Further Perspectives on Corporate Wrongdoing, In Pari Delicto, and Auditor Malpractice

Table of ContentsI. Introduction 339II. Agency Law and Defenses to Professional Malpractice 341III. The Sharp Bite of Choice of Law 347IV. Determining When a Corporation Is Itself at Fault ....... 351I. IntroductionIntroduction By specifying when one person is subject to the legal consequences of another's conduct, the common law of agency serves as a bridge to the application of other legal doctrines, including the defense of in pari delicto.1 Its bridging function implicates agency law in a wide range of disputes involving disparate bodies of primary law, including the tort and contract doctrines relevant to professional malpractice cases. Christine Shepard's Note, Corporate Wrongdoing and the In Pari Delicto Defense in Auditor Malpractice Cases: A New Approach2 ably examines several recent cases that are sharply divided on the implications of agency doctrine for defenses available in such cases, in particular when auditors are defendants.3 Shepard focuses on recent cases stemming from auditors' failure to detect or report fraud perpetrated by a corporation's agents, typically, but not necessarily, situated high within the corporation's management hierarchy, through manipulation of the corporation's financial records. She argues that courts should decouple the operation of agency doctrines that charge a corporation with the legal consequences of its agents' wrongdoing, including their knowledge of their own fraud, from a separate determination of whether the doctrine of in pari delicto should bar recovery, whether by the corporation itself, its shareholders suing derivatively on its behalf, a trustee in bankruptcy, or a litigation trust or committee created to pursue claims following bankruptcy. Only when a corporation is itself directly at fault should in pari delicto apply. Shepard's proposal is grounded in the insight-with which I agree-that the broad reach of agency doctrine does not mean that it necessarily answers all questions arising from a dispute. Moreover, as Shepard explains, agency doctrines of attribution and imputation operate on an all-or-nothing basis that disallows consideration of relative fault or responsibility. I begin with some background and then turn to questions beyond those examined in Shepard's Note. These include the functions served by auditors, in particular in companies with public shareholders, and the significance of choice of law. I conclude with some reservations about implementing the approach Shepard recommends and about the capacity of private law to resolve the underlying issues.II. Agency Law and Defenses to Professional MalpracticeAgency law and the legal doctrines applicable to professional malpractice intersect in several ways. For starters, agency law defines when the relationship between two persons situates one as an agent and the other as the principal.4 In the corporate context, a corporation's agents include its officers and managerial employees. Agency doctrines of general applicability also specify when the legal consequences of an agent's conduct may be attributed to the principal. When an agent makes a contract purportedly on behalf of the corporation, attribution turns in most cases on whether the agent acted with actual and/or apparent authority.5 An agent's tortious conduct may also be attributed to a corporate principal with the result that it becomes vicariously liable to the victim; when the agent is an employee, the long-established doctrine of respondeat superior determines whether the principal is vicariously liable.6 When the agent is not an employee (or is an employee acting outside the scope of employment for purposes of respondeat superior), the principal's vicarious liability for unauthorized tortious conduct turns on whether the agent's conduct appeared to be authorized, bringing the issue within the ambit of the doctrine of apparent authority. …