused

them no harm, id. at 38-44; and (6) even if the adverse interest
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exception were otherwise applicable, it would be precluded by the

“sole actor” exception to the adverse interest exception, id. at 44-

52.

Agreeing that New York law determines the availability of the

adverse interest exception to the Wagoner rule, both sides have

enlisted the same New York decisions for their respective positions:

Center v. Hampton Affiliates, Inc., 66 N.Y.2d 782, 497 N.Y.S.2d 898

(1985); Marine Midland Bank v. John E. Russo Produce, 50 N.Y.2d 31,

427 N.Y.S.2d 961 (1980); Capital Wireless Corp. v. Deloitte & Touche,

216 A.D.2d 663, 627 N.Y.S. 2d 794 (App. Div. 1995); Bullmore v. Ernst

& Young Cayman Islands, 20 Misc. 3d 667, 861 N.Y.S.2d 578 (Sup. Ct.

2008). Their differing uses of New York cases, coupled with the

somewhat divergent language used by the District Court in the pending

case and by our Court in CBI, both endeavoring to interpret New York

law, make it appropriate to seek authoritative guidance from the New

York Court of Appeals. Although the precise allegations in the

pending case are distinctive, the recent frequency of insider

misconduct in the corporate world underscores the virtue of using

certification.

Accordingly, pursuant to N.Y. Rules of Court § 500.27 (McKinney

2010) and Second Circuit Local Rule § 0.27, we certify to the New York

Court of Appeals (1) the over-arching question whether the allegations

of the complaint in this case satisfy the “adverse interest” exception
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to the Wagoner rule of imputing insiders’ misconduct to their

corporation, and the following subsidiary questions subsumed within

that ultimate question: (2) whether the adverse interest exception is

satisfied by showing that the insiders intended to benefit themselves

by their misconduct; (3) whether the exception is available only where

the insiders’ misconduct has harmed the corporation; (4) if harm is

required, whether the analysis of such harm may include any detriment

to a corporation resulting from the eventual unmasking of the

misconduct; (5) if harm is required, whether such harm may be

determined by considering a corporation and its related corporations

as a single enterprise; (6) if harm is required and is to be

determined with respect to separate though related corporations,

whether the allegations of the complaint adequately allege such harm;

(7) whether the exception is precluded where the misconduct conferred

some benefit upon the corporation; and (8) if the adverse interest

exception were otherwise available, would it be precluded by the “sole

actor” rule? If the Court of Appeals is disinclined to answer or at

least discuss all of these questions, we hope it will focus its

attention on questions (2) and (3).

As is our custom, we invite the Court of Appeals to expand upon

or vary the terms of these questions as that Court deems appropriate.

See In re Peaslee, 547 F.3d 177, 186 (2d Cir. 2008); Consorti v.

Owens-Corning Fiberglas Corp., 45 F.3d 48, 51 (2d Cir. 1995).
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We direct the Clerk to transmit to the New York Court of Appeals

this opinion as our certificate, together with the parties’ briefs and

appendix. This panel will resume its consideration of the appeal

after disposition of this certification by the New York Court of

Appeals.