Opinion ID: 2482599
Heading Depth: 1
Heading Rank: 7

Heading: Subjective Intent and Illusory Benefits

Text: First, the Litigation Trustee advocates that we adopt the rule of CBI, under which the insiders' intent is the touchstone and a short term, illusory benefit to the company does not defeat the adverse interest exception. The derivative plaintiffs similarly argue that analysis of the adverse interest exception should focus on the agent's overall intent. As an initial matter, it is not entirely clear that CBI stands for any such far-reaching rule. CBI held that plaintiff Bankruptcy Services, Inc. (BSI), CBI's successor under its bankruptcy plan, possessed standing by virtue of the adverse interest exception to assert claims against its outside accountants arising from their performance of pre-bankruptcy audits of CBI. This was so because [t]he bankruptcy court's finding that CBI's management `was acting for its own interest and not that of CBI' [was] not clearly erroneous and constitute[d] the `total abandonment' of [the] corporation's interests necessary to satisfy the adverse interest exception ( CBI, 529 F3d 432, 438 [2008]). In particular, the bankruptcy court found as a matter of fact that the fraud was perpetrated for the purpose of obtaining a bigger bonus for [CBI's president and CEO and principal shareholder], and to preserve [his] personal control over the company ( id. at 449). Further, the bankruptcy court found as a matter of fact that CBI would have sold for almost $28 million as late as October 1993, about 10 months before it declared bankruptcy ( id. at 453). The ongoing plundering practiced by its president, and not flagged by the accountants as early as the bankruptcy court determined it should have been, deprived the company of this opportunity to sell equity for value. Giving a broad reading to the Second Circuit's opinion in CBI, the Litigation Trustee asks us to make availability of the adverse interest exception depend upon whether corrupt insiders intend to benefit themselves at the company's expense to be alleged and proved by showing that the corrupt insiders intended to benefit themselves personally and actually received personal benefits and/or that the company received only short term benefits but suffered long term harm (emphasis added). To recast the adverse interest exception in this fashion, as the District Court pointed out, would explode the exception, turning it into a nearly impermeable rule barring imputation in every case ( Kirschner v Grant Thornton LLP, 2009 WL 1286326,  n 14, 2009 US Dist LEXIS 32581, -28 n 14 [2009]). This is so because fraudsters are presumably not, as a general rule, motivated by charitable impulses, and a company victimized by fraud is always likely to suffer long-term harm once the fraud becomes known. The Trustee's proposed rule would limit imputation to fraudsters so inept they gain no personal benefit and unexposed frauds, which is another way of saying the adverse interest exception would become a dead letter because it would encompass every corporate fraud prompting litigation.