Opinion ID: 176236
Heading Depth: 4
Heading Rank: 2

Heading: Imputation analysis

Text: Under Michigan law, the knowledge of a corporate agent can be imputed to the entire corporation: A corporation can only act through its employees and, consequently, the acts of its employees, within the scope of their employment, constitute the acts of the corporation. Likewise, knowledge acquired by employees within the scope of their employment is imputed to the corporation. In consequence, a corporation cannot plead innocence by asserting that the information obtained by several employees was not acquired by any one individual employee who then would have comprehended its full import. Rather, the corporation is considered to have acquired the collective knowledge of its employees and is held responsible for their failure to act accordingly. Upjohn Co. v. N.H. Ins. Co., 438 Mich. 197, 476 N.W.2d 392, 400 (1991) (citation omitted). This general imputation rule applies where the corporate officer acts in the course of his or her employment and for the benefit of the corporation. MCA Fin. Corp. v. Grant Thornton, L.L.P., 263 Mich.App. 152, 687 N.W.2d 850, 857 (2004). An exception to the imputation rule, however, provides that the corporate officer's actions will not be deemed to have been done for the benefit of the corporation if the actions were adverse to the corporation's interests. Id.; see also New Properties, Inc. v. George D. Newpower, Jr., Inc., 282 Mich.App. 120, 762 N.W.2d 178, 188 (2009) (The general rule which imputes an agent's knowledge to his principal is subject to an exception where the agent acts in his own interest, adversely to his principal. (citation omitted)). The adverse-interest exception, however, itself has an exception: The sole actor rule is an exception to the adverse interest exception.... The sole actor rule comes into play where the wrongdoer is, in essence, the corporation (the sole actor). Indeed, it has its roots in cases where the agent and the principal are literally the same person (literally a sole actor) and thus information obtained by a person in his role as an agent is treated as also being obtained in his role as principal, even if his activities as agent are contrary to his interests as a principal. Therefore, where the wrongdoer acts contrary to the interests of the corporation, under the adverse interest exception the wrongdoer's conduct would not ordinarily be imputed to the corporation. But where the wrongdoer is a sole actor, the adverse interest exception is not applied and his wrongdoing is nevertheless imputed to the corporation. MCA Fin. Corp., 687 N.W.2d at 860. Thus, for example, where a sole shareholder loots the corporation of its assets[,] the adverse interest exception will not apply. Id. We pause to note Gold's argument that a court cannot undertake the imputation analysis without first applying Michigan's wrongful-conduct rule, which precludes a plaintiff from recovering on a claim that is based on the plaintiff's own wrongdoing. Id. at 853. In other words, Gold claims that the only actions that can be imputed to a corporation are those that are deemed wrongful by this common law rule. He then proceeds to argue that the wrongful-conduct rule does not apply to bar Venture's recovery because, among other things, Winget's conduct was not prohibited or almost entirely prohibited under a penal or criminal statute. See Orzel v. Scott Drug Co., 449 Mich. 550, 537 N.W.2d 208, 214 (1995) (holding that a plaintiff's claim that a pharmacy negligently supplied him with a controlled substance was barred because the harm was caused, at least in part, by the plaintiff's illegal conduct). This argument is contradicted by the caselaw cited above that explicitly acknowledges that courts can impute a corporate agent's knowledge in addition to an agent's wrongful conduct. And the only case cited by Gold to support his argument regarding the proper order of analysis, MCA Financial, is distinguishable. In that case, the Michigan Court of Appeals first held that the wrongful-conduct rule applied to the actions of individual officers of the corporation. Next, the court went on to hold that the wrongful conduct of these officers would be imputed to the entire corporation, thus barring the corporation from recovering on its claims against its former auditor. MCA Fin. Corp., 687 N.W.2d at 857-61. To argue, however, that MCA Financial stands for the proposition that imputation can occur only if the wrongful-conduct rule applies is inaccurate. Indeed, the Michigan Supreme Court has applied the imputation rule without undertaking a wrongful-conduct analysis. In National Turners Building & Loan Ass'n v. Schreitmueller, 288 Mich. 580, 285 N.W. 497 (1939), which appears to be the earliest Michigan case applying the sole-actor rule, the Court held that a corporate agent's knowledge should be imputed to the corporation where the agent issued a fraudulent stock certificate to an investor. The corporation thus could not seek to cancel the stock certificate because [i]f a corporation is so lax as to trust the whole of a transaction to one officer, it should suffer the consequences of his misfeasance as an officer. Id. at 499. Importantly, the Court undertook the imputation analysis, see id. at 499-500, without any mention of the wrongful-conduct rule, which was solidly in place in Michigan at the time of the Court's decision. See, e.g., Garwols v. Bankers Trust Co., 251 Mich. 420, 232 N.W. 239, 240-42 (1930); McDonald v. Hall, 193 Mich. 50, 159 N.W. 358, 362 (1916). Gold's argument that imputation can occur only where the wrongful-conduct rule applies is thus without merit. Returning now to the imputation analysis, we note that Gold alleges that Winget used his power as CEO to cause Venture to enter into the related-party transactions. This allegation meets the threshold requirement for the imputation rule. But Gold also alleges that Winget's transactions were solely in his own interest and entirely against the interests of Venture, which implicates the adverse-interest exception. Deloitte responds by arguing that Winget was clearly the sole actor because he was the CEO and sole shareholder of Venture. See In re Mediators, Inc., 105 F.3d 822, 827 (2d Cir.1997) (Where, as here, a sole shareholder is alleged to have stripped the corporation of assets, the adverse interest exception to the presumption of knowledge cannot apply.), cited in MCA Fin. Corp., 687 N.W.2d at 860 n. 28. And Gold does not seriously dispute that Winget was the sole actor through this point in the imputation analysis. Indeed, at oral argument, Gold's counsel conceded that the sole-actor rule would be applicable but for the innocent-decisionmaker exception to the sole-actor rule. This exception was most clearly articulated in In re Sharp International Corp., 278 B.R. 28, 39 (Bankr.E.D.N.Y.2002), where the court declined to apply the sole-actor rule to impute the knowledge of Sharp's CEO in perpetrating a fraud to the corporation because the complaint alleged the presence of a person with the ability to bring an end to the fraudulent activity at issue. Id. That is, there was an innocent 13% shareholder who served on Sharp's board of directors, served as a consultant to Sharp, regularly visited Sharp's offices, and regularly received and reviewed financial statements, and who could or would have prevented the fraud had he known about it. Id. at 37, 39. These allegations were deemed sufficient to defeat the applicability of the sole-actor exception. Here, Gold contends that Venture's creditors and the Fairness Committee were innocent decision-makers because they had the authority to stop Winget from entering into the related-party transactions. He argues that given the presence of these innocent parties, Winget cannot be considered to be Venture's sole actor, meaning that Winget's knowledge should not be imputed to Venture so as to bar any recovery by Venture. We first note that no Michigan court has thus far adopted the innocent-decision-maker exception. See MCA Fin. Corp., 687 N.W.2d at 861 (stating that the court need not consider whether to apply the Sharp exception to the sole actor rule). Nonetheless, as explained below, Gold still fails to state a claim for relief even if the Michigan courts would apply the innocent-decision-maker exception in the imputation context.